NETSCOUT SYSTEMS INC 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of March 31, 2023, NetScout, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2023 our disclosure controls and procedures were effective in ensuring that material information relating to NetScout, including its consolidated subsidiaries, required to be disclosed by NetScout in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting During the quarter ended March 31, 2023, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting was designed to provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2023. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework in 2013. Based on our assessment, we concluded that our internal control over financial reporting was effective as of March 31, 2023. The effectiveness of our internal control over financial reporting as of March 31, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8 herein. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 51 PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item 10 will be included under the captions "Directors and Executive Officers," "Proposal 1 Election of Directors," "Delinquent Section 16(a) Reports," "Corporate Governance -- Code of Ethics," "The Board of Directors and its Committees" and "Corporate Governance" in our definitive Proxy Statement with respect to our 2023 Annual Meeting of Stockholders to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference. We have adopted a written code of business conduct that applies to all of our employees, officers and directors, including our principal executive officer, principal financial officer and principal accounting officer. The code of business conduct and ethics is available on our corporate website at ir.netscout.com under the section entitled "Governance Overview & Related Materials" in the "Corporate Governance" menu. If we make any substantive amendments to our code of business conduct or grant any of our directors or executive officers any waiver, including any implicit waiver, from a provision of our code of business conduct and ethics, we will disclose the nature of the amendment or waiver on our website or in a Current Report on Form 8-K. Item 11. Executive Compensation The information required by this Item 11 will be included under the caption "Compensation and Other Information Concerning Directors and Executive Officers" in our definitive Proxy Statement with respect to our 2023 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item 12 will be included under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Compensation and Other Information Concerning Directors and Executive Officers -- Equity Compensation Plan Information" in our definitive Proxy Statement with respect to our 2023 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item 13 will be included, as applicable, under the captions "Corporate Governance --Director Independence," "Compensation and Other Information Concerning Directors and Executive Officers -- Employment and Other Agreements" and "Transactions with Related Persons" in our definitive Proxy Statement with respect to our 2023 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this Item 14 will be included under the captions "Auditors Fees and Services" and "Auditors Fees and Services -- Policy on Audit Committee Pre-approval of Audit and Non-Audit Services" in our definitive Proxy Statement with respect to our 2023 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference. 52 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) 1. Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm (PCAOB ID 238) F- 2 Consolidated Balance Sheets at March 31, 202 3 and 20 22 F- 4 Consolidated Statements of Operations for the Years Ended March 31, 202 3 , 202 2 and 20 21 F- 5 Consolidated Statements of Comprehensive Income for the Years Ended March 31, 202 3 , 202 2 and 20 21 F- 6 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 202 3 , 202 2 and 20 21 F- 7 Consolidated Statements of Cash Flows for the Years Ended March 31, 202 3 , 202 2 and 20 21 F- 8 Notes to Consolidated Financial Statements F- 9 2. Financial Statement Schedule. Valuation and Qualifying Accounts for the Years Ended March 31, 202 3 , 202 2 and 20 21 S- 1 No other financial statement schedules have been included because they are either not applicable or the information is in the consolidated financial statements. 3. Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report. (b) We hereby file as part of this Annual Report on Form 10-K the exhibits listed in Item 15(a)(3) above. (c) We hereby file as part of this Annual Report on Form 10-K the financial statement schedule listed in Item 15(a)(2) above. 53 NetScout Systems, Inc. Index to Exhibits 3.1, 4.1 Composite conformed copy of Third Amended and Restated Certificate of Incorporation of NetScout (as amended) (filed as Exhibit 3.2 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed on September 21, 2016, and incorporated herein by reference). 3.2, 4.2 Amended and Restated By-laws of NetScout (filed as Exhibit 3.1 to NetScout’s current Report on Form 8-K, SEC File No. 000-26251, filed on May 11, 2020 and incorporated herein by reference). 4.3 Specimen Certificate for shares of NetScout’s Common Stock (filed as Exhibit 4.3 to NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, SEC File No. 000-26251, filed on June 29, 2001, and incorporated herein by reference). 4.4 Description of Common Stock (filed as Exhibit 4.4 to NetScout's Annual Report on Form 10-K for the fiscal year ended March 31, 2020, SEC File No. 000-26251, filed on May 20, 2020 and incorporated herein by reference). 10.1* Form of Amended and Restated Indemnification Agreement between NetScout and each director and executive officer filed as Exhibit 10.1 to NetScout's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2013, SEC File No. 000-26251, filed January 28, 2014, and incorporated herein by reference). 10.2 Lease between Arturo J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000 and recorded with the Middlesex North Registry of Deeds in Book 10813, Page 38 and NetScout for Westford Technology Park West, as amended (filed as Exhibit 10.26 to NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, SEC File No. 000-26251, filed on June 29, 2001, and incorporated herein by reference). 10.3* Agreement Relating to Employment, dated January 3, 2007, by and between NetScout and Anil K. Singhal (filed as Exhibit 10.2 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on January 5, 2007 and incorporated herein by reference). 10.4* Amendment No. 1, dated February 2, 2007, to Agreement Relating to Employment by and between the Company and Anil K. Singhal (filed as exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2006, SEC File No. 000-26251, filed February 5, 2007 and incorporated herein by reference). 10.5* Amendment No. 2, dated December 22, 2008, to Agreement Relating to Employment by and between the Company and Anil K. Singhal (filed as exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2008, SEC File No. 000-26251, filed February 6, 2009 and incorporated herein by reference). 10.6* Amendment No. 3, dated May 28, 2012, to Agreement Relating to Employment, by and between the Company and Anil K. Singhal (filed as Exhibit 10.3 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). 10.7* NetScout Systems, Inc. 2007 Equity Incentive Plan, as amended (filed as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A, SEC File No. 000-26251, filed with the Commission on July 28, 2015 and incorporated herein by reference). 10.8* NetScout Form of Restricted Stock Unit Agreement with respect to the NetScout 2007 Equity Incentive Plan (filed as Exhibit 99.2 to NetScout’s Registration Statement on Form S-8, SEC File No. 333-148364, filed on December 27, 2007 and incorporated herein by reference). 10.9* Form of Amended and Restated Severance Agreement for Named Executive Officers (other than the CEO and CFO) (filed as Exhibit 10.1 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). 10.10* Amended and Restated Severance Agreement, dated May 28, 2012, by and between the Company and Jean Bua (filed as Exhibit 10.2 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). 54 10.11 Third Amendment Agreement, dated August 10, 2010, to that certain Lease, dated August 17, 2000, as amended, between the Company and Westford West I Limited Partnership, as successor to Arturo J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000 (filed as Exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, SEC File No. 000-26251, filed November 9, 2010 and incorporated herein by reference). 10.12* NetScout Systems, Inc. Amended and Restated 2011 Employee Stock Purchase Plan, as amended (filed as Exhibit 99.2 to NetScout’s Registration Statement on Form S-8, SEC File No. 333-267069, filed on August 25, 2022 and incorporated herein by reference). 10.13* Form of Amendment to Amended and Restated Severance Agreement for Executive Officers (filed as Exhibit 10.9 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014, SEC File No. 000-26251, filed on January 27, 2015 and incorporated herein by reference). 10.14 Second Amendment and Restatement Agreement, dated as of July 27, 2021, to the Amended and Restated Credit Agreement, dated as of January 16, 2018, by and among NetScout Systems, Inc., as borrower; certain subsidiaries of NetScout Systems, Inc., as loan parties; the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent attaching the Second Amended and Restated Credit Agreement, dated as of July 27, 2021, by and among NetScout Systems, Inc., as borrower; JPMorgan Chase Bank, N.A., as administrative agent and collateral agent; JPMorgan Chase Bank, N.A., 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 and issuing banks party thereto (filed as Exhibit 10.5 to NetScout's current report on Form 8-K, SEC File No. 000-26251, filed on July 27, 2021 and incorporated herein by reference). 10.15* Summary of Non-Employee Director Compensation (filed as Exhibit 10.2 to NetScout's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, SEC File No. 000-26251, filed on November 4, 2021 and incorporated herein by reference. 10.16* NetScout Systems, Inc. 2019 Equity Incentive Plan, as amended (filed as Exhibit 99.1 to NetScout’s Registration Statement on Form S-8, SEC File No. 333-267069, filed on August 25, 2022 and incorporated herein by reference). 10.17* Form of Restricted Stock Unit Agreement with respect to the NetScout Systems, Inc. 2019 Equity Incentive Plan (filed as Exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2019, SEC File No. 000-26251, filed on February 6, 2020 and incorporated herein by reference). 10.18 First Amendment Agreement, dated as of February 22, 2023, to the Second Amended and Restated Credit Agreement, dated as of July 27, 2021, by and among NetScout Systems, Inc., as borrower; certain subsidiaries of NetScout Systems, Inc., as loan parties; the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent, attaching Second Amended and Restated Credit Agreement, dated as of July 27, 2021 (as amended by the First Amendment Agreement), by and among NetScout Systems, Inc., as borrower; JPMorgan Chase Bank, N.A., as administrative agent and collateral agent; JPMorgan Chase Bank, N.A., 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 and issuing banks party thereto (filed as Exhibit 10.1 to NetScout's current report on Form 8-K, SEC File No. 000-26251, filed on February 22, 2023 and incorporated herein by reference). 21 Subsidiaries of NetScout (filed herewith). 23 Consent of PricewaterhouseCoopers LLP (filed herewith). 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 † Certification Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 (furnished herewith). 32.2 † Certification Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 (furnished herewith). 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 55 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 104 The cover page from the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2023 formatted in Inline XBRL * Indicates a management contract or compensatory plan or arrangement. † Exhibit has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing Item 16. Form 10-K Summary Not provided. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NETSCOUT SYSTEMS, INC. By: / S / A NIL K. S INGHAL Anil K. Singhal President, Chief Executive Officer, and Chairman Date: May 16, 2023 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date / S / A NIL K. S INGHAL President, Chief Executive Officer, and Chairman (Principal Executive Officer) May 16, 2023 Anil K. Singhal / S / J EAN B UA Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) May 16, 2023 Jean Bua / S / M ICHAEL S ZABADOS Chief Operating Officer and Vice Chairman May 16, 2023 Michael Szabados / S / R OBERT E. D ONAHUE Director May 16, 2023 Robert E. Donahue / S / J OHN R. E GAN Director May 16, 2023 John R. Egan / S / A LFRED G RASSO Director May 16, 2023 Alfred Grasso / S / J OSEPH G. H ADZIMA , J R . Director May 16, 2023 Joseph G. Hadzima, Jr. / S / S HANNON N ASH Director May 16, 2023 Shannon Nash / S / M ARLENE P ELAGE Director May 16, 2023 Marlene Pelage / S / C HRISTOPHER P ERRETTA Director May 16, 2023 Christopher Perretta / S / S USAN L. S PRADLEY Director May 16, 2023 Susan L. Spradley / S / V IVIAN V ITALE Director May 16, 2023 Vivian Vitale 57 Table of Contents NetScout Systems, Inc. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) F- 2 Consolidated Balance Sheets at March 31, 202 3 and 20 22 F- 4 Consolidated Statements of Operations for the Years Ended March 31, 202 3 , 202 2 and 20 21 F- 5 Consolidated Statements of Comprehensive Income for the Years Ended March 31, 202 3 , 202 2 and 20 21 F- 6 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 202 3 , 202 2 and 20 21 F- 7 Consolidated Statements of Cash Flows for the Years Ended March 31, 202 3 , 202 2 and 20 21 F- 8 Notes to Consolidated Financial Statements F- 9 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of NetScout Systems, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of NetScout Systems, Inc. and its subsidiaries (the “Company”) as of March 31, 2023 and 2022, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended March 31, 2023, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. F-2 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue from Contracts with Customers - Identification of Distinct Performance Obligations As described in Note 3 to the consolidated financial statements, the Company derives revenues primarily from the sale of network management tools and cybersecurity solutions for service provider and enterprise customers, which include hardware, software and service offerings. 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. During the year ended March 31, 2023, the Company recognized revenue from contracts with customers of $914.5 million. The principal considerations for our determination that performing procedures relating to revenue from contracts with customers, specifically the identification of distinct performance obligations, is a critical audit matter are the significant judgment by management in determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management’s identification of distinct performance obligations. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the identification of distinct performance obligations. These procedures also included, among others, (i) testing management’s process for identifying distinct performance obligations, and (ii) evaluating the revenue recognition impact of contractual terms and conditions by examining customer contracts on a test basis. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts May 16, 2023 We have served as the Company’s auditor since 1993. F-3 Table of Contents NetScout Systems, Inc. Consolidated Balance Sheets (In thousands, except share and per share data) March 31, 2023 March 31, 2022 Assets Current assets: Cash and cash equivalents $ 386,794 $ 636,161 Marketable securities 32,204 67,037 Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $ 675 and $ 1,649 at March 31, 2023 and 2022, respectively 143,855 148,245 Inventories and deferred costs 17,956 28,220 Prepaid income taxes 2,235 9,349 Prepaid expenses and other current assets 34,316 32,927 Total current assets 617,360 921,939 Fixed assets, net 34,735 41,337 Operating lease right-of-use assets 51,456 54,996 Goodwill 1,724,404 1,723,156 Intangible assets, net 366,591 433,419 Deferred income taxes 4,534 6,883 Long-term marketable securities 8,940 — Other assets 12,540 12,979 Total assets $ 2,820,560 $ 3,194,709 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 16,473 $ 21,959 Accrued compensation 83,279 75,788 Accrued other 26,283 32,064 Income taxes payable 4,391 4,353 Deferred revenue and customer deposits 311,531 330,585 Current portion of operating lease liabilities 11,650 11,411 Total current liabilities 453,607 476,160 Other long-term liabilities 7,683 7,470 Deferred tax liability 24,939 78,899 Accrued long-term retirement benefits 26,049 34,737 Long-term deferred revenue and customer deposits 129,814 133,121 Operating lease liabilities, net of current portion 48,819 53,927 Long-term debt 100,000 350,000 Total liabilities 790,911 1,134,314 Commitments and contingencies (Note 18) Stockholders’ equity: Preferred stock, $ 0.001 par value: 5,000,000 shares authorized; no shares issued or outstanding at March 31, 2023 and 2022 — — Common stock, $ 0.001 par value: 300,000,000 shares authorized; 128,683,824 and 126,425,383 shares issued and 71,249,045 and 74,102,293 shares outstanding at March 31, 2023 and 2022, respectively 128 126 Additional paid-in capital 3,099,698 3,023,403 Accumulated other comprehensive income 5,738 141 Treasury stock at cost, 57,434,779 and 52,323,090 shares at March 31, 2023 and 2022, respectively ( 1,546,128 ) ( 1,373,840 ) Retained earnings 470,213 410,565 Total stockholders' equity 2,029,649 2,060,395 Total liabilities and stockholders' equity $ 2,820,560 $ 3,194,709 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents NetScout Systems, Inc. Consolidated Statements of Operations (In thousands, except per share data) Fiscal Year Ended March 31, 2023 2022 2021 Revenue: Product $ 450,793 $ 410,121 $ 377,721 Service 463,737 445,454 453,561 Total revenue 914,530 855,575 831,282 Cost of revenue: Product 94,868 90,730 95,965 Service 128,230 123,456 126,132 Total cost of revenue 223,098 214,186 222,097 Gross profit 691,432 641,389 609,185 Operating expenses: Research and development 176,173 171,131 179,163 Sales and marketing 276,913 264,191 242,730 General and administrative 103,510 97,692 88,969 Amortization of acquired intangible assets 55,390 59,741 61,131 Restructuring charges 1,782 — 62 Total operating expenses 613,768 592,755 572,055 Income from operations 77,664 48,634 37,130 Interest and other expense, net: Interest income 4,923 297 646 Interest expense ( 10,248 ) ( 8,048 ) ( 10,879 ) Other income (expense), net ( 3,924 ) 2,009 ( 4,593 ) Total interest and other expense, net ( 9,249 ) ( 5,742 ) ( 14,826 ) Income before income tax expense 68,415 42,892 22,304 Income tax expense 8,767 7,018 2,952 Net income $ 59,648 $ 35,874 $ 19,352 Basic net income per share $ 0.83 $ 0.48 $ 0.26 Diluted net income per share $ 0.82 $ 0.48 $ 0.26 Weighted average common shares outstanding used in computing: Net income per share—basic 71,781 74,019 73,103 Net income per share—diluted 73,046 75,084 73,822 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents NetScout Systems, Inc. Consolidated Statements of Comprehensive Income (In thousands) Fiscal Year Ended March 31, 2023 2022 2021 Net income $ 59,648 $ 35,874 $ 19,352 Other comprehensive income: Cumulative translation adjustments ( 270 ) 153 2,926 Recognition of actuarial net gains (losses) from pension and other post-retirement plans, net of tax (benefit) of $ 2,448 , $ 824 , and ($ 657 ) 5,759 1,937 ( 1,548 ) Changes in market value of investments: Changes in unrealized gains (losses), net of tax (benefit) of $ 14 , ($ 9 ), and ($ 41 ) 42 ( 29 ) ( 130 ) Total net change in market value of investments 42 ( 29 ) ( 130 ) Changes in market value of derivatives: Changes in market value of derivatives, net of (benefit) tax of ($ 116 ), $ 19 , and $ 66 ( 361 ) 63 208 Reclassification adjustment for net gain (loss) included in net income, net of tax (benefit) of $ 137 , ($ 13 ), and ($ 73 ) 427 ( 43 ) ( 236 ) Total net change in market value of derivatives 66 20 ( 28 ) Other comprehensive income 5,597 2,081 1,220 Total comprehensive income $ 65,245 $ 37,955 $ 20,572 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents NetScout Systems, Inc. Consolidated Statements of Stockholders' Equity (In thousands, except share data) Common stock Voting Additional Paid In Capital Accumulated Other Comprehensive Income (Loss) Treasury stock Retained Earnings Total Stockholders' Equity Shares Par Value Shares Stated Value Balance, March 31, 2020 122,006,077 $ 122 $ 2,891,553 $ ( 3,160 ) 49,785,171 $ ( 1,305,935 ) $ 355,339 $ 1,937,919 Net income 19,352 19,352 Unrealized net investment losses ( 130 ) ( 130 ) Unrealized net losses on derivative financial instruments ( 28 ) ( 28 ) Cumulative translation adjustments 2,926 2,926 Recognition of actuarial net losses from pension and other post-retirement plan ( 1,548 ) ( 1,548 ) Issuance of common stock pursuant to vesting of restricted stock units 1,630,228 2 2 Stock-based compensation expense for restricted stock units granted to employees 49,418 49,418 Issuance of common stock under employee stock purchase plan 561,669 14,429 14,429 Repurchase of treasury stock 661,188 ( 16,561 ) ( 16,561 ) Balance, March 31, 2021 124,197,974 124 2,955,400 ( 1,940 ) 50,446,359 ( 1,322,496 ) 374,691 2,005,779 Net income 35,874 35,874 Unrealized net investment losses ( 29 ) ( 29 ) Unrealized net gains on derivative financial instruments 20 20 Cumulative translation adjustments 153 153 Recognition of actuarial net gains from pension and other post-retirement plan 1,937 1,937 Issuance of common stock pursuant to vesting of restricted stock units 1,728,994 2 2 Stock-based compensation expense for restricted stock units granted to employees 53,421 53,421 Issuance of common stock under employee stock purchase plan 498,415 14,582 14,582 Repurchase of treasury stock 1,876,731 ( 51,344 ) ( 51,344 ) Balance, March 31, 2022 126,425,383 126 3,023,403 141 52,323,090 ( 1,373,840 ) 410,565 2,060,395 Net income 59,648 59,648 Unrealized net investment gains 42 42 Unrealized net gains on derivative financial instruments 66 66 Cumulative translation adjustments ( 270 ) ( 270 ) Recognition of actuarial net gains from pension and other post-retirement plan 5,759 5,759 Issuance of common stock pursuant to vesting of restricted stock units 1,777,658 2 2 Stock-based compensation expense for restricted stock units granted to employees 59,086 59,086 Issuance of common stock under employee stock purchase plan 480,783 14,353 14,353 Repurchase of treasury stock 2,856 5,111,689 ( 172,288 ) ( 169,432 ) Balance, March 31, 2023 128,683,824 $ 128 $ 3,099,698 $ 5,738 57,434,779 $ ( 1,546,128 ) $ 470,213 $ 2,029,649 The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents NetScout Systems, Inc. Consolidated Statements of Cash Flows (In thousands) Fiscal Year Ended March 31, 2023 2022 2021 Cash flows from operating activities: Net income $ 59,648 $ 35,874 $ 19,352 Adjustments to reconcile net income to cash provided by operating activities, net of the effects of acquisitions: Depreciation and amortization 85,918 95,784 105,828 Loss on extinguishment of debt — 596 — Operating lease right-of-use assets 10,598 10,292 10,004 Loss on disposal of fixed assets 49 5 236 Share-based compensation expense associated with equity awards 61,986 56,074 51,892 Change in fair value of derivative instrument 1,380 — — Net change in fair value of contingent and contractual liabilities — ( 837 ) — Deferred income taxes ( 54,032 ) ( 12,681 ) ( 23,804 ) Other gains ( 1 ) ( 11 ) ( 196 ) Changes in assets and liabilities Accounts receivable and unbilled costs 4,897 49,322 16,878 Inventories 9,007 ( 7,996 ) ( 2,043 ) Prepaid expenses and other assets 5,039 ( 13,001 ) 11,483 Accounts payable ( 5,549 ) 4,211 ( 1,734 ) Accrued compensation and other expenses 12,071 2,391 31,955 Operating lease liabilities ( 11,927 ) ( 12,060 ) ( 10,307 ) Income taxes payable 165 ( 3,087 ) 6,684 Deferred revenue ( 22,599 ) 91,137 ( 2,307 ) Net cash provided by operating activities 156,650 296,013 213,921 Cash flows from investing activities: Purchase of marketable securities ( 114,513 ) ( 78,367 ) ( 15,673 ) Proceeds from maturity of marketable securities 140,462 20,569 56,806 Purchase of fixed assets ( 10,487 ) ( 10,350 ) ( 11,986 ) Purchase of intangible assets ( 161 ) ( 50 ) ( 4,537 ) Decrease (increase) in deposits 3 ( 155 ) 88 Net cash provided by (used in) investing activities 15,304 ( 68,353 ) 24,698 Cash flows from financing activities: Issuance of common stock under stock plans 2 2 2 Payment of contingent consideration — — ( 1,748 ) Treasury stock repurchases ( 150,039 ) ( 35,653 ) ( 3,275 ) Tax withholding on restricted stock units ( 19,393 ) ( 15,691 ) ( 13,286 ) Payment of debt issuance costs — ( 3,660 ) — Repayment of long-term debt ( 250,000 ) ( 350,000 ) ( 100,000 ) Proceeds from issuance of long-term debt — 350,000 — Collection of contingent consideration — 837 — Net cash used in financing activities ( 419,430 ) ( 54,165 ) ( 118,307 ) Effect of exchange rate changes on cash and cash equivalents ( 1,891 ) ( 4,510 ) 6,627 Net (decrease) increase in cash and cash equivalents ( 249,367 ) 168,985 126,939 Cash and cash equivalents and restricted cash, beginning of year 636,161 467,176 340,237 Cash and cash equivalents and restricted cash, end of year $ 386,794 $ 636,161 $ 467,176 Supplemental disclosures of cash flow information: Cash paid for interest $ 8,063 $ 4,962 $ 7,685 Cash paid for income taxes $ 55,924 $ 31,702 $ 11,472 Non-cash transactions: Transfers of inventory to fixed assets $ 1,371 $ 2,657 $ 1,530 Additions to property, plant and equipment included in accounts payable $ 56 $ 197 $ 333 Issuance of common stock under employee stock purchase plans $ 14,353 $ 14,582 $ 14,429 The accompanying notes are an integral part of these consolidated financial statements. F-8 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements NOTE 1 – NATURE OF BUSINESS NetScout Systems, Inc., or NetScout or the Company, has been a technology innovator for three-plus decades since its founding in 1984. The Company's solutions, based on patented Adaptive Service Intelligence (ASI) technology, help customers identify network and application performance issues, defend their networks from denial of service (DDoS) attacks, and rapidly find and isolate advanced network threats. As a result, customers can quickly resolve issues that cause business disruptions, downtime, poor service quality or compromised security, thereby driving compelling returns on their investments in their network and broader information technology (IT) initiatives. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of NetScout and its wholly owned subsidiaries. Inter-company transactions and balances have been eliminated in consolidation. Segment Reporting The Company's operating segments are determined based on the units that constitute a business for which financial information is available and for which operating results are regularly reviewed by the Chief Operating Decision Maker (CODM). The Company reports revenue and income in one reportable segment. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include those involving revenue recognition, valuation of goodwill and acquired assets and liabilities, valuation of the pension obligation, valuation of a derivative instrument, valuation of contingent consideration and share-based compensation. These items are continuously monitored and analyzed by management for changes in facts and circumstances and material changes in these estimates could occur in the future. Global and Macroeconomic Conditions The Company continues to closely monitor the current global and macroeconomic conditions, including the impacts of the war in Ukraine and related sanctions, global geopolitical tension, stock market volatility, exchange rate fluctuations, rising inflation and interest rates, the risk of a recession, and the impacts of epidemics or pandemics such as the coronavirus (COVID-19) on all aspects of its business, including the manner and extent to which they have impacted and could continue to impact its customers, employees, supply chain, and distribution network. The impacts of these global and macroeconomic trends remain uncertain. It is possible that the measures taken by the governments of countries affected and the resulting economic impacts may materially and adversely affect the Company's future results of operations, cash flows and financial position as well as its customers. The Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. The Company has taken and continues to take precautionary actions to manage costs and spending across the organization. This includes managing discretionary spending and hiring activities. In addition, based on covenant levels, the Company had as of March 31, 2023 an incremental $ 700 million available under the 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. The Company elected to defer the employer-paid portion of social security taxes. The Company had deferred $ 4.5 million of employer payroll F-9 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) taxes, which was included as accrued other in the Company's consolidated balance sheet at March 31, 2022. The balance was paid in December 2022. The Company expects net cash provided by operations combined with cash, cash equivalents, and marketable securities and borrowing availability under the 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. Cash and Cash Equivalents and Marketable Securities Under authoritative guidance, NetScout has classified its investments as "available-for-sale" which are carried at fair value associated unrealized gains or losses are recorded as a separate component of stockholders’ equity until realized. NetScout considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents and those investments with original maturities greater than three months to be marketable securities. At March 31, 2023 and periodically throughout the year, NetScout has maintained cash balances in various operating accounts in excess of federally insured limits. NetScout limits the amount of credit exposure by investing only with credit worthy institutions which the Company believes are those institutions with an investment grade rating for deposits. Revenue Recognition The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers (Topic 606). For further discussion of the Company's accounting policies related to revenue see Note 3, "Revenue Recognition." Commission Expense Sales commissions are recorded as an asset when the initial contract's duration is longer than 12 months and amortized to expense ratably over the remaining performance periods of the related contracts. Uncollected Deferred Revenue Because of NetScout's revenue recognition policies, there are circumstances for which the Company does not recognize revenue relating to sales transactions that have been billed, but the related account receivable has not been collected. While the receivable represents an enforceable obligation, the Company does not believe its right to payment is unconditional, therefore for balance sheet presentation purposes, the Company has not recognized the deferred revenue or the related account receivable and no amounts appear in the consolidated balance sheets for such transactions because control of the underlying deliverable has not transferred. The aggregate amount of unrecognized accounts receivable and deferred revenue w as $ 6.6 million a nd $ 9.4 million at March 31, 2023 and 2022, respectively. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of investments, trade accounts receivable and accounts payable. NetScout's cash, cash equivalents, and marketable securities are placed with financial institutions with high credit standings. At March 31, 2023 and March 31, 2022, the Company had no direct customers or indirect channel partners which accounted for more than 10% of the accounts receivable balance. During the fiscal year ended March 31, 2023, one direct customer, Verizon, accounted for more than 10% of the Company's total revenue, while no indirect channel partners accounted for more than 10% of the Company's total revenue. During the fiscal years ended March 31, 2022 and 2021 respectively, no direct customers or indirect channel partners accounted for more than 10% of total revenue. Historically, the Company has not experienced any significant failure of its customers to meet their payment obligations nor does the Company anticipate material non-performance by its customers in the future; accordingly, the Company does not require collateral from its customers. However, if the Company’s assumptions are incorrect, there could be an adverse impact on its allowance for doubtful accounts. F-10 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) Trade Receivable Valuations Accounts receivable are stated at their net realizable value. The allowance against gross trade receivables reflects the best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. Inventories Inventories are stated at the lower of actual cost or net realizable value. Cost is determined by using the first-in, first-out (FIFO) method. Fixed Assets Fixed assets are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or anticipated useful life of the improvement. Gains and losses upon asset disposal are recognized in the year of disposition. Expenditures for replacements and building improvements are capitalized, while expenditures for maintenance and repairs are charged against earnings as incurred. Leases The Company has operating leases for administrative, research and development, sales and marketing and manufacturing facilities and equipment under various non-cancelable lease agreements. Lease commencement occurs on the date the Company takes possession or control of the property or equipment. The Company's lease terms may include options to extend or terminate the lease where it is reasonably certain that the Company will exercise those options. The Company considers several economic factors when making this determination, including but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a particular lease. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. For further discussion of the Company's policies related to leases see Note 17, "Leases." Valuation of Goodwill, Intangible Assets and Other Acquisition Accounting Items The Company amortizes 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. The Company performs 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. The Company has one reporting unit. To test impairment, the Company first assesses 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 the Company's 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 the Company concludes otherwise, quantitative impairment testing is not required. The Company performed its annual impairment analysis for goodwill as of January 31, 2023, using the qualitative (Step 0) assessment, and the Company concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value. 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, the Company uses either an income, market or cost method approach. The contingent purchase consideration represents 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 Company did not have any acquisitions during the years ended March 31, 2023, 2022 and 2021. Capitalized Software Development Costs Costs incurred in the research and development of the Company's products are expensed as incurred, except for certain software development costs. Costs associated with the development of computer software are expensed prior to the establishment of technological feasibility and capitalized thereafter until the related software products are available for first F-11 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) customer shipment. Such costs are amortized using the straight-line method over the estimated economic life of the product, which generally does not exceed three years . Capitalized software development costs are periodically assessed for recoverability in the event of changes to the anticipated future revenue for the software products or changes in product technologies. Unamortized capitalized software development costs that are determined to be in excess of the net realizable value of the software products would be expensed in the period in which such a determination is made. Typically for accounting purposes, these R&D investments have not been capitalized because of the development methodology employed. The developments are added individually to the core code over a shorter period of time but marketed as a release once all portions are complete. Derivative Financial Instruments Under authoritative guidance for derivative financial instruments and hedging activities, all hedging activities must be documented at the inception of the hedge and must meet the definition of highly effective in offsetting changes to future cash flows in order for the derivative to qualify for hedge accounting. Under the guidance, if an instrument qualifies for hedge accounting, the changes in the fair value each period for open contracts, measured at the end of the period, are recorded to other comprehensive income. Otherwise, changes in the fair value are recorded in earnings each period. Management must perform initial and ongoing tests in order to qualify for hedge accounting. In accordance with the guidance, the Company accounts for its instruments under hedge accounting. The effectiveness and a measurement of ineffectiveness of qualifying hedge contracts are assessed by the Company quarterly. The Company records the fair value of its derivatives in prepaid expenses and other current assets and accrued other in the Company's consolidated balance sheet. The effective portion of gains or losses resulting from changes in the fair value of qualifying hedges are recorded in other comprehensive income (loss) until the forecasted transaction occurs, with any ineffective portion classified directly to the Company’s consolidated statement of operations based on the expense categories of the items being hedged. When forecasted transactions occur, unrealized gains or losses associated with the effective portion of the hedge are reclassified to the respective expense categories in the Company’s consolidated statement of operations. Gains or losses related to hedging activity are included as operating activities in the Company’s consolidated statement of cash flows. If the underlying forecasted transactions do not occur, or it becomes probable that they will not occur, the gain or loss on the related cash flow hedge is recognized immediately in earnings. NetScout also periodically enters into foreign exchange forward contracts to manage exchange rate risk associated with certain third-party transactions and for which the Company does not elect hedge accounting treatment as there is no difference in the timing of gain or loss recognition on the hedge instrument and the hedged item. Contingencies NetScout accounts for claims and contingencies in accordance with authoritative guidance that requires an estimated loss to be recorded from a claim or loss contingency when information available prior to issuance of its 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 NetScout determines 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, NetScout discloses the amount or range of estimated loss if the amount or range of estimated loss is material. Accounting for claims and contingencies requires NetScout to use its judgment. NetScout consults with legal counsel on those issues related to litigation and seeks input from other experts and advisors with respect to matters in the ordinary course of business. Share-Based Compensation NetScout recognizes compensation expense for all share-based payments granted. Under the fair value recognition provisions, share-based compensation is calculated net of an estimated forfeiture rate and compensation cost is only recognized for those shares expected to vest on a straight-line basis over the expected requisite service period of the award. Foreign Currency NetScout accounts for its reporting of foreign operations in accordance with guidance which establishes guidelines for the determination of the functional currency of foreign subsidiaries. In accordance with the guidance, NetScout has determined its functional currency for those foreign subsidiaries that are an extension of NetScout's U.S. operations to be the U.S. Dollar. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars are translated into U.S. dollars using the period-end exchange rate, and income and expense items are translated using the F-12 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of stockholders' equity. NetScout will experience currency exchange risk with respect to foreign currency denominated expenses. In order to partially offset the risks associated with the effects of certain foreign currency exposures, NetScout has established a program that utilizes foreign currency forward contracts. Under this program, increases or decreases in foreign currency exposures are partially offset by gains or losses on forward contracts, to mitigate the impact of foreign currency transaction gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency forward contracts are recorded at fair value at the end of each fiscal period. The Company had foreign currency losses of $ 2.8 million, $ 0.2 million and $ 5.5 million for the fiscal years ended March 31, 2023, 2022 and 2021, respectively. These amounts are included in other income (expense), net in the Company's consolidated statements of operations. Advertising Expense NetScout recognizes advertising expense as incurred. Advertising expense was $ 10.2 million, $ 11.4 million and $ 8.7 million for the fiscal years ended March 31, 2023, 2022 and 2021, respectively. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income typically consists of unrealized gains and losses on marketable securities, unrealized gains and losses on hedge contracts, actuarial gains and losses, and foreign currency translation adjustments. Income Taxes NetScout accounts for its income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as the effect of any net operating loss and tax credit carryforwards. Income tax expense is comprised of the current tax liability or benefit and the change in deferred tax assets and liabilities. NetScout evaluates the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. NetScout weighs objective and verifiable evidence more heavily in this analysis. In situations where NetScout concludes that it does not have sufficient objective and verifiable evidence to support the realizability of the deferred tax asset, NetScout creates a valuation allowance against it. Recent Accounting Standards In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires companies to recognize and measure contract assets and contract liabilities acquired in a business combination as if the acquiring company originated the related revenue contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. ASU 2021-08 is effective for the Company beginning April 1, 2023. Amendments within the standard are required to be applied on a prospective basis from the date of adoption. The adoption is not expected to have a material impact on the Company's financial position, results of operations, and disclosures. We will apply the provisions of ASU 2021-08 after adoption to future acquisitions, if any. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform, which clarifies the scope and application of certain optional expedients and exceptions regarding the original guidance. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform by delaying the effective date of the guidance issued in ASU 2020-04 to December 31, 2024. The Company adopted this guidance in the fourth quarter of fiscal year 2023 on a prospective basis, which did not have a material impact on the Company's financial position, results of operations, and disclosures. See Note 11 Long-term Debt for further discussion. F-13 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) NOTE 3 - REVENUE RECOGNITION Revenue Recognition Policy The Company exercises judgment and uses estimates in connection with determining the amounts of product and service revenues to be recognized in each accounting period. The Company derives revenues primarily from the sale of network management tools and cybersecurity solutions for service provider and enterprise customers, which include hardware, software, and service offerings. The Company's 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. The Company accounts 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 the Company 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 the Company deems 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 the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for products and services. Product revenue is typically recognized upon fulfillment, 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. The Company's 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. The Company generally provides 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 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, the Company's 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 the Company's product and service offerings that may be delivered at various points in time. The Company allocates 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. The Company uses a range of amounts to estimate SSP for each of the products and services sold, based primarily on the performance obligation's historical pricing. The Company also considers its overall pricing objectives and practices across different sales channels and geographies, and market conditions. Generally, the Company has established SSP for a majority of its service performance obligations based on historical standalone sales. In certain instances, the Company has established SSP for services based upon an estimate of profitability and the underlying cost to fulfill those services. 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. The Company reviews sales of the product performance obligations on a quarterly basis and updates, when appropriate, its SSP for such performance obligations to ensure that it reflects recent pricing experience. The Company's products are distributed through its 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. The Company records consideration given to a customer as a reduction of revenue to the extent they have F-14 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) recorded revenue from the customer. With limited exceptions, the Company's return policy does not allow product returns for a refund. Returns have been insignificant to date. In addition, the Company has a history of successfully collecting receivables from its resellers and distributors. During the fiscal year ended March 31, 2023, the Company recognized reven ue of $ 328.2 million rela ted to the Company's deferred revenue balance reported at March 31, 2022. Performance Obligations 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. The transaction price is allocated among performance obligations in bundled contracts in an amount that depicts the relative standalone selling prices of each obligation. For contracts involving distinct hardware and software licenses, the performance obligations are satisfied at a point in time when control is transferred to the customer. For standalone maintenance and post-contract support (PCS) the performance obligation is satisfied ratably over the contract term as a stand-ready obligation. For consulting and training services, the performance obligation may be satisfied over the contract term as a stand-ready obligation, satisfied over a period of time as those services are delivered, satisfied at the completion of the service when control has transferred, or the services have expired unused. Payments for hardware, software licenses, one-year maintenance, PCS and consulting services, are typically due up front with payment terms of 30 to 90 days. However, the Company does have contracts pursuant to which billings occur ratably over a period of years following the transfer of control for the contracted performance obligations. Payments on multi-year maintenance, PCS and consulting services are typically due in annual installments over the contract term. The Company did not have any material variable consideration such as obligations for returns, refunds or warranties at March 31, 2023. At March 31, 2023, the Company had total deferred revenu e of $ 441.3 million, which represents the aggregate total contract price allocated to undelivered performance obligations. The Company expect s to recognize $ 311.5 million, or 71 %, of this revenue during the next 12 months, and expects to recognize the remaining $ 129.8 million, or 29 %, of this revenue thereafter. NetScout expects that the amount of billed and unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer support and service agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations. The Company did not have material significant financing components, or variable consideration or performance obligations satisfied in a prior period recognized during the twelve months ended March 31, 2023. Contract Balances The Company may receive payments from customers based on billing schedules as established by the Company's contracts. Contract assets relate to performance obligations where control has transferred to the customer in advance of scheduled billings. The Company records unbilled accounts receivable representing the right to consideration in exchange for goods or services that have been transferred to a customer conditional on the passage of time. Deferred revenue relates to scenarios where billings with an unconditional right to payment occur before all performance obligations are delivered or payments are received in advance of performance under the contract. Costs to Obtain Contracts The Company has determined that the only significant incremental costs incurred to obtain contracts with customers within the scope of Topic 606 are sales commissions paid to its employees. Sales commissions are recorded as an asset and amortized to expense ratably over the remaining performance periods of the related contracts with remaining performance obligations. The Company expenses costs as incurred for sales commissions when the amortization period would have been one year or less. At March 31, 2023, th e consolidated ba lance sheet included $ 9.4 million in assets related to sales commissions to be expensed in future periods. A balance of $ 4.7 million was included in prepaid expenses and other current assets, and a balance of $ 4.7 million was in cluded in other assets in the Company's consolidated balance sheet at March 31, 2023. At March 31, 2022, the consolidated balance sheet included $ 8.8 million in assets related to sales commissions to be expensed in future F-15 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) periods. A balance of $ 4.6 million was included in prepaid expenses and other current assets, and a balance of $ 4.2 million was included in other assets in the Company's consolidated balance sheet at March 31, 2022. During the twelve months ended March 31, 2023 and 2022, the Company recognized $ 7.0 million and $ 6.3 million of amortization related to this sales commission asset, which is included in the sales and marketing expense line in the Comp any's consolidated statements of operations. Allowance for Credit Losses The Company continually monitors collections from its customers. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for credit losses based on a combination of factors, including but not limited to, analysis of the aging schedules, past due balances, historical collection experience and prevailing economic conditions. The following table summarizes the activity in the allowance for credit losses (in thousands): Balance at March 31, 2022 $ 1,649 Provision for allowance for credit losses 479 Recoveries and other adjustments 876 Write off charged against the allowance for credit losses ( 2,329 ) Balance at March 31, 2023 $ 675 NOTE 4 – CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES Cash and cash equivalents mainly consisted of U.S government and municipal obligations, commercial pap er, corporate bonds, certificate o f deposits, money market instruments and cash maintained with various financial institutions at March 31, 2023 and 2022. Cash, Cash Equivalents and Restricted Cash The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands): March 31, 2023 March 31, 2022 March 31, 2021 March 31, 2020 Cash and cash equivalents $ 386,794 $ 636,161 $ 467,176 $ 338,489 Restricted cash — — — 1,748 Total cash, cash equivalents and restricted cash $ 386,794 $ 636,161 $ 467,176 $ 340,237 The Company's restricted cash includes cash balances which are legally or contractually restricted. The Company's restricted cash is included within prepaid and other current assets and consists of amounts related to holdbacks associated with prior acquisitions. F-16 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) Marketable Securities The following is a summary of marketable securities held by NetScout at March 31, 2023 classified as short-term and long-term (in thousands): Amortized Cost Unrealized Gains (Losses) Fair Value Type of security: U.S. government and municipal obligations $ 8,796 $ ( 1 ) $ 8,795 Commercial paper 19,136 — 19,136 Corporate bonds 310 — 310 Certificate of deposits 3,963 — 3,963 Total short-term marketable securities 32,205 ( 1 ) 32,204 U.S. government and municipal obligations 8,915 25 8,940 Total long-term marketable securities 8,915 25 8,940 Total marketable securities $ 41,120 $ 24 $ 41,144 The following is a summary of marketable securities held by NetScout at March 31, 2022, classified as short-term and long-term (in thousands): Amortized Cost Unrealized Losses Fair Value Type of security: U.S. government and municipal obligations $ 40,895 $ ( 32 ) $ 40,863 Commercial paper 23,353 — 23,353 Corporate bonds 823 ( 2 ) 821 Certificates of deposit 2,000 — 2,000 Total short-term marketable securities 67,071 ( 34 ) 67,037 Total long-term marketable securities — — — Total marketable securities $ 67,071 $ ( 34 ) $ 67,037 Contractual maturities of the Company's marketable securities held at March 31, 2023 and 2022 (in thousands) were as follows: March 31, 2023 March 31, 2022 Available-for-sale securities: Due in 1 year or less $ 32,204 $ 67,037 Due after 1 year through 5 years 8,940 — $ 41,144 $ 67,037 F-17 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) NOTE 5 – FAIR VALUE MEASUREMENTS The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant unobservable inputs. The following tables present the Company's financial assets and liabilities measured on a recurring basis using the fair value hierarchy at March 31, 2023 and 2022 (in thousands): Fair Value Measurements at March 31, 2023 Level 1 Level 2 Level 3 Total ASSETS: Cash and cash equivalents $ 370,455 $ 16,339 $ — $ 386,794 U.S. government and municipal obligations 17,735 — — 17,735 Commercial paper — 19,136 — 19,136 Corporate bonds 310 — — 310 Certificate of deposits — 3,963 — 3,963 Derivative financial instruments — 59 — 59 $ 388,500 $ 39,497 $ — $ 427,997 LIABILITIES: Derivative financial instruments $ — $ ( 49 ) $ ( 1,380 ) $ ( 1,429 ) $ — $ ( 49 ) $ ( 1,380 ) $ ( 1,429 ) Fair Value Measurements at March 31, 2022 Level 1 Level 2 Level 3 Total ASSETS: Cash and cash equivalents $ 617,734 $ 18,427 $ — $ 636,161 U.S. government and municipal obligations 40,863 — — 40,863 Commercial paper — 23,353 — 23,353 Corporate bonds 821 — — 821 Certificate of deposits — 2,000 — 2,000 Derivative financial instruments — 20 — 20 $ 659,418 $ 43,800 $ — $ 703,218 LIABILITIES: Derivative financial instruments $ — $ ( 78 ) $ — $ ( 78 ) $ — $ ( 78 ) $ — $ ( 78 ) This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including marketable securities and derivative financial instruments. The Company's Level 1 investments are classified as such because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency. The Company's Level 2 investments are classified as such because they are valued using observable inputs other than Level 1 quoted prices that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets in markets that are not active. The Company's Level 3 assets consisted of contingent consideration related to the divestiture of the Company's handheld network test (HNT) tools business in September 2018, which represented potential future earn outs to the Company that were contingent on the HNT tools business achieving certain milestones. During the fiscal year ended March 31, 2022, the Company F-18 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) recorded an $ 0.8 million change in the fair value of the contingent consideration, which is included in other income (expense) , net within the Company's consolidated statement of operations related to the divestiture of the handheld network test (HNT) tools business in September 2018. The contingent consideration, which was a Level 3 asset, represented potential future earn outs to the Company that were contingent on the HNT tools business achieving certain milestones. The $ 0.8 million of contingent consideration was paid to the Company as the final earnout during the fiscal year ended March 31, 2022. The Company’s Level 3 liability at March 31, 2023 consisted of a forward share purchase contract, which qualified as a derivative instrument under authoritative guidance. In February 2023, the Company entered into an agreement with Napatech A/S (Napatech) to purchase approximately 6.2 million shares of Napatech’s common stock for $ 7.5 million. The Company measured the forward share purchase contract at March 31, 2023 at fair value based on inputs which were observable and those which were not observable in the market, resulting in a charge related to the Level 3 fair value hierarchy classification. During the fiscal year ended March 31, 2023, the Company recorded a $ 1.4 million change in the fair value of the derivative instrument in other income (expense) , net within the Company's consolidated statement of operations. On April 14, 2023, the Company settled the contract and paid $ 7.5 million to Napatech in exchange for approximately 6.2 million shares of Napatech's common stock. During the fiscal year ended March 31, 2021, the Company paid contingent purchase consideration related to the two acquisitions that occurred during fiscal year 2020. The $ 0.7 million of purchase consideration related to the Gigavation acquisition was paid to the seller in February 2021. The $ 1.0 million contingent purchase consideration related to the Eastwind acquisition was paid to the seller in April 2020. The following table sets forth a reconciliation of changes in the fair value of the Company’s Level 3 financial asset for the fiscal year ended March 31, 2022 (in thousands): Contingent Consideration Balance at March 31, 2021 $ — Change in fair value of contingent consideration 837 Collection of contingent consideration ( 837 ) Balance at March 31, 2022 $ — The following table sets forth a reconciliation of changes in the fair value of the Company’s Level 3 financial liability for the fiscal year ended March 31, 2023 (in thousands): Derivative Instrument Balance at March 31, 2022 $ — Change in fair value of derivative instrument ( 1,380 ) Balance at March 31, 2023 $ ( 1,380 ) NOTE 6 – INVENTORIES Inventories are stated at the lower of actual cost or net realizable value. Cost is determined by using the FIFO method. Inventories consisted of the following (in thousands): March 31, 2023 2022 Raw materials $ 12,352 $ 14,779 Work in process 14 695 Finished goods 5,183 5,761 Deferred costs 407 6,985 $ 17,956 $ 28,220 F-19 NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) NOTE 7 – FIXED ASSETS Fixed assets consisted of the following (in thousands): Estimated Useful Life in Years March 31, 2023 2022 Furniture and fixtures 3 - 7 $ 9,786 $ 9,757 Computer equipment and internal use software 3 - 5 192,168 185,177 Leasehold improvements (1) up to 12 54,863 54,442 Demonstration and spare part units 2 - 5 18,733 18,254 275,550 267,630 Less – accumulated depreciation ( 240,815 ) ( 226,293 ) $ 34,735 $ 41,337 (1) Leasehold improvements are depreciated over the shorter of the lease term or anticipated useful life of the improvement. Depreciation expense was $ 18.8 million, $ 20.1 million and $ 22.4 million for the fiscal years ended March 31, 2023, 2022 and 2021, respectively. NOTE 8 – GOODWILL & INTANGIBLE ASSETS Goodwill The Company has one reporting unit. Goodwill is tested for impairment at a reporting unit level at least annually, as of January 31, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. At March 31, 2023 and 2022, the carrying amount of goodwill was $ 1.7 billion. During fiscal years 2023 and 2022, the Company's annual impairment tests indicated that goodwill was not impaired. The Company completed its annual goodwill impairment test at January 31, 2023, using the qualitative (Step 0) assessment, and the Company concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value. The change in the carrying amount of goodwill for the fiscal year ended March 31, 2023 is due to the impact of foreign currency translation adjustments related to asset balances that are recorded in currencies other than the U.S. Dollar. The changes in the carrying amount of goodwill for the fiscal years ended March 31, 2023 and 2022 are as follows (in thousands): Balance at March 31, 2021 $ 1,717,554 Foreign currency translation impact 5,602 Balance at March 31, 2022 $ 1,723,156 Foreign currency translation impact 1,248 Balance at March 31, 2023 $ 1,724,404 Intangible Assets The net carrying amounts of intangible assets we re $ 366.6 million and $ 433.4 million at March 31, 2023 and 2022, respectively. Intangible assets acquired in a business combination are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. The Company amortizes intangible assets over their estimated useful lives. During the first quarter of fiscal year 2022, in conjunction with the renewal process of an acquired indefinite-lived trade name and the Company's focus on advancing new product lines, the Company reassessed the estimated economic life of the acquired indefinite-lived trade name. As a result, the Company began amortizing the acquired trade name over 8 years. Prior to reclassifying the acquired trade name to a finite-lived intangible asset, the Company tested the acquired trade name for impairment and determined the fair value of the asset exceeded the carrying value. This change in estimate did not materially impact the Company's income statement. F-20 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) During the fiscal years ended March 31, 2023, 2022 and 2021, the Company acquired $ 0.2 million , $ 50 thousand, and $ 4.5 million of technol ogy licenses, respectively. These amounts are included within distributor relationships and are being amortizing using the economic benefit method over useful lives of between one and four years . Intangible assets include the following amortizable intangible assets at March 31, 2023 (in thousands): Estimated Useful Life in Years Cost Accumulated Amortization Net Developed technology 3 - 13 years $ 249,903 $ ( 233,440 ) $ 16,463 Customer relationships 8 - 18 years 768,179 ( 433,876 ) 334,303 Distributor relationships and technology licenses 1 - 6 years 11,547 ( 10,133 ) 1,414 Definite-lived trademark and trade name 2 - 9 years 57,694 ( 43,489 ) 14,205 Core technology 10 years 7,192 ( 7,192 ) — Non-compete agreements 3 years 292 ( 292 ) — Capitalized software 3 years 3,317 ( 3,317 ) — Other 1 - 20 years 1,208 ( 1,002 ) 206 $ 1,099,332 $ ( 732,741 ) $ 366,591 Intangible assets include the following amortizable intangible assets at March 31, 2022 (in thousands): Estimated Useful Life in Years Cost Accumulated Amortization Net Developed technology 3 - 13 years $ 250,247 $ ( 224,426 ) $ 25,821 Customer relationships 8 - 18 years 769,404 ( 384,347 ) 385,057 Distributor relationships and technology licenses 1 - 6 years 11,408 ( 8,896 ) 2,512 Definite-lived trademark and trade name (a) 2 - 9 years 57,748 ( 37,944 ) 19,804 Core technology 10 years 7,192 ( 7,192 ) — Non-compete agreements 3 years 292 ( 292 ) — Capitalized software 3 years 3,317 ( 3,317 ) — Other 1 - 20 years 1,208 ( 983 ) 225 $ 1,100,816 $ ( 667,397 ) $ 433,419 (a) The Company’s $ 18.6 million acquired trade name changed from indefinite-lived to definite-lived during the first quarter of fiscal year 2022. Amortization included as cost of product revenue consists of amortization of developed technology, distributor relationships and technology licenses, core technology and software. Amortization included as operating expense consists of all other intangible assets. The following table provides a summary of amortization expense during the fiscal years ended March 31, 2023, 2022, and 2021 (in thousands). Years Ended March 31, 2023 2022 2021 Amortization of intangible assets included as: Cost of product revenue 10,542 14,600 20,457 Operating expense 55,410 59,761 61,151 $ 65,952 $ 74,361 $ 81,608 F-21 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) The following is the expected future amortization expense at March 31, 2023 for the fiscal years ended March 31 (in thousands): 2024 $ 57,987 2025 50,809 2026 46,446 2027 43,566 2028 40,608 Thereafter 127,175 Total $ 366,591 NOTE 9 – DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES NetScout operates internationally and, in the normal course of business, is exposed to fluctuations in foreign currency exchange rates. The exposures result from costs that are denominated in currencies other than the U.S. Dollar, primarily the Euro, British Pound, Canadian Dollar, and Indian Rupee. The Company manages its foreign cash flow risk by hedging forecasted cash flows for operating expenses denominated in foreign currencies for up to twelve months , within specified guidelines through the use of forward contracts. The Company enters into foreign currency exchange contracts to hedge cash flow exposures from costs that are denominated in currencies other than the U.S. Dollar. These hedges are designated as cash flow hedges at inception. NetScout also periodically enters into forward contracts to manage exchange rate risk associated with certain third-party transactions and for which the Company does not elect hedge accounting treatment as there is no difference in the timing of gain or loss recognition on the hedge instrument and the hedged item. All of the Company's foreign exchange forward contract derivative instruments are utilized for risk management purposes, and the Company does not use derivatives for speculative trading purposes. These contracts will mature over the next twelve months and are expected to impact earnings on or before maturity. The notional amounts and fair values of foreign exchange forward contract derivative instruments in the consolidated balance sheets at March 31, 2023 and 2022 were as follows (in thousands): Notional Amounts (a) Prepaid Expenses and Other Current Assets Accrued Other March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022 Derivatives Designated as Hedging Instruments: Foreign exchange forward contracts $ 10,265 $ 5,578 $ 59 $ 20 $ 29 $ 78 Derivatives Not Designated as Hedging Instruments: Foreign exchange forward contracts 6,031 — — — 20 — $ 59 $ 20 $ 49 $ 78 (a) Notional amounts represent the gross contract/notional amount of the derivatives outstanding. F-22 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) The following table provides the effect foreign exchange forward contracts had on other comprehensive income (loss), (OCI) and results of operations during the fiscal years ended March 31, 2023 and 2022 (in thousands): Gain (Loss) Recognized in OCI on Derivative (a) Gain (Loss) Reclassified from Accumulated OCI into Income (b) March 31, March 31, March 31, March 31, 2023 2022 Location 2023 2022 Foreign exchange forward contracts $ ( 477 ) $ 82 Research and development $ 62 $ ( 26 ) Sales and marketing 502 ( 30 ) $ ( 477 ) $ 82 $ 564 $ ( 56 ) (a) The amount represents the change in fair value of derivative contracts due to changes in spot rates. (b) The amount represents reclassification from other comprehensive income to earnings that occurs when the hedged item affects earnings. The following table provides the effect foreign exchange forward contracts not designated as hedging instruments had on the Company's results of operations during the fiscal years ended March 31, 2023 and 2022 (in thousands): Loss Recognized in Income (a) March 31, March 31, Location 2023 2022 Foreign exchange forward contracts General and administrative $ ( 21 ) $ ( 107 ) $ ( 21 ) $ ( 107 ) (a) The amount represents the change in fair value of derivative contracts due to changes in spot rates. In addition to foreign exchange forward contracts, as discussed in Note 5, during the fiscal year ended March 31, 2023, the Company entered into a forward share purchase contract to purchase approximately 6.2 million shares of Napatech's common stock for $ 7.5 million, which qualified as a derivative instrument under authoritative guidance. The notional amount of the derivative instrument was $ 7.5 million. At March 31, 2023, the fair value of the derivative instrument of $ 1.4 million was included as accrued other in the Company's consolidated balance sheet. During the fiscal year ended March 31, 2023, the Company recorded a $ 1.4 million charge related to the change in the fair value of the derivative instrument in other income (expense), net within the Company's consolidated statement of operations. NOTE 10 – RESTRUCTURING CHARGES During the fiscal year ended March 31, 2020, the Company approved two restructuring plans to restructure certain departments to better align functions. During the second quarter of the fiscal year ended March 31, 2020, as a result of the first workforce reduction, the Company recorded a restructuring charge totaling $ 0.5 million during the fiscal year ended March 31, 2020. During the fourth quarter of the fiscal year ended March 31, 2020, as a result of the second workforce reduction, the Company recorded a restructuring charge totaling $ 2.1 million during the fiscal year ended March 31, 2020 and an additional $ 0.1 million during the fiscal year ended March 31, 2021. The one-time employee-related termination benefits for the two approved restructuring plans were paid in full during the fiscal year ended March 31, 2021. During the fiscal year ended March 31, 2022, the Company did not approve any restructuring plans. During the fiscal year ended March 31, 2023, the Company restructured certain departments to better align functions resulting in the termination of eighteen employees. As a result of the workforce reduction, during the fiscal year ended March 31, 2023, the Company recorded a restructuring charge totaling $ 1.9 million related to one-time employee-related termination benefits for the employees that were notified of their termination during the period. The one-time employee-related termination benefits were paid in full during the fiscal year ended March 31, 2023. F-23 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) The following table provides a summary of the activity related to the restructuring plans and the related restructuring liability (in thousands): Q2 FY20 Plan Q4 FY20 Plan FY23 Plan Total Balance at March 31, 2020 $ 3 $ 1,717 $ — $ 1,720 Restructuring charges to operations — 62 — 62 Cash payments ( 3 ) ( 1,860 ) — ( 1,863 ) Other adjustments — 81 — 81 Balance at March 31, 2021 $ — $ — $ — $ — Balance at March 31, 2022 $ — $ — $ — $ — Restructuring charges to operations — — 1,861 1,861 Cash payments — — ( 1,712 ) ( 1,712 ) Other adjustments — — ( 149 ) ( 149 ) Balance at March 31, 2023 $ — $ — $ — $ — NOTE 11 – LONG-TERM DEBT On July 27, 2021, the Company amended and extended the existing credit facility (Second Amended and Restated Credit Agreement) with a syndicate of lenders by and among: the Company; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; 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 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. The Company may elect to use the credit facility for general corporate purposes (including to finance the repurchase of shares of the Company's 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, during the fiscal year ended March 31, 2022, the Company paid off the outstanding balance of $ 350 million under the previous amended credit agreement by borrowing the same amount under the Second Amended and Restated Credit Agreement. Additionally, the Company 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. On February 22, 2023, the Company entered into a First Amendment Agreement (First Amendment) of its Second Amended and Restated Credit Agreement with its syndicate of lenders. The Company entered into the First Amendment in order to remove and replace the LIBOR-based interest rate benchmark provisions for U.S. dollar-denominated loans with interest rate benchmark provisions for U.S. dollar-denominated loans based on a term secured overnight financing rate (SOFR). During the fiscal year ended March 31, 2023, the Company repaid $ 250.0 million of borrowings under the Second Amended and Restated Credit Agreement. At March 31, 2023, $ 100 million was outstanding under the Second Amended and Restated Credit Agreement. The First Amendment provides that U.S. dollar-denominated advances under the Second Amended Credit Agreement will bear interest at a term SOFR rate plus a credit spread adjustment of 0.10 % or an Alternate Base Rate (defined in a customary manner), at the option of the Company, plus a margin that ranges from 1.00 % per annum for Alternate Base Rate loans and 2.00 % per annum for term SOFR loans if the Company’s consolidated gross leverage ratio is greater than 3.50 to 1.00, down to 0 % per annum for Alternate Base Rate loans and 1.00 % per annum for term SOFR loans if the Company's consolidated gross leverage ratio is equal to or less than 1.50 to 1.00. For the period from the delivery of the Company's financial statements for the quarter ended December 31, 2022, until the Company has delivered financial statements for the quarter ended March 31, 2023, the applicable margin will be 1.00 % per annum for Term Benchmark Revolving loans and 0 % per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on the Company's F-24 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) 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 the Company’s consolidated gross leverage ratio is greater than 3.50 to 1.00, down to 0 % per annum for Alternate Base Rate loans and 1.00 % per annum for Term Benchmark Revolving loans if the Company’s consolidated gross leverage ratio is equal to or less than 1.50 to 1.00. The Company's consolidated gross leverage ratio is the ratio of its consolidated total debt compared to its 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. Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of the Company's financial statements for the quarter ended December 31, 2022, until the Company has delivered financial statements for the quarter ended March 31, 2023, the commitment fee will be 0.15 % per annum, and thereafter the commitment fee will vary depending on the Company's consolidated gross leverage ratio, ranging from 0.30 % per annum if the Company's consolidated gross leverage ratio is greater than 2.75 to 1.00, down to 0.15 % per annum if the Company's 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 subfacility on the amount of such lender’s letter of credit exposure, at a rate per annum equal to the applicable margin for term SOFR loans. 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 a rate per annum equal to the applicable margin for term SOFR loans assuming such loans were outstanding during the period. Additionally, the Company will pay a fronting fee to each issuing bank in amounts to be agreed to between the Company and the applicable issuing bank. Interest on Alternate Base Rate loans is payable at the end of each calendar quarter. Interest on term SOFR 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. The Company 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 the Company’s wholly-owned material domestic restricted subsidiaries, subject to certain exceptions, and (b) are secured by substantially all of the assets of the Company 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 the Company and its 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 the Company and its 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 the Company to maintain a certain consolidated net leverage ratio and removes the previous requirement under the Company's previous amended credit agreement that the Company maintain a minimum consolidated interest coverage ratio. The Company's consolidated net leverage ratio is the ratio of its Consolidated Total Debt minus the lesser of unrestricted cash and 125 % of adjusted consolidated EBITDA compared to its adjusted consolidated EBITDA. The Company’s maximum consolidated net leverage ratio is 4.00 to 1.00. These covenants and limitations are more fully described in the Second Amended and Restated Credit Agreement. As of March 31, 2023, the Company was in compliance with all 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 consolidated 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 F-25 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) 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. The Company had unamortized capitalized debt issuance costs, net of $ 3.7 million at March 31, 2023, 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 $ 2.6 million was included as other assets in the Company's consolidated balance sheet at March 31, 2023. NOTE 12 – NET INCOME PER SHARE Calculations of the basic and diluted net income per share and potential common shares are as follows (in thousands, except for per share data): Fiscal Year Ended March 31, 2023 2022 2021 Numerator: Net income $ 59,648 $ 35,874 $ 19,352 Denominator: Denominator for basic net income per share - weighted average common shares outstanding 71,781 74,019 73,103 Dilutive common equivalent shares: Weighted average restricted stock units and performance-based restricted stock units 1,265 1,065 719 Denominator for diluted net income per share - weighted average shares outstanding 73,046 75,084 73,822 Net income per share: Basic net income per share $ 0.83 $ 0.48 $ 0.26 Diluted net income per share $ 0.82 $ 0.48 $ 0.26 The following table sets forth restricted stock units excluded from the calculation of diluted net income per share, since their inclusion would be antidilutive (in thousands): Fiscal Year Ended March 31, 2023 2022 2021 Restricted stock units 1,799 1,222 2,864 Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted net income per share is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding restricted shares and restricted stock units using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of unrecognized compensation expense as additional proceeds. The delivery of 4.5 million shares under the Company's ASR agreements reduced the Company's outstanding shares used to determine the weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share for the fiscal year ended March 31, 2023. See Note 13 for additional information. NOTE 13 – TREASURY STOCK On October 24, 2017, the Company's Board of Directors approved a share repurchase program that enables the Company to repurchase up to twenty-five million shares of its common stock (2017 Share Repurchase Program). This program became effective once the Company's previously disclosed twenty million share repurchase program was completed. The Company is F-26 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) not obligated to acquire any specific amount of common stock within any particular timeframe as a result of this share repurchase program. On May 3, 2022, the Company's Board of Directors approved a new share repurchase program that enables the Company to repurchase up to twenty-five million shares of its common stock (2022 Share Repurchase Program). The 2022 Share Repurchase Program will become effective once the 2017 Share Repurchase Program is completed. The Company is not obligated to acquire any specific amount of common stock within any particular timeframe as a result of the 2022 Share Repurchase Program. On May 9, 2022, the Company entered into accelerated share repurchase (ASR) agreements with Mizuho Markets Americas LLC (Mizuho) and Wells Fargo Bank, National Association (Wells Fargo) (collectively, the Dealers) to repurchase an aggregate of $ 150 million of the Company's common stock via accelerated stock repurchase transactions under the 2017 Share Repurchase Program. Under the terms of the ASR, the Company made a $ 75 million payment to each of the Dealers on May 10, 2022, and received an initial delivery of 1,627,907 shares from each of the Dealers, or 3,255,814 shares in the aggregate, which was approximately 70 percent of the total number of shares of the Company's common stock expected to be repurchased under the ASR agreements. These shares reduced the number of shares of the Company's common stock available for repurchase under the 2017 Share Repurchase Program. Final settlement of the ASR agreements was completed in November 2022. As a result, the Company received an additional 651,213 shares from Mizuho and 642,302 shares from Wells Fargo, or 1,293,515 shares in the aggregate, for $ 47.9 million, which reduced the number of shares of the Company's common stock available to be repurchased under the 2017 Share Repurchase Program. In total, 4,549,329 shares of the Company's common stock were repurchased under the ASR agreements at an average cost per share of $ 32.97 during the fiscal year ended March 31, 2023. Through March 31, 2023, the Company repurchased a total of 23,790,847 shares for $ 660.4 million in the open market under the 2017 Share Repurchase Program. At March 31, 2023, 1,209,153 shares of common stock remained available to be purchased under the 2017 Share Repurchase Program, and 25,000,000 shares of common stock remained available to be purchased under the 2022 Share Repurchase Program. The Co mpany repurchased 4,549,329 shares for $ 152.9 million, 1,330,678 shares for $ 35.6 million, and 154,271 shares for $ 3.3 million of its common stock under the 2017 Share Repurchase Program during the fiscal years ended March 31, 2023, 2022 and 2021, respectively. In connection with the vesting and release of the restriction on shares of restricted stock, the Company repurchased 562,360 shares for $ 19.4 million, 546,053 shares for $ 15.7 million and 506,917 shares for $ 13.3 million related to minimum statutory tax withholding requirements on the se restricted stock units during the fiscal years ended March 31, 2023, 2022 and 2021, respectively. These repurchase transactions do not fall under the repurchase program described above, and therefore do not reduce the amount that is available for repurchase under those programs. NOTE 14 – STOCK PLANS 2011 Employee Stock Purchase Plan On September 7, 2011, the Company's stockholders approved the 2011 Employee Stock Purchase Plan (the ESPP), under which 2.5 million shares of the Company's common stock were reserved for issuance. On November 8, 2018, the Company increased the number of shares available under the ESPP by an additional 3 million shares, and on August 24, 2022, the Company's stockholders approved an amendment to the ESPP that increased the number of shares available under the ESPP by another 2,000,000 shares . The Company implemented the ESPP on March 1, 2012. Eligible employees may purchase shares of the Company's common stock through regular payroll deductions of up to 20 % of their eligible compensation. Under the terms of the offering under the ESPP, the number of shares of the Company's common stock which a participant could purchase during any purchase period is limited to 2,000 . In addition, the fair market value of shares purchased by an individual participant in the plan may not exceed $ 25,000 if the contribution period is within any calendar year. However, if contribution periods overlap calendar years, an individual participant is eligible to utilize the unused portion of the $ 25,000 limit from the subsequent purchase in the current purchase up to $ 50,000 . Under the ESPP, shares of the Company's common stock may be purchased on the last day of each bi-annual offering period at 85 % of the fair market value on the last day of such offering period. The offering periods run from March 1 through August 31 and from September 1 through the last day of February of each year. During the fiscal year ended March 31, 2023, employees purchased 480,783 shares under the ESPP with a weighted average purchase price per share of $ 29.85 . At March 31, 2023, 2,772,615 shares were available for future issuance under the ESPP. F-27 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) 2019 Equity Incentive Plan On September 12, 2019, the Company's stockholders approved the 2019 Equity Incentive Plan (2019 Plan), which replaced the Company's 2007 Equity Incentive Plan, as Amended (Amended 2007 Plan). The 2019 Plan permits the granting of incentive and nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other stock awards, collectively referred to as "share-based awards." On September 10, 2020, the Company's stockholders approved an amendment and restatement of the 2019 Equity Incentive Plan (2019 First Amended Plan) to increase the number of shares reserved for issuance by 4,700,000 shares, established a one-year minimum vesting requirement for awards granted on or after September 10, 2020, and change the "fungible share counting ratio" used to calculate the increase or reduction in the number of shares available for issuance under the 2019 First Amended Plan. On August 24, 2022, the Company's stockholders approved an amendment to the 2019 First Amended Plan (2019 Second Amended Plan). This amendment increased the number of shares reserved for issuance by 7,000,000 shares and changed the "fungible share counting ratio" used to calculate the increase or reduction in the number of shares available for issuance under the 2019 Second Amended Plan. At August 24, 2022, there was a total of 8,764,811 shares reserved for issuance under the 2019 Second Amended Plan, which consisted of 7,000,000 new shares plus 1,764,811 shares that remained available for grant under the 2019 First Amended Plan as of August 24, 2022, the effective date of the 2019 Second Amended Plan. We refer the the 2019 Plan, 2019 First Amended Plan and 2019 Second Amended Plan collectively as the "Amended 2019 Plan". The aggregate number of shares available for issuance under the 2019 Second Amended Plan will increase for any shares (each a "Returning Share"): (i) subject to an award granted under the Amended 2007 Plan or Amended 2019 Plan that are not issued because such award expires or otherwise terminates without all of the shares covered by such award having been issued; (ii) subject to an award under the Amended 2007 Plan or Amended 2019 Plan that are not issued because such award is settled in cash; (iii) issued pursuant to an award granted under the Amended 2007 Plan or Amended 2019 Plan that are forfeited back to or repurchased by the Company because of failure to vest; and (iv) that are reacquired or withheld by the Company to satisfy tax withholding obligations in connection with common stock issued pursuant to a Full Value Award (as defined below) granted under the Amended 2007 Plan or Amended 2019 Plan. The amount of such increase will be (i) one share for each Returning Share subject to a stock option or stock appreciation right with an exercise or strike price that is at least 100% of the fair market value of the Company's common stock on the date of grant (an "Appreciation Award"); and (ii) 2.34 shares for each Returning Share subject to an equity award other than an Appreciation Award (a "Full Value Award") that is returned on or after August 24, 2022. Furthermore, the share reserve under the 2019 Second Amended Plan is reduced by: (i) one share for each share of common stock issued pursuant to an Appreciation Award, (ii) 2.76 shares for each share of common stock issued pursuant to a Full Value Award granted under the Amended 2019 Plan on or after September 12, 2019 but prior to September 10, 2020; (iii) 2.32 shares for each share of common stock issued pursuant to a Full Value Award granted under the Amended 2019 Plan on or after September 10, 2020 but prior to August 24, 2022; and (iv) by 2.34 shares for each share of common stock issued pursuant to a Full Value Award granted under the Amended 2019 Plan on or after August 24, 2022. At March 31, 2023, an aggregate of 5,749,471 shares of unvested equity awards granted under the amended 2019 Plan were outstanding. The 2019 Amended Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee operates under guidelines established by the Board of Directors. The Compensation Committee has the authority to select the employees and consultants to whom awards are granted (except for directors and executive officers) and determine the terms of each award, including the number of shares of common stock subject to the award. Share-based awards generally vest over four years . The exercise price of stock options shall not be less than 100 % of the fair market value of the common stock at the date of grant ( 110 % for incentive stock options granted to holders of more than 10 % of the voting stock of NetScout). The term of stock options granted cannot exceed seven years ( five years for incentive stock options granted to holders of more than 10 % of the voting stock of NetScout). Based on historical experience, the Company assumed an annualized forfeit ure rate of 0 % for awards granted to its independent directors, approximately 2 % for awards granted to its senior executives, and approximately 5 % granted to all remaining employees during the fiscal years ended March 31, 2023, 2022 and 2021. Periodically, the Company grants share-based awards to employees, officers, and directors of the Company and its subsidiaries. During the fiscal years ended March 31, 2023 and 2022, the Company granted performance-based restricted stock units to certain executive officers that vest based upon the Company's total shareholder return as compared to the Russell 2000 Index over a three-year period. The performance-based restricted stock units were valued using the Monte Carlo Simulation model. The measurement and recognition of compensation expense is based on estimated fair values for all share-based payment awards made to its employees and directors. Share-based award grants are generally measured at fair value on the date F-28 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) of grant based on the number of shares granted and the quoted price of the Company's common stock. Such value is recognized as a cost of revenue or an operating expense over the corresponding vesting period. The following is a summary of share-based compensation expense including restricted stock units and performance-based restricted stock units granted pursuant to the Company's Amended 2007 Plan, the 2019 Plan, the 2019 Amended Plan, and the 2019 Second Amended Plan, and employee stock purchases made under the Company's 2011 Amended and Restated Employee Stock Purchase Plan (ESPP), based on estimated fair values within the applicable cost and expense lines identified below (in thousands): Fiscal Year Ended March 31, 2023 2022 2021 Cost of product revenue $ 1,129 $ 1,022 $ 1,038 Cost of service revenue 7,286 6,020 5,823 Research and development 17,055 15,505 16,138 Sales and marketing 22,612 19,684 17,328 General and administrative 13,904 13,843 11,565 $ 61,986 $ 56,074 $ 51,892 Transactions under the Amended 2007, 2019 Plan, the 2019 Amended Plan, and the 2019 Second Amended Plan during the fiscal years ended March 31, 2023, 2022 and 2021 are summarized in the table below. Restricted Stock Units Number of Awards Weighted Average Fair Value Outstanding – March 31, 2020 4,274,473 $ 28.68 Granted 2,038,681 27.42 Vested ( 1,630,228 ) 28.63 Canceled ( 187,313 ) 28.28 Outstanding – March 31, 2021 4,495,613 $ 28.14 Granted 2,121,937 29.06 Vested ( 1,728,994 ) 29.04 Canceled ( 260,622 ) 28.07 Outstanding – March 31, 2022 4,627,934 $ 28.23 Granted 3,096,295 33.73 Vested ( 1,777,708 ) 28.34 Canceled ( 197,050 ) 30.93 Outstanding – March 31, 2023 5,749,471 $ 31.07 At March 31, 2023, the re were 6,241,002 shares of common stock available for grant under the 2019 Second Amended Plan. The aggregate intrinsic value of stock options exercised and the fair value of restricted stock units vested at March 31, 2023, 2022 and 2021 were as follows (in thousands): Fiscal Year Ended March 31, 2023 2022 2021 Total fair value of restricted stock unit awards vested $ 61,128 $ 49,593 $ 42,510 At March 31, 2023, the total unrecognized compensation cost related to restricted stock unit aw ards was $ 135.1 million, which is expected to be amortized over a weighted-average period of 1.4 years. F-29 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) NOTE 15 – PENSION BENEFIT PLANS 401(k) Plan The Company has a defined contribution program for certain employees that is qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended. The Company matches 50 % of the employee's contribution up to 6 % of the employee’s salary. NetScout contributions vest at a rate of 25 % per year of service. NetScout made matching contributions of $ 6.7 million, $ 7.1 million and $ 6.7 million to the plan for the fiscal years ended March 31, 2023, 2022 and 2021, respectively. Defined Benefit Pension Plan Certain of the Company's non-U.S. employees participate in certain noncontributory defined benefit pension plans. None of the Company's employees in the U.S. participate in any noncontributory defined benefit pension plans. In general, these plans are funded based on considerations relating to legal requirements, underlying asset returns, the plan's funded status, the anticipated deductibility of the contribution, local practices, market conditions, interest rates and other factors. The components of the change in benefit obligation of the pension plan is as follows (in thousands): March 31, March 31, 2023 2022 Benefit obligation, at beginning of year $ 32,849 $ 37,586 Service cost 291 331 Interest cost 699 560 Benefits paid and other ( 535 ) ( 422 ) Actuarial gain ( 8,207 ) ( 2,761 ) Foreign exchange rate impact ( 530 ) ( 2,445 ) Benefit obligation, at end of year $ 24,567 $ 32,849 The reconciliation of the beginning and ending balances of the fair value of the assets of the pension plan is as follows (in thousands): March 31, March 31, 2023 2022 Fair value of plan assets, at beginning of year $ — $ — Employer direct benefit payments 535 422 Benefits paid and other ( 535 ) ( 422 ) Fair value of plan assets, at end of year $ — $ — The following sets forth the components of the Company's net periodic pension cost of the noncontributory defined benefit pension plans for the fiscal years ended March 31, 2023, 2022, and 2021 (in thousands): Fiscal Year Ended March 31, 2023 2022 2021 Service cost $ 291 $ 331 $ 333 Interest cost 699 560 667 Net periodic pension cost $ 990 $ 891 $ 1,000 Weighted average assumptions used to determine net periodic pension cost at date of measurement: March 31, March 31, March 31, 2023 2022 2021 Discount rate 4.10 % 2.20 % 1.60 % Rate of compensation increase 3.00 % 3.00 % 3.00 % F-30 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) As of March 31, 2023, unrecognized actuarial gain of $ 8.2 million ($ 5.8 million, net of tax) whi ch have not yet been recognized in net periodic pension cost are included in accumulated other comprehensive income. The unrecognized actuarial gains and losses are calculated as the difference between the actuarially determined projected benefit obligation and the value of the plan assets less accrued pension costs. None of this amount is expected to be recognized in net periodic pension costs during the fiscal year endin g March 31, 2024. No plan assets are expected to be returned to the Company during the fiscal year ending March 31, 2024. Expected Contributions During the fiscal year ended March 31, 2023, the Company contributed $ 535 thousand to its defined benefit pension plan. The following sets forth benefit payments, which reflect expected future service, as appropriate, expected to be paid by the plan in the periods indicated (in thousands): 2024 $ 582 2025 $ 691 2026 $ 788 2027 $ 878 2028 $ 997 2029 - 2033 $ 6,233 NOTE 16 – INCOME TAXES Income before income tax expense consisted of the following (in thousands): Fiscal Year Ended March 31, 2023 2022 2021 Domestic $ 56,463 $ 27,690 $ 4,985 Foreign 11,952 15,202 17,319 $ 68,415 $ 42,892 $ 22,304 The components of the income tax expense are as follows (in thousands): Fiscal Year Ended March 31, 2023 2022 2021 Current income tax expense: Federal $ 48,853 $ 7,240 $ 14,701 State 5,766 2,897 2,426 Foreign 7,879 9,343 9,902 62,498 19,480 27,029 Deferred income tax benefit: Federal ( 47,297 ) ( 7,240 ) ( 18,190 ) State ( 4,006 ) ( 3,406 ) ( 3,404 ) Foreign ( 2,428 ) ( 1,816 ) ( 2,483 ) ( 53,731 ) ( 12,462 ) ( 24,077 ) $ 8,767 $ 7,018 $ 2,952 F-31 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) The income tax expense computed using the U.S. statutory federal income tax rate differs from NetScout's effective tax rate primarily due to the following: Fiscal Year Ended March 31, 2023 2022 2021 U.S. statutory federal income tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal tax effect 3.6 1.1 2.4 U.S. federal and state research and development tax credits ( 9.0 ) ( 11.9 ) ( 23.7 ) Effect of foreign operations 1.8 6.3 ( 4.5 ) Meals and entertainment 0.4 0.2 0.8 Change in valuation allowance 3.5 5.1 24.0 Stock compensation ( 0.6 ) 2.0 5.1 Global intangible low taxed income — ( 0.1 ) 0.8 Foreign derived intangible income ( 11.7 ) ( 12.6 ) ( 24.5 ) Foreign withholding 4.1 5.2 13.8 Other permanent differences ( 0.3 ) 0.1 ( 2.0 ) 12.8 % 16.4 % 13.2 % The components of net deferred tax assets and liabilities are as follows (in thousands): Fiscal Year Ended March 31, 2023 2022 Deferred tax assets: Accrued expenses $ 6,074 $ 8,721 Capitalized R&D expenses 40,909 — Deferred revenue 24,112 17,267 Reserves 3,902 3,106 Pension and other retiree benefits 2,319 4,903 Net operating loss carryforwards 9,016 11,611 Tax credit carryforwards 21,512 21,132 Share-based compensation 7,338 6,172 Operating lease liability 14,020 15,639 Other deferred tax assets 35 658 Total gross deferred tax assets 129,237 89,209 Valuation allowance ( 15,612 ) ( 13,160 ) Net deferred tax assets 113,625 76,049 Deferred tax liabilities: Intangible assets ( 104,245 ) ( 117,839 ) Operating lease right-of-use asset ( 11,854 ) ( 13,189 ) Depreciation ( 5,563 ) ( 6,612 ) Other deferred tax liabilities ( 12,368 ) ( 10,425 ) Total deferred tax liabilities $ ( 20,405 ) $ ( 72,016 ) The 2017 Tax Cuts and Jobs Act (TCJA) contained a provision which became effective for R&D expenditures incurred in years beginning on or after Jan. 1, 2022, that R&D expenditures incurred are no longer allowed as an immediate deduction for federal income tax purposes. Rather, R&D expenditures incurred must be capitalized and amortized over a five-year period or fifteen -year period depending on if the expenditures are domestic or foreign, respectively. F-32 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) Deferred tax assets and liabilities are recognized based on the anticipated future tax consequences, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets by considering all positive and negative evidence. The Company weighs objective and verifiable evidence more heavily in this analysis. In situations where the Company concludes that it does not have sufficient objective and verifiable evidence to suppo rt the realizability of the asset it creates a valuation allowance against it. As a result, the Company established a valuation allowance of $ 13.2 million as of March 31, 2022 and $ 15.6 million as of March 31, 2023, representing an increase of $ 2.4 million. The increase in the valuation allowance as of March 31, 2023, as compared to March 31, 2022, is primarily due to deferred tax assets related to U.S. foreign tax credits that the Company believes are not more likely than not to be realized. I f it is later determined the Company is able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the Company may be required to recognize these deferred tax assets as a tax benefit recorded in the period such determination is made. At March 31, 2023, the Company had U.S. federal net operating loss carry forwards of $ 4 million and state net operating loss carryforwards of $ 19 million that are subject to expire at various dates beginning in 2025 and 2036, respectively. At March 31, 2023, the Company also had U.S. foreign tax credit carryforwards and state tax credits of $ 7 million and $ 9 million that are subject to expire at various dates beginning 2030 and 2036, respectively. At March 31, 2023, the Company had foreign net operating loss carryforwards of $ 40 million and foreign tax credit carryforwards of $ 7 million, respectively. The majority of foreign net operating losses and foreign tax credits have no expiration dates. As of March 31, 2023, the Company does not expect any U.S. federal and state net operating losses or research and development tax credits to go unutilized. The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect to the U.S. federal and primary jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2018, although carryforward attributes that were generated prior to 2018 may still be adjusted upon examination if they either have been or will be used in a future period. The Company also receives inquiries from various tax jurisdictions during the year, and some of those inquiries may include an audit of tax returns previously filed. In the normal course of business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, for the fiscal years ended March 31, 2023, 2022 and 2021 is as follows (in thousands): Fiscal Year Ended March 31, 2023 2022 2021 Balance at April 1, $ 638 $ 913 $ 1,151 Additions based on tax positions related to the current year 28 28 48 Reductions of prior years tax positions due to lapse of statute of limitations — ( 303 ) ( 286 ) Increase in unrecognized tax benefits as a result of a tax position taken during a prior period 358 — — Balance at March 31, $ 1,024 $ 638 $ 913 The Company is 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. All of the unrecognized tax benefits would affect the effective tax rate if recognized. The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax provision. The interest and penalties are immaterial to the provision. Over the next twelve months, previously unrecognized tax benefits primarily due to the lapse of statute of limitations will be immaterial. The Company continues to assert that certain historical book over tax outside basis differences primarily related to unremitted foreign earnings are permanently reinvested. The Company's intent is to only make distributions from its foreign subsidiaries in the future when they can be made at no or an immaterial net tax cost. Unremitted foreign earnings total approximatel y $ 144 million. T he Company does not expect taxes related to the unremitted foreign earnings to be material if they were distributed which would primarily consist of foreign withholding taxes. F-33 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) NOTE 17 – LEASES The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the duration of the lease term. Lease liabilities represent the Company's contractual obligation to make lease payments over the lease term. The Company's policy is to combine lease and non-lease components and to not recognize ROU assets and lease liabilities for short-term leases. Leases with an initial term of twelve months or less are classified as short-term leases. ROU assets are recorded and recognized at commencement for the lease liability amount, plus initial direct costs incurred less lease incentives received. Lease liabilities are recorded at the present value of future lease payments over the lease term at commencement. The discount rate used is generally the Company's estimated incremental borrowing rate unless the lessor's implicit rate is readily determinable. Incremental borrowing rates are calculated periodically to estimate the rate the Company would pay to borrow the funds necessary to obtain an asset of similar value over a similar term. Lease expenses relating to operating leases are recognized on a straight-line basis over the lease term. The Company has operating leases for administrative, research and development, sales and marketing and manufacturing facilities and equipment under various non-cancelable lease agreements. The Company's leases have remaining lease terms ranging from 1 year to 8 years. The Company's lease terms may include options to extend or terminate the lease where it is reasonably certain that the Company will exercise those options. The Company considers several economic factors when making this determination, including but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a particular lease. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company has an obligation to return certain leased facilities to their original condition at the end of the respective lease term. These obligations were not material to the Company's financial statements for all years presented. Most of the Company's lease agreements contain variable payments, primarily for common area maintenance (CAM), which are expensed as incurred and not included in the measurement of the ROU assets and lease liabilities. The components of operating lease cost for the fiscal years ended March 31, 2023 and 2022 were as follows (in thousands): Fiscal Year Ended March 31, 2023 2022 Lease cost under long-term operating leases $ 12,352 $ 12,817 Lease cost under short-term operating leases 3,243 4,127 Variable lease cost under short-term and long-term operating leases 3,634 3,523 Total operating lease cost $ 19,229 $ 20,467 The table below presents supplemental cash flow information related to leases during the fiscal years ended March 31, 2023 and 2022 (in thousands): Fiscal Year Ended March 31, 2023 2022 Right-of-use assets obtained in exchange for new operating lease liabilities $ 7,143 $ 4,002 At March 31, 2023 and 2022, the weighted average remaining lease term in years and weighted average discount rate were as follows: March 31, 2023 March 31, 2022 Weighted average remaining lease term in years - operating leases 6.07 6.98 Weighted average discount rate - operating leases 4.2 % 4.0 % F-34 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) Future minimum payments under non-cancellable leases at March 31, 2023 are as follows (in thousands): Year Ending March 31, 2024 $ 12,987 2025 12,947 2026 11,202 2027 8,245 2028 7,215 Thereafter 15,697 Total lease payments $ 68,293 Less imputed interest ( 7,824 ) Present value of lease liabilities $ 60,469 NOTE 18 – COMMITMENTS AND CONTINGENCIES Legal F rom time to time, NetScout is subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not have a material adverse effect on the Company's 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. In October 2017, the jury rendered a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to $ 3.5 million for pre-suit damages and $ 2.3 million 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 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 $ 3.5 million pre-suit damages award, affirming the $ 2.3 million post-suit damages award, vacating the $ 2.8 million enhancement 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 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, "enhanced" the jury verdict in the amount of $ 1.1 million and also lowered the ongoing royalty rate on the G10 and GeoBlade products. The District Court entered an amended final judgment awarding Plaintiff $ 2.3 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. On July 20, 2022, NetScout filed a notice of appeal to the Federal Circuit from, among other things, the amended final judgment. Enforcement of the amended judgment is stayed pending the resolution of the appeal. In view of the current circumstances, and if the post-suit and enhanced damages award along with the associated interest and royalties survive the recent PTAB invalidation decisions and NetScout's appeal, NetScout has concluded that the risk of loss F-35 Table of Contents NetScout Systems, Inc. Notes to Consolidated Financial Statements—(Continued) associated with such damages award remains "probable" in accounting terms, and that the risk of loss associated with pre-suit damages is remote. Unconditional Purchase Obligations At March 31, 2023, the Company had unconditional purchase obligations of $ 100.1 million, which represent estimated open purchase orders to purchase inventory as well as commitments for products and services used i n the normal course of business. NOTE 19 – SEGMENT AND GEOGRAPHIC INFORMATION The Company manages its business in the following geographic areas: United States, Europe, Asia and the rest of the world. The Company's policies mandate compliance with economic sanctions and export controls. The Company reports revenues and income under one reportable segment. Total revenue by geography is as follows (in thousands): Fiscal Year Ended March 31, 2023 2022 2021 United States $ 583,482 $ 501,043 $ 484,129 Europe 145,678 165,190 160,372 Asia 61,685 64,968 56,562 Rest of the world 123,685 124,374 130,219 $ 914,530 $ 855,575 $ 831,282 The United States revenue includes sales to resellers in the United States. These resellers fulfill customer orders and may subsequently ship the Company's products to international locations. Further, the Company determines the geography of its sales after considering where the contract originated. A majority of revenue attributable to locations outside of the United States is a result of export sales. Substantially all of the Company's identifiable assets are located in the United States. F-36 Table of Contents NetScout Systems, Inc. Schedule II—Valuation and Qualifying Accounts (in thousands) Balance at Beginning of Fiscal Year Additions Resulting in Charges to Operations Charges to Other Accounts Deductions Due to Write-Offs Balance at End of Fiscal Year Fiscal year ended March 31, 2021 Allowance for credit losses $ 1,350 $ 48 $ ( 733 ) $ ( 249 ) $ 416 Deferred tax asset valuation allowance $ 5,641 $ 5,765 $ — $ — $ 11,406 Fiscal year ended March 31, 2022 Allowance for credit losses $ 416 $ 1,963 $ ( 25 ) $ ( 705 ) $ 1,649 Deferred tax asset valuation allowance $ 11,406 $ 1,720 $ — $ — $ 13,126 Fiscal year ended March 31, 2023 Allowance for credit losses $ 1,649 $ 479 $ 876 $ ( 2,329 ) $ 675 Deferred tax asset valuation allowance $ 13,126 $ 2,486 $ — $ — $ 15,612 S-1