10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number 000-26251
 
NETSCOUT SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
04-2837575
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
310 Littleton Road, Westford, MA 01886
(978) 614-4000
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ¨    NO  x
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of January 27, 2016 was 98,570,412.



Table of Contents

NETSCOUT SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2015
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
 
 
 
 
 
 
 
 



Table of Contents

PART I: FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
 
December 31,
2015
 
March 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
230,521

 
$
104,893

Marketable securities
127,751

 
101,392

Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $4,720 and $173 at December 31, 2015 and March 31, 2015, respectively
244,957

 
82,226

Inventories
63,427

 
12,130

Prepaid income taxes
37,795

 
1,393

Deferred income taxes

 
21,755

Prepaid expenses and other current assets (related party balances of $28,733 and $0, respectively)
49,421

 
13,495

Total current assets
753,872

 
337,284

Fixed assets, net
58,663

 
23,864

Goodwill
1,693,876

 
197,445

Intangible assets, net
1,075,532

 
50,180

Deferred income taxes
27,435

 

Long-term marketable securities
17,961

 
58,572

Other assets
7,775

 
1,704

Total assets
$
3,635,114

 
$
669,049

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable (related party balances of $5,009 and $0, respectively)
$
52,660

 
$
13,077

Accrued compensation
100,817

 
36,553

Accrued other
23,828

 
14,474

Income taxes payable

 
107

Deferred revenue and customer deposits
255,822

 
123,422

Total current liabilities
433,127

 
187,633

Other long-term liabilities
2,291

 
1,995

Deferred tax liability
330,254

 
10,639

Accrued long-term retirement benefits
28,977

 
1,587

Long-term deferred revenue and customer deposits
56,570

 
26,961

Long-term debt
250,000

 

Contingent liabilities, net of current portion
4,598

 
4,484

Total liabilities
1,105,817

 
233,299

Commitments and contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value:
 
 
 
5,000,000 shares authorized; no shares issued or outstanding at December 31, 2015 and March 31, 2015

 

Common stock, $0.001 par value:
 
 
 
150,000,000 shares authorized; 114,075,319 and 50,812,548 shares issued and 98,570,412 and 40,807,805 shares outstanding at December 31, 2015 and March 31, 2015, respectively
114

 
51

Additional paid-in capital
2,627,807

 
298,101

Accumulated other comprehensive loss
(3,688
)
 
(4,645
)
Treasury stock at cost, 15,504,907 and 10,004,743 shares at December 31, 2015 and March 31, 2015, respectively
(381,942
)
 
(169,516
)
Retained earnings
287,006

 
311,759

Total stockholders’ equity
2,529,297

 
435,750

Total liabilities and stockholders’ equity
$
3,635,114

 
$
669,049

The accompanying notes are an integral part of these consolidated financial statements.

1

Table of Contents

NetScout Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product
$
209,124

 
$
76,446

 
$
437,616

 
$
198,765

Service
98,555

 
46,387

 
231,916

 
135,519

Total revenue
307,679

 
122,833

 
669,532

 
334,284

Cost of revenue:
 
 
 
 
 
 
 
Product (related party balances of $8,736, $0, $16,464 and $0, respectively)
77,147

 
18,310

 
165,066

 
45,015

Service (related party balances of $2,225, $0, $4,717 and $0, respectively)
28,968

 
8,672

 
62,532

 
26,158

Total cost of revenue
106,115

 
26,982

 
227,598

 
71,173

Gross profit
201,564

 
95,851

 
441,934

 
263,111

Operating expenses:
 
 
 
 
 
 
 
Research and development (related party balances of $4,197, $0, $15,011 and $0, respectively)
65,131

 
18,864

 
149,085

 
56,872

Sales and marketing (related party balances of $3,650, $0, $12,728 and $0, respectively)
91,386

 
34,836

 
208,631

 
104,304

General and administrative (related party balances of $6,383, $0, $13,446 and $0, respectively)
30,973

 
13,391

 
82,477

 
33,211

Amortization of acquired intangible assets
11,249

 
821

 
21,901

 
2,539

Restructuring charges
572

 
0

 
468

 
0

Total operating expenses
199,311

 
67,912

 
462,562

 
196,926

Income (loss) from operations
2,253

 
27,939

 
(20,628
)
 
66,185

Interest and other income (expense), net:
 
 
 
 
 
 
 
Interest income
189

 
95

 
519

 
298

Interest expense
(2,070
)
 
(191
)
 
(4,047
)
 
(580
)
Other expense, net (related party balances of $0, $0, $383 and $0, respectively)
(1,022
)
 
(416
)
 
(349
)
 
(904
)
Total interest and other expense, net
(2,903
)
 
(512
)
 
(3,877
)
 
(1,186
)
Income (loss) before income tax expense (benefit)
(650
)
 
27,427

 
(24,505
)
 
64,999

Income tax expense
23,857

 
9,798

 
248

 
24,661

Net income (loss)
$
(24,507
)
 
$
17,629

 
$
(24,753
)
 
$
40,338

Basic net income (loss) per share
$
(0.25
)
 
$
0.43

 
$
(0.32
)
 
$
0.98

Diluted net income (loss) per share
$
(0.25
)
 
$
0.42

 
$
(0.32
)
 
$
0.97

Weighted average common shares outstanding used in computing:
 
 
 
 
 
 
 
Net income (loss) per share - basic
98,797

 
41,206

 
77,126

 
41,128

Net income (loss) per share - diluted
98,797

 
41,536

 
77,126

 
41,679

The accompanying notes are an integral part of these consolidated financial statements.

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NetScout Systems, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(24,507
)
 
$
17,629

 
$
(24,753
)
 
$
40,338

Other comprehensive income (loss):
 
 
 
 
 
 
 
Cumulative translation adjustments
(568
)
 
(1,290
)
 
285

 
(3,397
)
Changes in market value of investments:
 
 
 
 
 
 
 
Changes in unrealized losses
(125
)
 
(75
)
 
(67
)
 
(54
)
Total net change in market value of investments
(125
)
 
(75
)
 
(67
)
 
(54
)
Changes in market value of derivatives:
 
 
 
 
 
 
 
Changes in market value of derivatives, net of tax benefit of ($108), ($327), ($314) and ($595)
(180
)
 
(597
)
 
(492
)
 
(1,068
)
Reclassification adjustment for net gains included in net income, net of taxes of $60, $133, $718 and $115
99


214


1,231


195

Total net change in market value of derivatives
(81
)
 
(383
)
 
739

 
(873
)
Other comprehensive income (loss)
(774
)
 
(1,748
)
 
957

 
(4,324
)
Total comprehensive income (loss)
$
(25,281
)
 
$
15,881

 
$
(23,796
)
 
$
36,014

The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

NetScout Systems, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)
(Unaudited)
 
Common stock
 
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, 2014
49,922,959

 
$
50

 
$
273,574

 
$
2,772

 
8,757,175

 
$
(117,802
)
 
$
250,567

 
$
409,161

Net income
 
 
 
 
 
 
 
 
 
 
 
 
40,338

 
40,338

Unrealized net investment losses
 
 
 
 
 
 
(54
)
 
 
 
 
 
 
 
(54
)
Unrealized net losses on derivative financial instruments
 
 
 
 
 
 
(873
)
 
 
 
 
 
 
 
(873
)
Cumulative translation adjustments
 
 
 
 
 
 
(3,397
)
 
 
 
 
 
 
 
(3,397
)
Issuance of common stock pursuant to exercise of options
17,850

 

 
104

 
 
 
 
 
 
 
 
 
104

Issuance of common stock pursuant to vesting of restricted stock units
717,012

 
1

 
 
 
 
 
 
 
 
 
 
 
1

Stock-based compensation expense for restricted stock units granted to employees
 
 
 
 
11,299

 
 
 
 
 
 
 
 
 
11,299

Issuance of common stock under employee stock purchase plan
59,897

 
 
 
2,760

 
 
 
 
 
 
 
 
 
2,760

Repurchase of treasury stock
 
 
 
 
 
 
 
 
743,063

 
(31,543
)
 
 
 
(31,543
)
Excess tax benefit from share-based compensation awards
 
 
 
 
4,322

 
 
 
 
 
 
 
 
 
4,322

Balance, December 31, 2014
50,717,718

 
$
51

 
$
292,059

 
$
(1,552
)
 
9,500,238

 
$
(149,345
)
 
$
290,905

 
$
432,118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
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, 2015
50,812,548

 
$
51

 
$
298,101

 
$
(4,645
)
 
10,004,743

 
$
(169,516
)
 
$
311,759

 
$
435,750

Net income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
(24,753
)
 
(24,753
)
Unrealized net investment losses
 
 
 
 
 
 
(67
)
 
 
 
 
 
 
 
(67
)
Unrealized net gains on derivative financial instruments
 
 
 
 
 
 
739

 
 
 
 
 
 
 
739

Cumulative translation adjustments
 
 
 
 
 
 
285

 
 
 
 
 
 
 
285

Issuance of common stock pursuant to exercise of options
216,547

 

 

 
 
 
 
 
 
 
 
 

Issuance of common stock pursuant to vesting of restricted stock units
463,744

 
1

 
 
 
 
 
 
 
 
 
 
 
1

Stock-based compensation expense for restricted stock units granted to employees
 
 
 
 
19,343

 
 
 
 
 
 
 
 
 
19,343

Issuance of common stock under employee stock purchase plan
82,836

 

 
3,028

 
 
 
 
 
 
 
 
 
3,028

Repurchase of treasury stock
 
 
 
 
 
 
 
 
5,500,164

 
(212,426
)
 
 
 
(212,426
)
Issuance of shares related to the acquisition of the Communications Business of Danaher
62,499,644

 
62

 
2,305,549

 
 
 
 
 
 
 
 
 
2,305,611

Excess tax benefit from share-based compensation awards
 
 
 
 
1,786

 
 
 
 
 
 
 
 
 
1,786

Balance, December 31, 2015
114,075,319

 
$
114

 
$
2,627,807

 
$
(3,688
)
 
15,504,907

 
$
(381,942
)
 
$
287,006

 
$
2,529,297

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

NetScout Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Nine Months Ended
 
December 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(24,753
)
 
$
40,338

Adjustments to reconcile net income (loss) to cash provided by operating activities, net of the effects of acquisitions:
 
 
 
Depreciation and amortization
97,668

 
14,449

Loss on disposal of fixed assets
131

 
536

Deal related compensation expense and accretion charges
6,690

 
114

Share-based compensation expense associated with equity awards
20,400

 
11,947

Net change in fair value of contingent and contractual liabilities

 
(9
)
Deferred income taxes
6,981

 
2,151

Other losses
8

 
84

Changes in assets and liabilities
 
 
 
Accounts receivable and unbilled costs
(26,534
)
 
(22,973
)
Due from related party
(5,777
)
 

Inventories
5,167

 
1,359

Prepaid expenses and other assets
(36,343
)
 
(143
)
Accounts payable
13,670

 
(700
)
Accrued compensation and other expenses
35,236

 
10,132

Due to related party
(4,329
)
 

Income taxes payable
(107
)
 
(791
)
Deferred revenue
(31,510
)
 
828

                Net cash provided by operating activities
56,598

 
57,322

Cash flows from investing activities:
 
 
 
Purchase of marketable securities
(74,667
)
 
(78,547
)
Proceeds from maturity of marketable securities
88,852

 
61,189

Purchase of fixed assets
(14,007
)
 
(8,630
)
Purchase of intangible assets
(154
)
 
(131
)
(Increase) decrease in deposits
(25
)
 
103

Acquisition of businesses, net of cash acquired
27,701

 

Collection of contingently returnable consideration
8,750

 

Capitalized software development costs
(1,148
)
 

                Net cash provided by (used in) investing activities
35,302

 
(26,016
)
Cash flows from financing activities:
 
 
 
Issuance of common stock under stock plans
1

 
105

Treasury stock repurchases
(212,426
)
 
(31,543
)
Proceeds from issuance of long-term debt, net of issuance costs
244,623

 

Excess tax benefit from share-based compensation awards
1,786

 
4,322

                Net cash provided by (used in) financing activities
33,984

 
(27,116
)
Effect of exchange rate changes on cash and cash equivalents
(256
)
 
438

Net increase in cash and cash equivalents
125,628

 
4,628

Cash and cash equivalents, beginning of period
104,893

 
102,076

Cash and cash equivalents, end of period
$
230,521

 
$
106,704

Supplemental disclosures:
 
 
 
Non-cash transactions:
 
 
 
Transfers of inventory to fixed assets
$
1,855

 
$
940

Additions to property, plant and equipment included in accounts payable
$
316

 
$
380

Debt issuance costs settled through the issuance of additional debt
$
5,377

 
$

Gross decrease in contractual liability relating to fair value adjustment
$

 
$
(49
)
Gross increase in contingent consideration liability relating to fair value adjustment
$

 
$
40

Gross increase in contingently returnable consideration asset relating to fair value adjustment
$
3,676

 
$

Issuance of common stock under employee stock plans
$
3,028

 
$
2,760

Purchase consideration
$
2,276,235

 
$

Contingently returnable consideration
$
29,376

 
$

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

NetScout Systems, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared by NetScout Systems, Inc., or NetScout or the Company. Certain information and footnote disclosures normally included in financial statements prepared under United States generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations and cash flows. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results reported in these consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. All significant intercompany accounts and transactions are eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. On July 14, 2015, we completed the acquisition of the Communications Business (the Communications Business) of Danaher Corporation (Danaher) which is more fully described in Note 7 below. This transaction was recorded using the acquisition method of accounting; accordingly, the financial results of the acquisition are included in the accompanying unaudited consolidated financial statements for the periods subsequent to the acquisition.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015.
Fiscal Year End
The fiscal year end of NetScout and the entities acquired as part of the Communications Business ends on March 31st. Netscout’s quarters end on the last calendar day of the months of June, September and December. The fiscal year 2016 quarter end dates of the entities acquired as part of the Communications Business are October 2nd and December 31st. The Company does not adjust for the difference in fiscal periods between the acquired entities and itself, as such difference would be less than 93 days, pursuant to Regulation S-X Rule 3A-02. References herein to Fiscal 2016, 2015 and 2014 refer to the fiscal years ended March 31, 2016, 2015 and 2014, respectively.
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes, (ASU 2015-17), which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. The Company adopted this standard prospectively in the third quarter of fiscal year 2016 as early adoption was permitted and prior periods were not retrospectively adjusted.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, (ASU 2015-16), which eliminates the requirement to restate prior financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment be recognized in the reporting period in which the adjustment is identified. The Company adopted this standard in the second quarter of fiscal year 2016 as early adoption was permitted.
In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-Of-Credit Arrangements and Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (ASU 2015-15). The guidance in the previously issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted this standard in the second quarter of fiscal year 2016 as early adoption was permitted.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required

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Table of Contents

under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This ASU will be effective for the Company in the first quarter of its fiscal year 2019. Early adoption is not permitted. This ASU allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements.
NOTE 2 – CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject us to concentration of credit risk consist primarily of investments, trade accounts receivable and accounts payable. The Company's cash, cash equivalents, and marketable securities are placed with financial institutions with high credit standings.
At December 31, 2015, no direct customer or indirect channel partner accounted for more than 10% of the accounts receivable balance. At March 31, 2015, one direct customer accounted for more than 10% of the accounts receivable balance, while no indirect channel partner accounted for more than 10% of the accounts receivable balance.
During the three and nine months ended December 31, 2015, one direct customer accounted for more than 10% of the Company's total revenue, while no indirect channel partner accounted for more than 10% of total revenue for such periods.
During the three and nine months ended December 31, 2014, no direct customer or indirect channel partner accounted for more than 10% of the Company's total revenue.
As disclosed parenthetically within the Company's consolidated balance sheet, the Company has a receivable from Danaher in the amount of $28.7 million that represents a concentration of credit risk at December 31, 2015.
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.
NOTE 3 – SHARE-BASED COMPENSATION
The following is a summary of share-based compensation expense including restricted stock units and employee stock purchases made under the Company's 2011 Employee Stock Purchase Plan (ESPP) based on estimated fair values within the applicable cost and expense lines identified below (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
Cost of product revenue
$
196

 
$
85

 
$
465

 
$
238

Cost of service revenue
721

 
294

 
1,848

 
836

Research and development
2,579

 
1,455

 
6,641

 
3,971

Sales and marketing
2,718

 
1,221

 
6,361

 
3,419

General and administrative
2,072

 
1,095

 
5,069

 
3,483

 
$
8,286

 
$
4,150

 
$
20,384

 
$
11,947

Employee Stock Purchase Plan – The Company maintains the ESPP for all eligible employees as described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2015. 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 value on the last day of such offering period. The offering periods run from March 1st through August 31st and from September 1st through the last day of February each year. During the nine months ended December 31, 2015, employees purchased 82,836 shares under the ESPP and the value per share was $36.55.
NOTE 4 – CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company 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. Cash and cash equivalents consisted of money market instruments and cash maintained with various financial institutions at December 31, 2015 and March 31, 2015.

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Marketable Securities
The following is a summary of marketable securities held by NetScout at December 31, 2015, 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
$
110,917

 
$
(21
)
 
$
110,896

Commercial paper
12,970

 

 
12,970

Corporate bonds
3,886

 
(1
)
 
3,885

Total short-term marketable securities
127,773

 
(22
)
 
127,751

U.S. government and municipal obligations
17,993

 
(32
)
 
17,961

Total long-term marketable securities
17,993

 
(32
)
 
17,961

Total marketable securities
$
145,766

 
$
(54
)
 
$
145,712

The following is a summary of marketable securities held by NetScout at March 31, 2015, 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
$
88,651

 
$
3

 
$
88,654

Commercial paper
5,093

 
2

 
5,095

Corporate bonds
7,644

 
(1
)
 
7,643

Total short-term marketable securities
101,388

 
4

 
101,392

U.S. government and municipal obligations
56,683

 
8

 
56,691

Corporate bonds
1,880

 
1

 
1,881

Total long-term marketable securities
58,563

 
9

 
58,572

Total marketable securities
$
159,951

 
$
13

 
$
159,964

Contractual maturities of the Company’s marketable securities held at December 31, 2015 and March 31, 2015 were as follows (in thousands):

December 31,
2015

March 31,
2015
Available-for-sale securities:



Due in 1 year or less
$
127,751


$
101,392

Due after 1 year through 5 years
17,961


58,572


$
145,712


$
159,964

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 non-observable inputs. The following tables present the Company’s financial assets and liabilities measured on a recurring basis using the fair value hierarchy at December 31, 2015 and March 31, 2015 (in thousands):

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Fair Value Measurements at
 
December 31, 2015
 
Level 1

Level 2

Level 3

Total
ASSETS:

 

 



Cash and cash equivalents
$
230,521

 
$

 
$

 
$
230,521

U.S. government and municipal obligations
39,040

 
89,818

 


128,858

Commercial paper

 
12,970

 


12,970

Corporate bonds
3,885

 

 


3,885

Derivative financial instruments

 
9

 


9

Contingently returnable consideration
$

 
$

 
$
16,687

 
$
16,687


$
273,446

 
$
102,797

 
$
16,687


$
392,930

LIABILITIES:

 

 



Contingent purchase consideration
$

 
$

 
$
(7,234
)

$
(7,234
)
Derivative financial instruments

 
(467
)
 


(467
)

$

 
$
(467
)
 
$
(7,234
)

$
(7,701
)

Fair Value Measurements at
 
March 31, 2015
 
Level 1

Level 2

Level 3

Total
ASSETS:

 

 



Cash and cash equivalents
$
104,893

 
$

 
$


$
104,893

U.S. government and municipal obligations
46,564

 
98,781

 


145,345

Commercial paper

 
5,095

 


5,095

Corporate bonds
9,524

 

 


9,524

Derivative financial instruments

 
15

 


15


$
160,981


$
103,891


$


$
264,872

LIABILITIES:

 

 



Contingent purchase consideration
$

 
$

 
$
(4,484
)

$
(4,484
)
Derivative financial instruments

 
(1,664
)
 


(1,664
)

$


$
(1,664
)

$
(4,484
)

$
(6,148
)
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 fair value is being calculated using data from similar but not identical sources, or a discounted cash flow model using the contractual interest rate as compared to the underlying interest yield curve. The Company's derivative financial instruments consist of forward foreign exchange contracts and are classified as Level 2 because the fair values of these derivatives are determined using models based on market observable inputs, including spot prices for foreign currencies and credit derivatives, as well as an interest rate factor. The Company classifies municipal obligations as level 2 because the fair values are determined using quoted prices from markets the Company considers to be inactive. Commercial paper is classified as Level 2 because the Company uses market information from similar but not identical instruments and discounted cash flow models based on interest rate yield curves to determine fair value. For further information on the Company's derivative instruments refer to Note 9.
The Company's Level 3 asset and liability consist of contingently returnable consideration and contingent purchase consideration, respectively. The Company's contingently returnable consideration represents a contingent right of return from Danaher to reimburse NetScout for cash awards to be paid by NetScout to employees of the Communications Business transferred to Newco (as defined below) for post-combination services on various dates through August 4, 2016 as part of the acquisition of the Communications Business. The contingently returnable consideration is classified as Level 3 because the fair

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value of the asset was determined using assumptions developed by management in determining the estimated cash awards expected to be paid on August 4, 2016 after applying an assumed forfeiture rate. The contingently returnable consideration of $16.7 million, net of taxes as of December 31, 2015 is included as prepaid expenses and other current assets in the Company’s consolidated balance sheet. During the three months ended December 31, 2015, certain post combination cash retention payments have been disbursed. Danaher will reimburse the Company for those costs and NetScout will reimburse Danaher for the tax benefit. Because the right of offset has not been met, the Company recorded the gross amount of compensation as contingently returnable consideration and the tax benefit of $2.6 million as contingent purchase consideration. For additional information, see Note 7 of the Company's Notes to Consolidated Financial Statements.
The following table sets forth a reconciliation of changes in the fair value of the Company’s Level 3 financial assets and liabilities for the nine months ended December 31, 2015 (in thousands):

Contingent
Purchase
Consideration
 
Contingently Returnable Consideration
Balance at beginning of period
$
(4,484
)
 
$

Increase in fair value and accretion expense (included within research and development expense)
(114
)
 
 
Contingently returnable consideration
 
 
19,125

Increase in fair value
 
 
3,676

Gross presentation of contingently returnable consideration to contingent purchase consideration
(2,636
)
 
2,636

Payment received
 
 
(8,750
)
Balance at end of period
$
(7,234
)
 
$
16,687

Deal related compensation expense and accretion charges related to the contingent consideration for the nine months ended December 31, 2015 was $114 thousand and was included as part of earnings.
NOTE 6 – 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. Inventories consist of the following (in thousands):

December 31,
2015
 
March 31,
2015
Raw materials
$
16,636

 
$
6,134

Work in process
661

 
17

Finished goods
46,130

 
5,979


$
63,427

 
$
12,130


NOTE 7 - ACQUISITIONS
On July 14, 2015 (Closing Date), the Company completed the acquisition of the Communications Business, which included certain assets, liabilities, technology and employees within Tektronix Communications, VSS Monitoring, Arbor Networks and certain portions of the Fluke Networks Enterprise business, which excluded Danaher's data communications cable installation business and its communication service provider business. The acquisition was structured as a Reverse Morris Trust transaction (the Transaction) whereby Danaher contributed its Communications Business to a new subsidiary, Potomac Holding LLC (Newco). The total equity consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of NetScout common stock to the existing common unit holders of Newco, based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share. On the Closing Date, the Company did not gain control over certain foreign entities due to regulatory and other compliance requirements (Delayed Close Entities). The Company closed on the acquisition of these Delayed Close Entities on October 7, 2015.
The Transaction is being accounted for under the acquisition method of accounting with the operations of the Communications Business included in the Company’s operating results from the relevant date of acquisition. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The preliminary determination of the fair value of assets acquired and liabilities assumed has

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been recognized based on management's estimates and assumptions using the information about facts and circumstances that existed at the acquisition date.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment will result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill to reflect additional information received about facts and circumstances which existed at the date of acquisition. The Company records adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the Company’s operating results in the period in which the adjustments were determined. The size and breadth of the Transaction will necessitate the use of this measurement period to adequately analyze and assess a number of the factors used in establishing the fair value of certain tangible and intangible assets acquired and liabilities assumed as of the acquisition date and the related tax impacts of any changes made. Any potential adjustments made could be material in relation to the preliminary values presented below. During the three months ended December 31, 2015, the Company identified measurement period adjustments that impacted the estimated fair value of the assets and liabilities assumed on July 14, 2015 as a result of new information obtained about the facts and circumstances that existed as of the acquisition date. The table below, which summarizes the allocation of the purchase price for the entities acquired on July 14, 2015, has been updated to reflect these measurement period adjustments. The total measurement period adjustments resulted in an increase in equity consideration for replacement awards of $3.7 million, an increase in accounts receivable of $0.4 million, an increase in inventory of $0.2 million, a decrease in prepaid expenses and other assets of $0.4 million, an increase in property, plant and equipment of $0.3 million, an increase in accounts payable of $0.1 million, an increase in accrued expenses of $0.4 million, a decrease in deferred revenue of $6.3 million and an overall decrease in goodwill of $10.0 million. This change to the provisional amounts of fair value of the assets and liabilities assumed had no impact on the Statement of Operations for the period ended September 30, 2015 or December 31, 2015.
During the three months ended December 31, 2015, the Company determined that the accounts receivable, accounts payable, accrued expenses and goodwill balances of the acquired entities reported in the Company’s unaudited interim consolidated financial statements for the period ended September 30, 2015 were overstated and deferred revenue was understated. The affected balances were revised in the unaudited interim consolidated financial statements for the period ended December 31, 2015. These revisions correct the immaterial errors identified. The revision resulted in accounts receivable decreasing by $0.1 million, accounts payable decreasing by $0.7 million, accrued expenses decreasing by $3.9 million, deferred revenue increasing $1.5 million and an overall decrease in goodwill of $3.0 million. There was no impact to the Statement of Operations for the period ended September 30, 2015 or December 31, 2015.
In connection with the Transaction, under the Employee Matters Agreement dated July 14, 2015 by and among the Company, Danaher and Newco, Danaher will fund certain contracts under which employees will provide post-combination services to the Company.

1)
For any outstanding Danaher restricted stock units or stock options held by employees of the Communications Business transferred to Newco (Newco Employees) that vested from July 14, 2015 through August 4, 2015, the awards continued to vest in Danaher shares. These awards met the definition of a derivative under ASC 815 and as such, the Company determined the fair value of these awards on July 14, 2015 and recorded them separate from the business combination as prepaid compensation. The derivative was amortized into compensation expense through August 4, 2015, the post combination requisite settlement date. The total amount of compensation expense for post combination services recorded for the three and nine months ended December 31, 2015 was $0.0 million and $6.5 million, respectively.

2)
All outstanding Danaher restricted stock units or stock options held by Newco Employees that were due to vest after August 4, 2015 were cancelled and replaced by NetScout with a cash retention award equal to one half of the value of the employee’s cancelled Danaher equity award and up to $15 million of restricted stock units relating to shares of NetScout common stock equal to the remaining one half of the value of the employee’s cancelled Danaher equity award. The restricted stock units issued are considered new share-based payment awards granted by NetScout to the former employees of Danaher. NetScout accounted for these new awards separately from the business combination. The Company recognized share-based compensation net of an estimated forfeiture rate and only recognized compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the

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award. The cash retention award will become payable on the August 4, 2016, subject to the employee’s continued employment with NetScout through the applicable vesting date of August 4, 2016. Danaher will reimburse NetScout for the amount of the cash retention payments (net of any applicable employment taxes and tax deductions). The cash retention award liability will be accounted for separately from the business combination as the cash retention award is automatically forfeited upon termination of employment. NetScout will record the cash retention award liability over the period it is earned as compensation expense for post combination services. The reimbursement by Danaher to NetScout of the estimated cash retention award payment represents contingently returnable consideration, which will be accounted for separately from the business combination on the date of the acquisition. At December 31, 2015, the Company has recorded a receivable from Danaher in the amount of $8.4 million, net of tax and is included as prepaid expenses and other current assets in Company’s consolidated balance sheet. At December 31, 2015, the Company has recorded a cash retention award liability of $5.4 million and is included as accrued compensation in Company’s consolidated balance sheet. For the three and nine months ended December 31, 2015, $2.8 million and $5.4 million has been recorded as compensation expense for post combination services, respectively.

3)
Newco Employees that were entitled to receive an incentive bonus under the Danaher annual bonus plan and who continued to be employed by NetScout through December 31, 2015 will receive a cash incentive bonus payment. The cash incentive bonus liability will be accounted for separately from the business combination as the cash incentive bonus is automatically forfeited upon termination of employment. NetScout will record the liability over the period it is earned as compensation expense for post combination services. The payment of the cash retention award is reimbursable by Danaher to NetScout, which is accounted for separately from the business combination on the date of the acquisition. At December 31, 2015, the Company has a receivable due from Danaher in the amount of $556 thousand and is included as prepaid expenses and other current assets in the Company’s consolidated balance sheet. At December 31, 2015, the Company has recorded a cash incentive bonus liability of $9.3 million and is included as accrued compensation in the Company’s consolidated balance sheet. For the three and nine months ended December 31, 2015, $5.2 million and $9.3 million has been recorded as compensation expense for post combination services.

4)
Certain Newco Employees received cash retention payments that were subject to the employee’s continued employment with NetScout through October 16, 2015, ninety (90) days after the close of the acquisition. The cash retention payment liability will be accounted for separately from the business combination as the cash retention payment is automatically forfeited upon termination of employment. NetScout recorded the liability over the period it was earned as compensation expense for post combination services. The payment of the cash retention award will be reimbursed by Danaher to NetScout, which will be accounted for separately from the business combination on the date of the acquisition. At December 31, 2015, the Company has recorded a receivable due from Danaher in the amount of $7.8 million, and is included as prepaid expenses and other current assets in Company’s consolidated balance sheet. At December 31, 2015, the Company has recorded the tax effect of the cash retention award of $2.6 million, which is included as accounts payable in the Company’s consolidated balance sheet. For the three and nine months ended December 31, 2015, $1.1 million and $7.8 million has been recorded as compensation expense for post combination services, respectively.


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The following table summarizes the allocation of the purchase price for the entities acquired on July 14, 2015 (in thousands):
Purchase Price Allocation:
 
 
     Total equity consideration
$
2,299,911

(1)
     Less: Equity consideration for replacement awards
(29,376
)
(2)
Estimated Purchase Price
2,270,535

 
 
 
 
Estimated fair value of assets acquired and liabilities assumed:
 
 
     Cash
27,701

 
     Accounts receivable
135,607

 
     Inventories
80,532

 
     Prepaid expenses and other assets
6,715

 
     Property, plant and equipment
36,819

 
     Deferred income taxes
13,067

 
     Intangible assets
1,080,700

 
     Other assets
999

 
     Accounts payable
(21,217
)
 
     Accrued compensation
(24,737
)
 
     Accrued other
(13,438
)
 
     Deferred revenue
(193,478
)
 
     Other long-term liabilities
(3,615
)
 
     Accrued retirement benefits
(26,828
)
 
     Deferred tax liabilities
(319,612
)
 
Goodwill
$
1,491,320

 

 
(1)
Represents approximately 62.5 million new shares (plus cash in lieu of fractional shares) of NetScout common stock issued to the existing common unit holders of Newco based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share, less the fair value attributable to the foreign entities that the Company did not obtain control over on July 14, 2015 due to regulatory and other compliance requirements.

 
(2)
Represents the value of certain outstanding Danaher equity awards held by Newco Employees for which continuing employees will receive value after the Closing Date. A portion of this amount relates to awards that will continue to vest in Danaher shares after the Closing Date. These future compensation amounts will be settled in shares other than shares of the acquired business. The balance of this amount also represents future compensation expense and relates to cash awards to be paid by NetScout to acquired Newco employees on August 4, 2016. The cash payments by NetScout will be reimbursed by Danaher. These items are further described in the Employee Matters Agreement dated July 14, 2015 by and among NetScout Systems, Inc., Danaher Corporation and Potomac Holding LLC and have been accounted for separately from the Communications Business Acquisition.


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The following table summarizes the allocation of the purchase price for the Delayed Close Entities acquired on October 7, 2015 (in thousands):
Purchase Price Allocation:
 
 
    Total equity consideration
$
5,700

(1)
Estimated Purchase Price
$
5,700

 
 
 
 
Estimated fair value of assets acquired and liabilities assumed:
 
 
     Accounts receivable
$
110

 
     Inventories
78

 
     Prepaid expenses and other assets
35

 
     Property, plant and equipment
1,254

 
     Other assets
281

 
     Accounts payable
(8
)
 
     Accrued compensation
(824
)
 
     Accrued other
(176
)
 
     Deferred revenue
(65
)
 
     Other long-term liabilities
(126
)
 
Goodwill
$
5,141

 

 
(1
)
Represents the fair value attributable to the Delayed Close Entities that the Company obtained control over on October 7, 2015.

The Transaction is expected to extend the Company's reach into growth-oriented adjacent markets, including cyber security, with a broader range of market-leading products and capabilities, strengthen the Company's go-to-market resources to better support a larger, more diverse and more global customer base, and increase scale and elevate the Company's strategic position within key accounts. Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill of $1.5 billion from the acquisition will be included within the following operating segments: $533.1 million in Arbor Networks, $784.8 million in Tektronix Communications, $57.0 million in VSS, and $121.5 million in FNET.  All reporting units resulting from the Transaction will be included in the Company’s annual goodwill impairment review. 

Goodwill and intangible assets recorded as part of the acquisition are not deductible for tax purposes.

The fair values of intangible assets were based on valuations using an income approach. These assumptions include estimates of future revenues associated with the technology purchased as part of the acquisition and the migration of the current technology to more advanced version of the software. This fair value measurement was based on significant inputs not observable in the market and thus represents Level 3 fair value measurements. The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives (in thousands):
 
Fair Value
 
Useful Life (Years)
Developed technology
$
221,900

 
9 - 13
Customer relationships
794,100

 
13 - 18
Backlog
18,200

 
1 - 3
Definite lived trademark and tradenames
43,900

 
3 - 9
Leasehold interest
2,600

 
4 - 6
 
$
1,080,700

 
 

The weighted average useful life of identifiable intangible assets acquired in the transaction is 14.7 years. Developed technology is amortized using an accelerated amortization method and has a weighted average useful life of 11.7 years. Customer relationships are amortized using an accelerated amortization method and have a weighted average useful life of 16.3 years. Backlog is amortized using an accelerated amortization method and has a weighted average useful life of 2.0 years. Trademarks and tradenames are

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amortized using an accelerated amortization method and has a weighted average useful life of 8.5 years. Leasehold interests are amortized on a straight-line basis and has a weighted average useful life of 5.6 years.

The Company incurred approximately $23.7 million of acquisition-related costs related to the transaction during the nine months ended December 31, 2015.

During the nine months ended December 31, 2015, the Company has recorded $331.5 million of revenue and a net loss of $49.1 million directly attributable to the Transaction within its consolidated financial statements.

The following table presents unaudited pro forma results of the historical Consolidated Statements of Operations of the Company and the Communications Business of Danaher for the three and nine months ended December 31, 2015 and 2014, giving effect to the Transaction as it they occurred on April 1, 2014 (in thousands, except per share data):
 
Three Months Ended
December 31, (unaudited)
 
Nine Months Ended
December 31, (unaudited)
 
 
2015
 
2014
 
2015
 
2014
Pro forma revenue
 
$
307,679

 
 
$
318,368

 
 
$
845,739

 
$
877,377

 
Pro forma net income (loss)
 
$
(24,507
)
 
 
$
2,522

 
 
$
(55,190
)
 
$
(8,994
)
 
Pro forma income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
    Basic
 
$
(0.25
)
 
 
$
0.02

 
 
$
(0.55
)
 
$
(0.09
)
 
    Diluted
 
$
(0.25
)
 
 
$
0.02

 
 
$
(0.55
)
 
$
(0.09
)
 
Pro forma shares outstanding
 
 
 
 
 
 
 
 
 
 
 
    Basic
 
98,797

 
 
103,706

 
 
100,762

 
103,616

 
    Diluted
 
98,797

 
 
104,036

 
 
100,762

 
103,616

 

The pro forma results for the three and nine months ended December 31, 2015 and 2014 primarily include adjustments for amortization of intangibles. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisitions been completed on the assumed date, or which may be realized in the future.
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company has five operating segments: (1) legacy NetScout, (2) Arbor Networks, (3) Tektronix Communications, (4) VSS and (5) FNET. At December 31, 2015 and March 31, 2015, goodwill attributable to the legacy NetScout reporting unit was $197.5 million and $197.4 million, respectively. Goodwill attributable to the newly acquired Arbor Networks, Tektronix Communications, VSS and FNET operating segments were $533.1 million, $784.8 million, $57.0 million, and $121.5 million, respectively. Goodwill is tested for impairment at a reporting unit level at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value.
The change in the carrying amount of goodwill for the nine months ended December 31, 2015 is due to the acquisition of the Communications Business of Danaher, deferred revenue adjustments, change in assumptions for assumed liabilities and the impact of foreign currency translation adjustments related to asset balances that are recorded in currencies other than the U.S. Dollar.

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The changes in the carrying amount of goodwill for the nine months ended December 31, 2015 are as follows (in thousands):
Balance at March 31, 2015
$
197,445

Goodwill acquired during the quarter ended September 30, 2015
1,504,261

Goodwill acquired during the quarter ended December 31, 2015 from Delayed Close Entities
5,141

Deferred revenue adjustments
(6,490
)
Change in assumptions for assumed liabilities
(3,180
)
Adjust tax effect on equity consideration
(3,271
)
Foreign currency translation impact for the nine months ended December 31, 2015
(30
)
Balance at December 31, 2015
$
1,693,876

Intangible Assets
The net carrying amounts of intangible assets were $1.1 billion and $50.2 million at December 31, 2015 and March 31, 2015, 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, except for the acquired trade name which resulted from the Network General Central Corporation (Network General) acquisition, which has an indefinite life and thus is not amortized. The carrying value of the indefinite lived trade name is evaluated for potential impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Intangible assets include the indefinite lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at December 31, 2015 (in thousands):

Cost

Accumulated
Amortization

Net
Developed technology
$
252,852

 
$
(55,191
)

$
197,661

Customer relationships
832,606

 
(34,092
)

798,514

Distributor relationships
1,626

 
(1,626
)


Definite lived trademark and trade name
43,900

 
(3,578
)

40,322

Core technology
7,129

 
(4,393
)

2,736

Net beneficial leases
336

 
(336
)


Non-compete agreements
281

 
(281
)


Leasehold interest
2,600

 
(271
)
 
2,329

Backlog
18,200

 
(4,385
)
 
13,815

Capitalized software
1,149

 

 
1,149

Other
1,093

 
(687
)
 
406

 
$
1,161,772

 
$
(104,840
)
 
$
1,056,932


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Intangible assets include the indefinite lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at March 31, 2015 (in thousands):

Cost

Accumulated
Amortization

Net
Developed technology
$
30,865

 
$
(25,561
)

$
5,304

Customer relationships
38,498

 
(16,935
)

21,563

Distributor relationships
1,585

 
(711
)

874

Core technology
7,118

 
(3,660
)

3,458

Non-compete agreements
280

 
(280
)


Other
943

 
(562
)

381


$
79,289

 
$
(47,709
)

$
31,580

Amortization of software and core technology included as cost of product revenue was $14.8 million and $30.3 million for the three and nine months ended December 31, 2015, respectively. Amortization of other intangible assets included as operating expense was $11.3 million and $22.0 million for the three and nine months ended December 31, 2015, respectively.
Amortization of software and core technology included as cost of product revenue was $905 thousand and $2.8 million for the three and nine months ended December 31, 2014, respectively. Amortization of other intangible assets included as operating expense was $858 thousand and $2.7 million for the three and nine months ended December 31, 2014, respectively.
The following is the expected future amortization expense at December 31, 2015 for the fiscal years ending March 31 (in thousands):
2016 (remaining three months)
$
27,096

2017
123,477

2018
109,439

2019
103,911

2020
96,324

Thereafter
596,685


$
1,056,932

The weighted average amortization period of developed technology and core technology is 11.5 years. The weighted average amortization period for customer and distributor relationships is 16.1 years. The weighted average amortization period for trademarks and tradenames is 8.5 years. The weighted average amortization period for leasehold interests is 5.6 years. The weighted average amortization period for backlog is 2.0 years. The weighted average amortization period for capitalized software is 4.0 years.
The weighted average amortization period for amortizing all intangible assets is 14.6 years.
NOTE 9 – DERIVATIVE 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.
All of the Company’s 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.

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Table of Contents

The notional amounts and fair values of derivative instruments in the consolidated balance sheets at December 31, 2015 and March 31, 2015 were as follows (in thousands):
 
Notional Amounts (a)

Prepaid Expenses and Other Current Assets

Accrued Other
 
December 31,
2015

March 31,
2015
 
December 31,
2015
 
March 31,
2015
 
December 31,
2015
 
March 31,
2015
Derivatives Designated as Hedging Instruments:











Forward contracts
$
11,593

 
$
20,203

 
$
8

 
$
15

 
$
467

 
$
1,664

 
(a)
Notional amounts represent the gross contract/notional amount of the derivatives outstanding.
The following table provides the effect foreign exchange forward contracts had on other comprehensive income (loss) (OCI) and results of operations for the three months ended December 31, 2015 and 2014 (in thousands):
Derivatives in Cash
Flow Hedging
Relationships
Effective Portion

   Ineffective Portion                    
Gain (Loss) Recognized in
OCI on Derivative
(a)

Gain (Loss) Reclassified from
Accumulated OCI into Income
(b)

Gain (Loss) Recognized in Income (Amount
Excluded from Effectiveness Testing)
(c)
December 31, 2015
 
December 31, 2014

Location

December 31, 2015

December 31, 2014

Location

December 31, 2015
 
December 31, 2014
Forward contracts
$
(288
)
 
$
(924
)

Research and
development

$
46

 
$
1


Research and
development

$
39

 
$
(46
)





Sales and
marketing

113

 
(348
)

Sales and
marketing


 
(5
)

$
(288
)

$
(924
)



$
159


$
(347
)



$
39


$
(51
)
(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.
(c)
The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and therefore recognized in earnings. No gains or losses were reclassified as a result of discontinuance of cash flow hedges.

The following table provides the effect foreign exchange forward contracts had on other comprehensive income (loss) (OCI) and results of operations for the nine months ended December 31, 2015 and 2014 (in thousands):
Derivatives in Cash
Flow Hedging
Relationships
Effective Portion
 
   Ineffective Portion                    
Gain (Loss) Recognized in
OCI on Derivative
(a)
 
Gain (Loss) Reclassified from
Accumulated OCI into Income
(b)
 
Gain (Loss) Recognized in Income (Amount
Excluded from Effectiveness Testing)
(c)
December 31, 2015
 
December 31, 2014
 
Location
 
December 31, 2015
 
December 31, 2014
 
Location
 
December 31, 2015
 
December 31, 2014
Forward contracts
$
(806
)
 
$
(1,663
)
 
Research and
development
 
$
132

 
$
23

 
Research and
development
 
$
102

 
$
148

 
 
 
 
 
Sales and
marketing
 
1,817

 
(333
)
 
Sales and
marketing
 
(21
)
 
24

 
$
(806
)
 
$
(1,663
)
 
 
 
$
1,949

 
$
(310
)
 
 
 
$
81

 
$
172

(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.
(c)
The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and therefore recognized in earnings. No gains or losses were reclassified as a result of discontinuance of cash flow hedges.

18

Table of Contents

NOTE 10 – LONG-TERM DEBT
On July 14, 2015, the Company entered into a certain credit facility with a syndicate of lenders pursuant to a Credit Agreement (Credit Agreement), dated as of July 14, 2015, by and among: the Company; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto. The Credit Agreement provides for a five-year $800,000,000 senior secured revolving credit facility, including a letter of credit sub-facility of up to $50,000,000. The Company may elect to use the new credit facility for working capital purposes or repurchase of up to 20 million shares of common stock under the Company's common stock repurchase plan. The commitments under the Credit Agreement will expire on July 14, 2020, and any outstanding loans will be due on that date.
Subsequent to entering into the Credit Agreement, the Company drew down $250 million to support general working capital requirements as well as to help finance the repurchase of the Company's common stock under its authorized 20 million share common stock repurchase plan. At December 31, 2015, $250 million was outstanding under this credit facility.
At the Company’s election, revolving loans under the Credit Agreement bear interest at either (a) a Alternate Base Rate per annum equal to the greatest of (1) JPMorgan’s prime rate, (2) 0.50% in excess of the Federal Funds effective rate, or (3) an adjusted one month LIBO rate plus 1%; or (b) such adjusted LIBO rate (for the interest period selected by the Company), in each case plus an applicable margin. For the initial period until the Company has delivered financial statements for the quarter ended March 31, 2016, the applicable margin will be 1.75% per annum for LIBOR loans and 0.75% per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on the Company’s leverage ratio, ranging from 1.00% per annum for Base Rate loans and 2.00% per annum for LIBOR loans if the Company’s consolidated leverage ratio is greater than 2.50 to 1.00, down to 0.25% per annum for Alternate Base Rate loans and 1.25% per annum for LIBOR loans if the Company’s consolidated leverage ratio is equal to or less than 1.00 to 1.00.
The Company’s consolidated leverage ratio is the ratio of its total funded debt compared to its consolidated adjusted EBITDA. Consolidated adjusted EBITDA includes certain adjustments, including, without limitation, adjustments relating to extraordinary, unusual or non-recurring charges, certain restructuring charges, non-cash charges, certain transaction costs and expenses and certain pro forma adjustments in connection with material acquisitions and dispositions, all as set forth in detail in the definition of Consolidated EBITDA in the Credit Agreement.
Commitment fees will accrue on the daily unused amount of the credit facility. For the initial period until the Company has delivered financial statements for the quarter ended March 31, 2016, the commitment fee will be 0.30% per annum, and thereafter the commitment fee will vary depending on the Company’s consolidated leverage ratio, ranging from 0.35% per annum if the Company’s consolidated leverage ratio is greater than 2.50 to 1.00, down to 0.20% per annum if the Company’s consolidated leverage ratio is equal to or less than 1.00 to 1.00.

Letter of credit participation fees are payable to each lender on the amount of such lender’s letter of credit exposure, during the period from the closing date of the Credit Agreement to but excluding the date which is the later of (i) the date on which such lender’s commitment terminates or (ii) the date on which such lender ceases to have any letter of credit exposure, at a rate per annum equal to the applicable margin for LIBOR loans. Additionally, 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 LIBOR loans is payable at the end of each interest rate period or at the end of each three-month interval within an interest rate period if the period is longer than three months. The Company may also prepay loans under the Credit Agreement at any time, without penalty, subject to certain notice requirements.
Debt is recorded at the amount drawn on the revolving credit facility plus interest based on floating rates reflective of changes in the market which approximates fair value.
The loans and other obligations under the credit facility are (a) guaranteed by each of 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 Company 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 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 Credit Agreement.

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Table of Contents

The 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. In addition, the Company is required to maintain certain consolidated leverage and interest coverage ratios. These covenants and limitations are more fully described in the Credit Agreement. At December 31, 2015, the Company was in compliance with all of these covenants.
The 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 Credit Agreement and related documents, defaults under certain other indebtedness, certain insolvency events, certain events arising under ERISA, a change of control and certain other events. Upon an event of default, the administrative agent with the consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments may terminate the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Credit Agreement and the other loan documents.
In connection with the Company’s new revolving credit facility described above, effective as of the Closing Date, the Company terminated its existing term loan and revolving credit facility pursuant to the Credit and Security Agreement, dated as of November 22, 2011, by and among the Company, KeyBank National Association, as joint lead arranger, sole book runner and administrative agent, Wells Fargo Bank, National Association, as joint lead arranger and co-syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arranger, Bank of America, N.A., as co-syndication agent, and Silicon Valley Bank and Comerica Bank, as co-documentation agents, and the Lenders party thereto.
The Company capitalized $6.6 million of debt issuance costs associated with the origination of the Credit Agreement, which are being amortized over the life of the revolving credit facility. The unamortized balance was $6.1 million as of December 31, 2015. The balance of $1.4 million is included as prepaid expenses and other current assets and a balance of $4.7 million was included as other assets in Company’s consolidated balance sheet.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Acquisition related The Company has one contingent liability related to the acquisition of Simena, LLC (Simena) in November 2011 for future consideration to be paid to the former seller which had an initial fair value of $8.0 million at the time of acquisition. At December 31, 2015, the present value of the future consideration was $4.6 million.
The Company has one contingent liability related to the acquisition of the Communications Business of Danaher in July 2015 and represents the tax effected portion of the contingently returnable consideration. At December 31, 2015, the fair value of the future consideration to be paid to Danaher was $2.6 million. For additional information, see Note 7 of the Company's Notes to consolidated Financial Statements.
Legal – From time to time, NetScout is subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not have a significant adverse effect on the Company’s financial condition, results of operations or cash flows.

NOTE 12 – PENSION BENEFIT PLANS
Certain of the Company's non-U.S. employees participate in certain noncontributory defined benefit pension plans acquired in the Communications Business acquisition. 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.

20

Table of Contents

The following sets forth the components of the Company's net periodic pension cost of the noncontributory defined benefit pension plans for the three and nine months ended December 31, 2015 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
Service cost
$
49

 
$

 
$
98

 
$

Interest cost
75

 

 
150

 

Amortization of net loss
80

 

 
160

 

    Net periodic pension cost
$
204

 
$

 
$
408

 
$


Expected Contributions
During the nine months ended December 31, 2015, the Company did not make any contributions to its defined benefit pension plans. During the fiscal year ending March 31, 2016, the Company's cash contribution requirements for its defined benefit pension plans are expected to be less than $1.0 million. As the participants within the Company's plans are all active employees, the benefit payments are not expected to be material in the foreseeable future.

Other Matters
Substantially all employees not covered by defined benefit plans are covered by defined contribution plans, which generally provide for company funding based on a percentage of compensation. Expense for all defined benefit pension and defined contribution plans amounted to $2.3 million and $5.1 million for the three and nine months ended December 31, 2015, respectively.
NOTE 13 – TREASURY STOCK
On April 22, 2014, the Company's board of directors approved a stock repurchase program. This program authorized management to make additional repurchases of NetScout outstanding common stock of up to $100 million. Through December 31, 2015, the Company had repurchased 824,452 shares totaling $34.3 million in the open market under this stock repurchase plan. The Company repurchased 67,752 shares for $2.8 million under this program during the nine months ended December 31, 2015. At December 31, 2015, there were no shares of common stock that remained available to be purchased under this plan due to the approval of a new share repurchase program approved on May 19, 2015.
On May 19, 2015, the Company’s board of directors approved a new share repurchase program, conditional upon the completion of the Company's acquisition of the Communications Business. This program enables the Company to repurchase up to 20 million shares of its common stock. This plan became effective on July 14, 2015 upon the completion of the Transaction and replaced the Company's previously existing open market stock repurchase program described above. For additional information regarding the acquisition of the Communications Business, see Note 7 above. Through December 31, 2015, the Company has repurchased 5,196,596 shares totaling $201.0 million in the open market under this stock repurchase plan. At December 31, 2015, 14,803,404 shares of common stock remained available to be purchased under the plan.
In connection with the vesting and release of the restriction on previously vested shares of restricted stock units, the Company withheld 235,816 shares at a cost of $8.6 million related to minimum statutory tax withholding requirements on these restricted stock units during the nine months ended December 31, 2015. These withholding transactions do not fall under the repurchase program described above, and therefore do not reduce the amount that is available for repurchase under that program.

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Table of Contents

NOTE 14 – NET INCOME PER SHARE
Calculations of the basic and diluted net income (loss) per share and potential common shares are as follows (in thousands, except for per share data):

Three Months Ended

Nine Months Ended
 
December 31,

December 31,
 
2015

2014

2015

2014
Numerator:







Net income (loss)
$
(24,507
)
 
$
17,629

 
$
(24,753
)
 
$
40,338

Denominator:
 
 
 
 
 
 
 
Denominator for basic net income per share - weighted average common shares outstanding
98,797

 
41,206

 
77,126

 
41,128

Dilutive common equivalent shares:
 
 
 
 
 
 
 
      Weighted average stock options

 
7

 

 
11

      Weighted average restricted stock units

 
323

 

 
540

Denominator for diluted net income per share - weighted average shares outstanding
98,797

 
41,536

 
77,126

 
41,679

Net income per share:
 
 
 
 
 
 
 
Basic net income (loss) per share
$
(0.25
)
 
$
0.43

 
$
(0.32
)
 
$
0.98

Diluted net income (loss) per share
$
(0.25
)
 
$
0.42

 
$
(0.32
)
 
$
0.97

The following table sets forth restricted stock units excluded from the calculation of diluted net income (loss) per share, since their inclusion would be antidilutive (in thousands):

Three Months Ended

Nine Months Ended
 
December 31,

December 31,
 
2015

2014

2015

2014
Restricted stock units
358

 
19

 
503

 
12

Basic net income (loss) per share is calculated by dividing net income (loss) 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 (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, 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 stock options, unrecognized compensation expense and any tax benefits as additional proceeds.
NOTE 15 – INCOME TAXES
The Company's effective income tax rates were 3,670.3% and 35.7% for the three months ended December 31, 2015 and 2014, respectively.  Generally, the effective tax rate differs from the statutory tax rate due to the impact of the domestic production activities deduction, research and development credit, the impact of state taxes and income generated in jurisdictions that have a different tax rate than the U.S. statutory rate. The effective tax rate for the three months ended December 31, 2015 is higher than the effective rate for the three months ended December 31, 2014 primarily related to a decrease in profit before taxes due to Transaction related expenses recorded in the quarter, increased research and development credits attributable to acquired companies and a change in the jurisdictional mix of earnings.
Our effective tax rates were 1.0% and 37.9% for the nine months ended December 31, 2015 and 2014, respectively. The effective tax rate is lower than the comparable period in the prior year primarily due to the decrease in profit before taxes due to Transaction related expenses recorded in the first nine months of fiscal year 2016, an increase in research and development tax credits attributable to acquired companies and a change in the jurisdictional mix of earnings.

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Table of Contents

NOTE 16 – SEGMENT AND GEOGRAPHIC INFORMATION
The Company reports revenues and income under five operating segments that aggregate under one reportable segment.
The Company manages its business in the following geographic areas: United States, Europe, Asia and the rest of the world. In accordance with United States export control regulations, the Company does not sell or do business with countries subject to economic sanctions and export controls.
Total revenue by geography is as follows (in thousands):

Three Months Ended

Nine Months Ended
 
December 31,

December 31,
 
2015

2014

2015

2014
United States
$
206,899

 
$
88,905

 
$
480,341

 
$
254,260

Europe
50,765

 
16,981

 
99,003

 
37,032

Asia
21,625

 
8,075

 
39,337

 
19,464

Rest of the world
28,390

 
8,872

 
50,851

 
23,528


$
307,679


$
122,833


$
669,532


$
334,284

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. The Company reports these shipments as United States revenue since the Company ships the products to a United States location. 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.
NOTE 17 - RELATED PARTY TRANSACTIONS
A member of the Company’s Board of Directors serves as an executive officer (under Section 16 of the Securities Exchange Act of 1934, as amended (the Exchange Act)) of Danaher. As part of the split off of Danaher’s Communications Business and the Company’s subsequent acquisition of that business from Newco's shareholders, NetScout has entered into multiple transactions with Danaher which include: transitions services agreements, lease agreements, closing agreements, and compensation for post combination services provisions within the separation and distribution agreement. The Company has disclosed these transactions parenthetically within the financial statements.
A member of the Company’s Board of Directors serves as a member of the board of directors for EMC, Corp. (EMC) and therefore, the Company considers sales to EMC to be a related party transaction.  The Company recognized $409 thousand in revenue from EMC during the nine months ended December 31, 2015 in the ordinary course of business. Another member of the Company’s Board of Directors also serves as a Section 16 officer of State Street Corporation (State Street) and therefore, the Company considers sales to State Street to be a related party transaction.  The Company recognized $254 thousand in revenue from State Street during the nine months ended December 31, 2015 in the ordinary course of business.

23

Table of Contents



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements under Section 21E of the Exchange Act and other federal securities laws. These forward looking statements involve risks and uncertainties. These statements relate to future events or our future financial performance and are identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “intends,” “seeks,” “anticipates,” “believes,” “estimates,” “potential” or “continue,” or the negative of such terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors, including those referred to in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended March 31, 2015, our subsequent Quarterly Reports on Form 10-Q and elsewhere in this quarterly report. These factors may cause our actual results to differ materially from any forward-looking statement. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report or to conform these statements to actual results or revised expectations.
Overview
We are an industry leader for real-time service assurance and cyber security solutions that are used in many of the most demanding service provider, enterprise and government networks. Our Adaptive Service Intelligence (ASI) technology continuously monitors the service delivery environment to identify performance issues and provides insight into network-based security threats, helping teams to quickly resolve issues that can cause business disruptions or impact user experience. We manufacture and market these products in integrated hardware and software solutions that are used by customers to help drive return on investment on their network and broader information technology (IT) initiatives while reducing the tangible risks associated with downtime, poor service quality and compromised security. We report revenues and income under five operating segments that aggregate under a single reportable segment. Substantially all of our identifiable assets are located in the United States.
We have been a technology innovator for three-plus decades since our founding in 1984. Our solutions change how organizations manage and optimize the delivery of business applications and services,