GOODWILL & INTANGIBLE ASSETS

Goodwill

The Company has five reporting units: (1) NetScout, (2) Arbor Networks, (3) Tektronix Communications, (4) VSS and (5) FNET. At March 31, 2016 and March 31, 2015, goodwill attributable to the NetScout reporting unit was $198.1 million and $197.4 million, respectively. Goodwill attributable to the Arbor Networks, Tektronix Communications, VSS and FNET reporting units at March 31, 2016 were $534.8 million, $794.4 million, $57.0 million and $125.1 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 Company completed its annual impairment test on January 31, 2016. The fair value of the reporting unit's goodwill is determined using established income and market valuation approaches.

In fiscal year 2016 and 2015, the Company's annual impairment tests indicated that goodwill was not impaired. In fiscal year 2016, the Company performed a quantitative step 1 analysis of each of its 5 reporting units. The Company determined the fair values of its reporting unit’s goodwill by preparing a discounted cash flow analysis using updated forward-looking projections of the unit's future operating results and by comparing the value of the operating segments to the implied market value of selected peers of the reporting unit. The significant assumptions used in the discounted cash flow analysis include: revenue and revenue growth, selling margins, other operating expenditures, projected capex, the discount rate used to present value future cash flows and terminal growth rates. The discount rate used is a cost of equity method, which is essentially equal to the “market participant” weighted-average cost of capital (WACC). The NetScout goodwill fair value substantially exceeded its carrying values. The Company performed a sensitivity analysis on our significant assumptions used to determine the fair value of the Arbor reporting unit and has determined that a reasonable, negative change in its assumptions, as follows, would not impact our conclusion: decrease projected revenue growth by 3%, decrease the selling margin by 2%, decrease the operating margin by 2% or increase the WACC by 75 basis points. The Company performed a sensitivity analysis on our significant assumptions used to determine the fair value of the Tektronix Communications reporting unit and has determined that a reasonable, negative change in its assumptions, as follows, would not impact our conclusion: decrease projected revenue growth by 3%, decrease the selling margin by 4%, decrease the operating margin by 4% or increase the WACC by 100 basis points. The Company performed a sensitivity analysis on our significant assumptions used to determine the fair value of the VSS reporting unit and has determined that a reasonable, negative change in its assumptions, as follows, would not impact our conclusion: decrease projected revenue growth by 17%, decrease the selling margin by 8%, decrease the operating margin by 8% or increase the WACC by 600 basis points. The Company performed a sensitivity analysis on our significant assumptions used to determine the fair value of the FNET reporting unit and has determined that a reasonable, negative change in its assumptions, as follows, would not impact our conclusion: decrease projected revenue growth by 16%, decrease the selling margin by 7%, decrease the operating margin by 7% or increase the WACC by 500 basis points.

The change in the carrying amount of goodwill for the fiscal year ended March 31, 2016 is due to the Transaction, deferred revenue adjustments, deferred tax liability adjustments, purchase accounting 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.

The changes in the carrying amount of goodwill for the fiscal years ended March 31, 2016 and 2015 are as follows (in thousands):




Balance at March 31, 2014	$	203,446
Purchase accounting adjustments	—
Foreign currency translation impact	(6,001		)
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	(11,392		)
Purchase accounting adjustments	(527		)
Change in assumptions for assumed liabilities	(6,258		)
Adjust deferred tax liability	25,034
Adjust tax effect on equity consideration	(3,271		)
Foreign currency translation impact	(1,064		)
Balance at March 31, 2016	$	1,709,369

Intangible Assets

The net carrying amounts of intangible assets were $1.1 billion and $50.2 million at March 31, 2016 and 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 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.

In fiscal year 2016 and 2015, the Company's annual impairment tests indicated that the acquired trade name was not impaired. In the fourth quarter of fiscal year 2016, the Company performed a quantitative step 1 analysis of its non-amortizing trade name. The Company determined the fair value of its trade name using a forward-looking relief from royalty model. The significant assumptions used in the forward-looking relief from royalty method include: revenue growth, royalty rates and the discount rate. The non-amortizing trade name fair value substantially exceeded its carrying values.

During fiscal year ended March 31, 2016, the Company acquired a technology license for $3.7 million. This amount is included within distributor relationships and is being amortized using the economic benefit method over a useful life of 4 years.

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, 2016 (in thousands):



	Cost		Accumulated Amortization			Net
Developed technology	$	253,249	$	(69,810	)	$	183,439
Customer relationships	834,091		(42,526		)	791,565
Distributor relationships	5,348		(1,633		)	3,715
Definite lived trademark and trade name	43,964		(5,511		)	38,453
Core technology	7,169		(4,659		)	2,510
Net beneficial leases	336		(336		)	—
Non-compete agreements	288		(288		)	—
Leasehold interest	2,600		(416		)	2,184
Backlog	18,245		(6,750		)	11,495
Capitalized software	1,625		—			1,625
Other	1,191		(737		)	454
	$	1,168,106	$	(132,666	)	$	1,035,440

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 $45.1 million, $3.6 million and $3.3 million for the fiscal years ended March 31, 2016, 2015 and 2014, respectively. Amortization of other intangible assets included as operating expense was $32.5 million, $3.5 million and $3.6 million for the fiscal years ended March 31, 2016, 2015 and 2014, respectively.

The following is the expected future amortization expense at March 31, 2016 for the years ended March 31 (in thousands):



2017	$	123,988
2018	110,449
2019	104,839
2020	97,333
2021	85,360
Thereafter	513,471
Total	$	1,035,440

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 trade names 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 amortizing capitalized software is 4.0 years. The weighted average amortization period for amortizing all intangible assets is 14.6 years.