FAIR VALUE MEASUREMENTS

3 Months Ended

Jun. 30, 2019

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 June 30, 2019 and March 31, 2019 (in thousands):



	Fair Value Measurements at
	June 30, 2019
	Level 1		Level 2			Level 3			Total
ASSETS:
Cash and cash equivalents	$	353,721	$	—		$	—		$	353,721
U.S. government and municipal obligations	47,145		2,074			—			49,219
Commercial paper	—		37,553			—			37,553
Corporate bonds	2,669		—			—			2,669
Derivative financial instruments	—		18			—			18
Contingent consideration	—		—			239			239
	$	403,535	$	39,645		$	239		$	443,419
LIABILITIES:
Contingent purchase consideration	$	—	$	—		$	(1,000	)	$	(1,000	)
Derivative financial instruments	—		(51		)	—			(51		)
	$	—	$	(51	)	$	(1,000	)	$	(1,051	)



	Fair Value Measurements at
	March 31, 2019
	Level 1		Level 2			Level 3		Total
ASSETS:
Cash and cash equivalents	$	409,632	$	—		$	—	$	409,632
U.S. government and municipal obligations	10,732		16,890			—		27,622
Commercial paper	—		48,722			—		48,722
Corporate bonds	1,012		—			—		1,012
Derivative financial instruments	—		58			—		58
Contingent consideration	—		—			762		762
	$	421,376	$	65,670		$	762	$	487,808
LIABILITIES:
Derivative financial instruments	$	—	$	(68	)	$	—	$	(68	)
	$	—	$	(68	)	$	—	$	(68	)

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 calculated using market observable data for similar but not identical instruments, or a discounted cash flow model using the contractual interest rate as compared to the underlying interest yield curve. 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. 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's Level 3 assets consist of contingent consideration related to the divestiture of the Company's handheld network test (HNT) tools business in September 2018. The contingent consideration represents potential future earnout payments to the Company of up to $4.0 million over two years that are contingent on the HNT tools business achieving certain milestones. The Company recorded a $0.5 million change in the fair value of the contingent consideration for the three months ended June 30, 2019, which is included in other expense, net within the Company's consolidated statement of operations for the three months ended June 30, 2019. The fair value of the contingent consideration was $0.2 million and $0.8 million at June 30, 2019 and March 31, 2019 respectively. The contingent consideration is included in other assets within the Company’s consolidated balance sheet at June 30, 2019 and March 31, 2019.

The Company's Level 3 liability consists of contingent purchase consideration related to the acquisition of certain assets and liabilities of Eastwind Networks, Inc. (Eastwind) in April 2019. The contingent purchase consideration represents amounts deposited into an escrow account, which was established to cover damages NetScout may suffer related to any liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the acquisition agreement. The contingent purchase consideration is included as accrued other in the Company's consolidated balance sheet at June 30, 2019.

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 three months ended June 30, 2019 (in thousands):



	Contingent Consideration			Contingent Purchase Consideration
Balance at March 31, 2019	$	762		$	—
Additions to Level 3	—			(1,000		)
Change in fair value of contingent consideration	(523		)	—
Balance at June 30, 2019	$	239		$	(1,000	)

Accretion income related to the contingent consideration received as partial consideration for the divestiture of the HNT tools business for the three months ended June 30, 2019 was $18 thousand and was included within interest income.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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