What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-19 compared with 2020-02-26 · 488 added, 339 removed, 716 unchanged (54% of the section changed)

1 unchanged sentence

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2019, 2018, and 2017

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Income for the year ended December 31, 2020, 2019 and 2018

Consolidated Statements of Comprehensive Income for the year ended December 31, 2020, 2019 and 2018

Consolidated Statements of Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2020, 2019 and 2018

Consolidated Statements of Cash Flows for the year ended December 31, 2020, 2019 and 2018

Notes to Consolidated Financial Statements

The supplementary financial information required by this Item 8 is included in Part II, Item 7 of this Annual Report on Form 10-K under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results of Operations.”

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

5 unchanged sentences

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue in fiscal 2018 due to adoption of the new revenue standard.

Basis for Opinion

36 unchanged sentences

(in millions, except per share amounts)

2020 December 31,

CURRENT ASSETS:

1 unchanged sentence

Short-term investments 775.5 843.1

Accounts receivable—Net of reserves for doubtful accounts of $1.2 million and $0.9 million at December 31, 2019 and 2018, respectively

Accounts receivable—Net of allowance for credit losses of $ 2.5 million at December 31, 2020 and net of allowance for doubtful accounts of $ 1.2 million at December 31, 2019

Inventory 139.8 117.9

Prepaid expenses and other current assets 43.3 41.2

5 unchanged sentences

OTHER INTANGIBLE ASSETS—NET 31.6 31.1

GOODWILL 93.0 67.2

OTHER ASSETS 63.2 60.0

TOTAL ASSETS $ 4,044.5 $ 3,879.2

LIABILITIES AND STOCKHOLDERS’ EQUITY

3 unchanged sentences

Accrued payroll and compensation 145.9 101.8

Income taxes payable

Deferred revenue 1,392.8 1,155.8

9 unchanged sentences

Additional paid-in capital 1,207.2 1,180.3

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income 0.7 1.1

Retained earnings (accumulated deficit) ( 352.1 ) 160.8

6 unchanged sentences

Year Ended December 31,

2020 2019 2018

Product $ 916.4 $ 788.5 $ 674.4

Service 1,678.0 1,374.5 1,130.2

Total revenue 2,594.4 2,163.0 1,804.6

COST OF REVENUE:

Product 352.4 324.6 291.0

Service 217.6 181.3 159.4

Total cost of revenue 570.0 505.9 450.4

GROSS PROFIT:

Product 564.0 463.9 383.4

Service 1,460.4 1,193.2 970.8

Total gross profit 2,024.4 1,657.1 1,354.2

3 unchanged sentences

General and administrative 119.5 102.1 93.0

Restructuring charges

Gain on intellectual property matter ( 40.2 ) — —

Total operating expenses 1,492.6 1,306.1 1,119.8

1 unchanged sentence

INTEREST INCOME—NET 17.7 42.5 26.5

OTHER INCOME (EXPENSE)—NET

OTHER EXPENSE—NET ( 7.8 ) ( 7.5 ) ( 6.6 )

INCOME BEFORE INCOME TAXES 541.7 386.0 254.3

PROVISION FOR (BENEFIT FROM) INCOME TAXES 53.2 54.3 ( 80.6 )

NET INCOME $ 488.5 $ 331.7 $ 334.9

Net income per share (Note 10):

Basic $ 2.98 $ 1.94 $ 1.98

Diluted $ 2.91 $ 1.90 $ 1.92

Weighted-average shares outstanding:

Basic 164.2 171.0 169.1

Diluted 167.7 175.0 174.2

See notes to consolidated financial statements.

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

Net income $ 488.5 $ 331.7 $ 334.9

Other comprehensive income (loss):

Change in unrealized gains (losses) on investments ( 0.2 ) 2.5 —

Tax provision (benefit) related to change in unrealized gains (losses) on investments

tax provision related to change in unrealized gains (losses) on investments 0.2 0.5 —

Other comprehensive income (loss) ( 0.4 ) 2.0 —

4 unchanged sentences

(in millions)

Comprehensive Income (Loss)

Retained Earnings (Accumulated Deficit)

Common Stock Additional

Capital Accumulated

Comprehensive Income (Loss) Retained Earnings (Accumulated Deficit) Total

Stockholders’

Shares Amount

BALANCE—December 31, 2017 167.9 $ 0.2 $ 909.6 $ ( 0.8 ) $ ( 307.0 ) $ 602.0

2 unchanged sentences

Stock-based compensation expense — — 162.9 — — 162.9

Net unrealized loss on investments - net of tax

Cumulative effect adjustments from adoption of Topic 606 — — — — 117.3 117.3

Net income — — — — 334.9 334.9

BALANCE—December 31, 2018 169.8 0.2 1,068.3 ( 0.8 ) ( 42.2 ) 1,025.5

2 unchanged sentences

Stock-based compensation expense — — 173.0 — — 173.0

Cumulative effect adjustments from adoption of Topic 606

Cumulative-effect adjustment from adoption of ASU 2018-02 — — — ( 0.1 ) 0.1 —

Net unrealized gain on investments - net of tax — — — 2.0 — 2.0

Net income — — — — 331.7 331.7

BALANCE—December 31, 2019 171.7 0.2 1,180.3 1.1 160.8 1,342.4

2 unchanged sentences

Stock-based compensation expense — — 191.7 — — 191.7

Cumulative-effect adjustment from adoption of ASU 2018-02

Net unrealized gain on investments - net of tax — — — ( 0.4 ) — ( 0.4 )

Net income — — — — 488.5 488.5

BALANCE—December 31, 2020 162.5 $ 0.2 $ 1,207.2 $ 0.7 $ ( 352.1 ) $ 856.0

4 unchanged sentences

Year Ended December 31,

2020 2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 488.5 $ 331.7 $ 334.9

Adjustments to reconcile net income to net cash provided by operating activities:

3 unchanged sentences

Amortization of investment premiums (discounts) 1.3 ( 6.0 ) ( 0.6 )

Other 6.0 5.7 ( 0.9 )

Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:

Accounts receivable—net ( 176.4 ) ( 96.7 ) ( 82.0 )

Inventory ( 42.2 ) ( 48.5 ) ( 33.4 )

Prepaid expenses and other current assets ( 2.8 ) ( 2.1 ) 4.2

1 unchanged sentence

Deferred tax assets ( 10.5 ) 19.4 ( 127.1 )

Other assets ( 4.6 ) ( 1.3 ) ( 3.8 )

Accounts payable 37.4 7.7 14.6

3 unchanged sentences

Deferred revenue 495.6 439.9 348.7

Income taxes payable

Net cash provided by operating activities 1,083.7 808.0 638.9

5 unchanged sentences

Payments made in connection with business combinations, net of cash acquired ( 40.2 ) ( 34.6 ) ( 21.7 )

Other 1.3 — —

Net cash used in investing activities ( 72.8 ) ( 502.3 ) ( 134.9 )

4 unchanged sentences

Payments of debt assumed in connection with business combinations ( 4.1 ) ( 3.7 ) ( 10.1 )

Other ( 1.3 ) ( 0.3 ) —

Net cash used in financing activities ( 1,171.6 ) ( 195.6 ) ( 202.6 )

NET INCREASE IN CASH AND CASH EQUIVALENTS

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 160.7 ) 110.1 301.4

CASH AND CASH EQUIVALENTS—Beginning of year 1,222.5 1,112.4 811.0

7 unchanged sentences

Transfers of evaluation units from inventory to property and equipment $ 20.9 $ 21.1 $ 21.6

Liability for purchase of property and equipment and asset retirement obligations

Liability for purchase of property and equipment $ 30.8 $ 16.0 $ 8.3

Liability incurred for repurchase of common stock $ — $ — $ 4.2

1 unchanged sentence

See notes to consolidated financial statements.

Table of Conten ts

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business —Fortinet, Inc.

(“Fortinet”) was incorporated in Delaware in November 2000 and is a global leader in broad, integrated and automated cybersecurity solutions.

Fortinet provides high performance cybersecurity solutions to a wide variety of businesses, such as enterprises, communication service providers and small businesses.

(“Fortinet”) was incorporated in Delaware in 2000 and is a global leader in broad, integrated and automated cybersecurity solutions.

Fortinet provides high performance cybersecurity solutions to a wide variety of businesses, such as large enterprises, communication service providers, government organizations and small to medium-sized enterprises.

Fortinet’s cybersecurity solutions are designed to provide broad visibility and segmentation of the digital attack surface, through our integrated Security Fabric Platform with automated protection, detection and responses.

2 unchanged sentences

Use of Estimates —The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

Such management estimates include, but are not limited to, the standalone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred contract costs for commissions, stock-based compensation, inventory valuation, the fair value of assets acquired and liabilities assumed in business combinations, the measurement of liabilities for uncertain tax positions and deferred tax assets and liabilities, the assessment of recoverability of our goodwill and other long-lived assets, the determination of sales returns reserves and contingent liabilities.

Such management estimates include, but are not limited to, the standalone selling price for our products and services, the period of benefit for deferred contract costs for commissions, stock-based compensation, inventory valuation, the fair value of assets acquired and liabilities assumed in business combinations, the measurement of liabilities for uncertain tax positions and deferred tax assets and liabilities, the assessment of recoverability of our goodwill and other long-lived assets, the determination of sales returns reserves and contingent liabilities.

We base our estimates on historical experience and also on assumptions that we believe are reasonable.

Actual results could differ from those estimates.

Actual results could differ materially from those estimates.

Concentration Risk —Financial instruments that subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term and long-term investments and accounts receivable.

1 unchanged sentence

Balances in the United States typically exceed the amount of insurance provided on such deposits.

We maintain our cash equivalents and investments in money market funds, commercial paper and fixed income securities with major financial institutions that our management believes are financially sound.

Our accounts receivables are primarily derived from our channel partners in various geographic locations.

We maintain our cash equivalents and investments in money market funds, commercial paper and fixed income debt securities with major financial institutions that our management believes are financially sound.

Our accounts receivables are primarily derived from our distributor customers in various geographic locations.

We perform ongoing credit evaluations of our customers.

1 unchanged sentence

As of December 31, 2020 and 2019, Exclusive Networks Group (“Exclusive”) accounted for 34 % and 36 % of total net accounts receivable, respectively.

As of December 31, 2019, Ingram Micro Inc.

(“ Ingram Micro ”) accounted for 10 % of total net accounts receivable.

As of December 31, 2020 and 2019, Ingram Micro Inc.

(“Ingram Micro”) accounted for 11 % and 10 % of total net accounts receivable, respectively.

During 2020, Exclusive and Ingram Micro accounted for 30 % and 10 % of total revenue, respectively.

During 2019, Exclusive and Ingram Micro accounted for 31 % and 11 % of total revenue, respectively.

During 2017, Exclusive accounted for 25 % of total revenue.

We rely on a small number of manufacturing partners, primarily in Taiwan but also in China and the United States, to manufacture our products, and some of the components of our products are available from limited or sole sources of supply.

Each of our proprietary Application-Specific Integrated Circuits is built by a sole contract manufacturer.

During 2018, Exclusive and Ingram Micro accounted for 30 % and 10 % of total revenue, respectively.

We rely on a small number of manufacturing partners, primarily in Taiwan, to manufacture our products, and some of the components of our products are available from limited or sole sources of supply.

Each of our proprietary Application-Specific Integrated Circuits is built by contract manufacturers located in Japan.

Financial Instruments and Fair Value — We define fair value as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

2 unchanged sentences

Due to their short-term nature, the carrying amounts reported in the consolidated financial statements approximate the fair value for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and accrued payroll and compensation.

Comprehensive Income —Comprehensive income includes certain changes in equity from non-owner sources that are excluded from net income, specifically, unrealized gains and losses on available-for-sale investments and the related tax impact.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Foreign Currency and Transaction Gains and Losses —The functional currency of our foreign subsidiaries is the U.S.

1 unchanged sentence

dollars using the exchange rates in effect at the balance sheet dates.

Foreign currency denominated income and expenses have been remeasured using the exchange rates in effect during each period.

Foreign currency remeasurement gains (losses) of $( 4.7 ) million , $( 8.2 ) million and $ 1.0 million are included in other income (expense)—net for 2019 , 2018 and 2017 , respectively.

Foreign currency remeasurement losses of $ 5.5 million, $ 4.7 million and $ 8.2 million, which are related to changes in foreign currency rates, are included in other expense—net for 2020, 2019, and 2018, respectively.

Cash, Cash Equivalents and Available-for-Sale Investments —We consider all highly liquid investments, purchased with original maturities of three months or less, to be cash equivalents.

Cash and cash equivalents consist of balances with banks and highly liquid investments in money market funds, commercial paper, term deposits and corporate debt.

We classify our investments as available-for-sale at the time of purchase, since it is our intent that these investments are available for current operations.

Investments with original maturities greater than three months that mature less than one year from the consolidated balance sheet date are classified as short-term investments.

Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments.

We hold investment grade securities consisting of money market funds, corporate debt securities, U.S.

government securities, commercial paper, certificates of deposit and term deposits that our management believes are financially sound.

We classify our investments as available-for-sale (“AFS”) at the time of purchase, since it is our intent that these investments are available for current operations.

Investments with original maturities greater than three months with a remaining maturity less than one year from the consolidated balance sheet date are classified as short-term investments.

Investments with remaining maturities greater than one year from the consolidated balance sheet date are classified as long-term investments.

Our AFS investments in debt securities are carried at estimated fair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive income (loss) in consolidated statements of stockholders’ equity.

AFS debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses.

An investment is impaired if the fair value of the investment is less than its cost.

If the fair value of an investment is less than its amortized cost basis at the balance sheet date and if we do not intend to sell the investment, we consider available evidence to assess whether it more likely than not that we will be required to sell the investment before the recovery of its amortized cost basis.

If the fair value of an investment is less than its amortized cost basis at the balance sheet date and if we do not intend to sell the investment, we consider available evidence to assess whether it is more likely than not that we will be required to sell the investment before the recovery of its amortized cost basis.

We consult with our investment managers and consider available quantitative and qualitative evidence in evaluating, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our ability to hold the investment.

Once an impairment is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

The difference between the investment’s then-current amortized cost basis and fair value is separated into (i) the amount of the impairment related to the credit loss (i.e., the credit loss component) and (ii) the amount of the impairment related to all other factors (i.e., the non-credit loss component).

The credit loss component is recognized in earnings.

The non-credit loss component is recognized in accumulated other comprehensive income (loss).

Once an impairment is determined to be attributable to credit-related factors, allowance for credit losses (i.e., the credit loss component) on AFS debt securities is recognized as credit loss expense, a charge in other expense—net, on our consolidated statements of income, and any remaining unrealized losses (i.e., the non-credit loss component), net of taxes, are included in accumulated other comprehensive income (loss) on our consolidated statements of stockholders’ equity.

Prior to 2020, we followed the guidance in Accounting Standards Codification (“ASC”) 320 Investments—Debt and Equity Securities in determining whether unrealized losses were other than temporary.

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13—Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“Topic 326”).

We adopted Topic 326 on January 1, 2020, and now consider whether unrealized losses have resulted from a credit loss or other factors.

The unrealized losses on our AFS debt securities as of December 31, 2020 and December 31, 2019 were caused by fluctuations in market value and interest rates as a result of the market conditions.

We concluded that an allowance for credit losses was unnecessary as of December 31, 2020 and that the impairments as of December 31, 2019 were not other than temporary because (i) the decline in market value was attributable to changes in market conditions and not credit quality, and (ii) we concluded that neither do we intend to sell nor is it more likely than not that we will be required to sell these investments prior to recovery of their amortized cost basis.

As a result, we had no credit losses recorded for the year ended December 31, 2020, and there was no impairment charge for any unrealized losses in 2019 and 2018.

We determine realized gains or losses on sale of AFS debt securities using specific identification method to determine the cost basis of investments sold and record such gains or losses as other expense-net on the consolidated statements of income.

We have elected to not record an allowance for credit losses for accrued interest for AFS investments in debt securities and will reverse the accrued interest against interest income in the period in which we determine the accrued interest to be uncollectible.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounts receivable —Trade accounts receivable are recorded at the invoiced amount.

On January 1, 2020, we adopted Topic 326, which provides guidance on how to measure credit losses on financial instruments, including accounts receivable.

Prior to our adoption of Topic 326, our accounts receivable balance was reduced by an allowance for doubtful accounts that we determined based on our assessment of the collectability of customer accounts.

Under Topic 326, our accounts receivable balance is reduced by an allowance for expected credit losses.

We measure expected credit losses of accounts receivable on a collective (pooled) basis, aggregating accounts receivable that are either current or no more than 60 days past due, and aggregating accounts receivable that are more than 60 days past due.

We apply a credit-loss percentage to each of the pools that is based on our historical credit losses.

We review whether each of our significant accounts receivable that is more than 60 days past due continues to exhibit similar risk characteristics with the other accounts receivable in the pool.

If we determine that it does not, we evaluate it for expected credit losses on an individual basis.

We further consider collectibility trends for the allowance for credit losses based on our assessment of various factors, including credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from our customers.

The COVID-19 pandemic and the recent economic downturn prompted us to perform additional credit reviews of our existing customers, including obtaining recent credit reports and reviewing their latest available statements of financial position.

In addition, we have seen an increase in requests for extended payment terms.

After performing our additional reviews, we increased the allowance for credit losses for certain accounts receivable.

Expected credit losses are recorded as general and administrative expenses on our consolidated statements of income.

The allowance for credit losses was $ 2.5 million as of December 31, 2020, and the allowance for doubtful accounts was $ 1.2 million as of December 31, 2019.

Provisions, write-offs and recoveries were not material during the year ended December 31, 2020.

Inventory —Inventory is recorded at the lower of cost or net realizable value.

3 unchanged sentences

Property and Equipment —Property and equipment are stated at cost less accumulated depreciation.

We do not depreciate the allocated cost of land.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

Estimated Useful Lives

Building and building improvements

2 to 30 years

Computer equipment and software

Evaluation units

Furniture and fixtures

Leasehold improvements

Shorter of useful life or lease term

Other Investments —Investments in privately held companies where we own less than 20% of the voting stock and have no indicators of significant influence over operating and financial policies of those companies are included in other assets in the consolidated balance sheets.

As of December 31, 2017, these investments were accounted for under the cost method.

As of December 31, 2018, with the adoption of the Accounting Standards Update (“ASU”) 2016-01—Financial Instruments—Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities, these investments are accounted for at cost, adjusted for changes in observable prices minus impairment.

Adoption of ASU 2016-01 did not have an impact on our consolidated financial statements.

Building and building improvements 2 to 30 years

Computer equipment and software 1 to 7 years

Evaluation units 1 year

Furniture and fixtures 3 to 5 years

Leasehold improvements Shorter of useful life or lease term

Other Investments —Other investments are investments in equity securities of privately held companies without readily determinable fair values and are included in other assets in the consolidated balance sheets.

We elected to account for these equity investments using the measurement alternative, which is at cost, less any impairment, adjusted for changes in fair value resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer.

For these non-quoted investments, we regularly review the assumptions underlying the operating performance and cash flow forecasts as well as current fundraising activities and valuations based on information provided by these privately held companies.

If it is determined that an other-than-temporary decline or increase in

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

value exists in an investment without readily determinable value, we adjust the value of the investment to its fair value and record the related impairment or increase in value as an investment loss or gain in our consolidated statements of income.

If it is determined that a decline or increase in value exists in an investment without readily determinable fair value, we adjust the carrying value of the investment to its fair value and record the related impairment or increase in value as an investment loss or gain.

The change in carrying value, if any, is recognized in other income (expense)—net on our consolidated statements of income.

In addition, as of December 31, 2020, we also held equity investments with readily determinable fair values accounted for at fair value through net income, which were immaterial as of December 31, 2020.

Business Combinations —We include the results of operations of the businesses that we acquire as of the respective dates of acquisition.

1 unchanged sentence

The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.

We often continue to gather additional information throughout the measurement period, and if we make changes to the amounts recorded, such amounts are recorded in the period in which they are identified.

Our estimates and assumptions are subject to change

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and we often continue to gather additional information throughout the measurement period, which is up to 12 months after the acquisition date, and if we make changes to the amounts recorded, such amounts are recorded in the period in which they are identified.

Impairment of Long-Lived Assets —We evaluate events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable.

2 unchanged sentences

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

There was no material impairment in 2020, 2019 and 2018.

Goodwill —Goodwill represents the excess of purchase consideration over the estimated fair value of net assets of businesses acquired in a business combination.

7 unchanged sentences

Amortization is computed using the straight-line or accelerated method over the estimated economic lives of the assets, which range from three to five years .

Deferred Revenue —Deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue.

The majority of deferred revenue is comprised of security subscription and technical support services which are invoiced upfront and delivered over 12 months or longer.

Income Taxes —We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns.

4 unchanged sentences

The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Effective January 1, 2018, the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) reduced the federal corporate income tax rate from 35% to 21% and created a territorial tax system with a one-time transition tax on foreign earnings of U.S.

subsidiaries not previously subject to U.S.

Our selection of an accounting policy for 2018 with respect to the Global Intangible Low-Taxed Income (“GILTI”) tax rules was to treat GILTI tax as a current period expense under the period cost method.

For 2019 and 2020, we were not subject to GILTI.

We will continue to monitor and assess the impact of the 2017 Tax Act and ongoing guidance and accounting interpretations issued in response to the 2017 Tax Act.

As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate.

We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes.

These differences result in deferred tax assets, which are included in our consolidated balance sheets.

In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of income become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

We continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist.

Any adjustment to the valuation allowance on deferred tax assets would be recorded in the consolidated statements of income for the period that the adjustment is determined to be required.

Stock-Based Compensation —The fair value of restricted stock units (“RSUs”) is based on the closing market price of our common stock on the date of grant.

2 unchanged sentences

We account for forfeitures of all stock-based payment awards when they occur.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Leases —We rent certain facilities under operating lease agreements.

On January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) Topic 842, Leases (“Topic 842”), which requires the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases on the consolidated balance sheet.

On January 1, 2019, we adopted FASB Topic 842, Leases (“Topic 842”), which requires the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases on the consolidated balance sheet.

Under Topic 842, we determine if an arrangement is a lease at inception.

23 unchanged sentences

Research and Development Costs —Research and development costs are expensed as incurred.

Deferred Contract Costs and Commission Expense —In 2017, we recognized commission expense on both product sales and service contracts at the time of sale.

Beginning on January 1, 2018, we recognize sales commissions related to product sales upfront while sales commissions for service contracts are deferred as Deferred contract costs in the consolidated balance sheets and amortized over the applicable amortization period.

Costs for initial contracts that are not commensurate with renewal commissions are amortized on a straight-line basis over the period of benefit, which we have determined to be five years and which is typically longer than the initial contract term.

Software Development Costs —The costs to develop software that is marketed have not been capitalized as we believe our current software development process is essentially completed concurrently with the establishment of technological feasibility.

Such costs are expensed as incurred and included in research and development in our consolidated statements of income.

The costs to obtain or develop software for internal use are capitalized based on qualifying criteria, which includes a determination of whether such costs are incurred during the application development stage.

Such costs are amortized over the software’s estimated useful life.

Revenue Recognition —On January 1, 2018 we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

January 1, 2018.

Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under ASU 2009-13, Revenue Recognition (Topic 605) (“Topic 605”).

The details of significant changes and quantitative impact of the changes are discussed below.

Beginning in 2018, revenues are recognized when control of these goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Prior to 2018, revenue was recognized under Topic 605 when all of the following criteria were met:

(i) persuasive evidence of an arrangement existed, (ii) delivery has occurred or services have been rendered, (iii) sales price was fixed or determinable and (iv) collectability was reasonably assured.

Under Topic 606, we determine revenue recognition through the following steps:

Such costs are amortized over the software’s estimated useful life.

Deferred Contract Costs and Commission Expense —Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer.

We recognize sales commissions expenses related to product sales upfront while sales commissions expenses for service contracts are deferred as deferred contract costs in the consolidated balance sheets and amortized over the applicable amortization period.

Commission costs for initial contracts that are not commensurate with renewal commissions are amortized on a straight-line basis over the period of benefit, which we have determined to be five years and which is typically longer than the initial contract term.

The amortization of deferred contract costs is included in sales and marketing expense in our consolidated statements of income.

Amortization of deferred contract costs during 2020, 2019 and 2018 was $ 137.4 million, $ 107.9 million and $ 90.9 million, respectively.

No impairment loss was recognized during 2020, 2019 and 2018.

Deferred Revenue —Deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue.

Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current deferred revenue.

The majority of deferred revenue is comprised of security subscription and technical support services which are invoiced upfront and delivered over 12 months or longer.

Revenue Recognition —Our revenue consists of product and service revenue.

Revenues are recognized when control of these goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:

• identification of a contract or contracts with a customer;

1 unchanged sentence

• determination of a transaction price;

• allocation of a transaction price to the performance obligations in a contract, and

• allocation of a transaction price to the performance obligations in a contract;

• recognition of revenue when, or as, we satisfy a performance obligation.

We derive a majority of product sales from our FortiGate products which include a broad set of built-in security and networking features and functionalities, including firewall, next-generation firewall, secure web gateway, secure sockets layer (“ SSL ”) inspection, software-defined wide-area network, intrusion prevention, SSL data leak prevention, virtual private network, switch and wireless controller and wide area network edge.

We previously recognized product revenue for sales to distributors that had no general right of return and direct sales to end-customers upon shipment, based on general revenue recognition accounting guidance once all other revenue recognition criteria were met.

Certain distributors are granted stock rotation rights, limited rights of return or rebates for sales of our products.

The arrangement fee for this group of distributors was not fixed or determinable when products were shipped and revenue was therefore deferred and recognized upon sell-through.

Under Topic 606, we recognize product revenue upon shipment when control of the promised goods is transferred to the customer.

We derive a majority of product sales from our FortiGate hardware and virtual machine products which include a broad set of built-in security and networking features and functionalities, including firewall, next-generation firewall, secure web gateway, secure sockets layer (“SSL”) inspection, software-defined wide-area network, intrusion prevention, SSL data leak prevention, virtual private network, switch and wireless controller and wide area network edge.

We recognize product revenue upon shipment when control of the promised goods is transferred to the customer.

Our term software licenses represent multiple performance obligations, which include software licenses and software support services where the term licenses are recognized upfront upon transfer of control, with the associated software support services recognized ratably over the contract term as services and software updates are provided.

Previously, term licenses were recognized over the license period.

Service revenue relates to sales of our FortiGuard security subscription, FortiCare technical support services and other services.

Our typical subscription and contractual support term is one to three years , and to a lesser extent, five years .

Our revenue recognition for service arrangements did not significantly change under Topic 606.

We continue to recognize revenue from these services ratably over the contractual service period because of continuous transfer of control to the customer over the support period.

We generally recognize revenue from these services ratably over the support period because of continuous transfer of control to the customer.

Revenue related to subsequent renewals of these services are recognized over the support term of the renewal agreement.

We also generate a small portion of our revenue from other services consisting of professional services, training and software-as-a-service (“SaaS”) which is either hosted or cloud-based services.

We also generate a small portion of our revenue from other services consisting of professional services, training and software-as-a-service (“SaaS”) which is either hosted by us or provided through cloud-providers.

We recognize revenue from professional and training services as the services are provided.

1 unchanged sentence

To date, SaaS revenue has not represented a significant percentage of our total revenue.

Our sales contracts typically contain multiple performance obligations, such as hardware, software license, security subscription, technical support services and other services.

These are distinct from our security subscriptions, technical support services and other services in that the customer can benefit from the product without these services and such services are separately identifiable within the contract.

We allocate the transaction price to each performance obligation based on relative standalone selling price.

We determine standalone selling price based on the historical pricing and discounting practices for those services when sold separately.

If not observable through past transactions, we may require judgment to determine the standalone selling price for distinct performance obligations by considering multiple historical factors including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies and the term of the service contract that fall within a reasonably range as a percentage of list price.

Revenue is reported net of sales tax.

Our sales contracts typically contain multiple deliverables, such as hardware, software license, security subscription, technical support services and other services, which are generally capable of being distinct and accounted for as separate performance obligations.

Our hardware and software licenses have significant standalone functionalities and capabilities.

Accordingly, the hardware and software licenses are distinct from the security subscription and technical support services, as a customer can benefit from the product without the services and the services are separately identifiable within a contract.

We allocate a transaction price to each performance obligation based on relative standalone selling price.

We establish standalone

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Under Topic 605, revenue from contracts that contain our products and services were allocated to each unit of accounting based on an estimated selling price using vendor-specific objective evidence (“VSOE”) of selling price, if it existed, or third-party evidence (“TPE”) of selling price.

If neither VSOE nor TPE of selling price existed for a deliverable, we used our best estimate of selling price for that deliverable.

For multiple-element arrangements where software deliverables were included, revenue was allocated to the non-software deliverables and to the software deliverables as a group using the relative estimated selling prices of each of the deliverables in the arrangement based on the estimated selling price hierarchy.

The amount allocated to the software deliverables was then allocated to each software deliverable using the residual method when VSOE of fair value existed.

If evidence of VSOE of fair value of one or more undelivered elements did not exist, all software allocated revenue was deferred and recognized when delivery of those elements occurred or when fair value was established.

When the undelivered element for which we did not have VSOE of fair value was support, revenue for the entire arrangement was recognized ratably over the support period.

The same residual method and VSOE of fair value principles applied for our multiple element arrangements that contained only software elements.

selling price using the prices charged for a deliverable when sold separately.

If not observable through past transactions, we determine standalone selling price by considering multiple historical factors including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies and the term of a service contract.

Revenue is reported net of sales tax.

In certain circumstances, our contracts include provisions for sales rebates and other customer incentive programs.

4 unchanged sentences

Our estimate for refund liabilities, which include sales returns reserve and customer rebates, was $ 43.0 million and $ 27.6 million as of December 31, 2020 and 2019, respectively, and is included in current liabilities in our consolidated balance sheet.

We generally invoice at the time of our sale for the total price of the hardware, software licenses, security and technical support and other services, and the invoice is payable within 30 to 45 days.

We generally invoice at the time of our sale for the total price of the hardware, software licenses, security and technical support and other services.

Standard payment terms are generally no more than 60 days, but we have accepted more requests for non-standard payment terms since the first quarter of 2021.

We also invoice certain services on a monthly basis.

11 unchanged sentences

There are many uncertainties associated with any disputes, litigation and other legal actions, and these actions or other third-party claims against us may cause us to incur costly litigation fees, costs and substantial settlement charges, and possibly subject us to damages and other penalties, which are inherently difficult to estimate and could adversely affect our results of operations.

In addition, the resolution of any intellectual property litigation may require us to make royalty payments, which could adversely affect our gross margins in future periods.

In addition, the resolution of any IP litigation may require us to make royalty payments, which could adversely affect our gross margins in future periods.

We review significant new claims and litigation for the probability of an adverse outcome.

1 unchanged sentence

The actual liability in any such matters may be materially different from our estimates, which could result in the need to adjust our liability and record additional expenses, which may be material.

Recently Adopted Accounting Standards

Financial Instruments

In June 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which provides guidance on how an entity should measure credit losses on financial instruments.

The standard replaces the existing incurred loss model with an expected credit loss model for financial assets measured at amortized cost, including trade receivables, and requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down.

The new approach to estimating credit losses (referred to as the current expected credit losses model) generally accelerates recognition of credit losses.

We adopted Topic 326 on January 1, 2020 using the modified retrospective method.

The adoption of this standard did not have a material impact on our consolidated financial statements.

We continue to monitor the financial implications of the COVID-19 pandemic on expected credit losses.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recently Adopted Accounting Standards

In February 2016, the FASB issued Topic 842, which requires the recognition of ROU assets and lease liabilities for operating leases on the consolidated balance sheet.

We adopted Topic 842 and its related amendments as of January 1, 2019 using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods.

We elected the package of practical expedients permitted under the transition guidance, which allowed us to waive reassessing the lease classification for any expired or existing leases, the initial direct costs for any existing leases and whether any expired or existing contracts contained leases.

Under the new guidance, we determine if an arrangement contains a lease and the classification of that lease, if applicable, at inception or upon modification of a contract.

We have elected to not recognize a lease liability or ROU asset for short-term leases (leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that we are reasonably certain to exercise).

We have elected to not allocate the contract consideration for operating lease contracts with lease and non-lease components, and account for the lease and non-lease components as a single lease component.

The primary impact of adopting Topic 842 was the recognition of ROU assets and lease liabilities for operating leases of $ 39.1 million and $ 40.6 million , respectively, on January 1, 2019, which included reclassifying prepaid rent and deferred rent as a component of the ROU asset.

Topic 842 did not have a material impact on our consolidated statements of income and cash flows.

Our accounting for finance leases (formerly referred to as capital leases prior to the adoption of Topic 842) remained substantially unchanged.

Finance leases are not material to our consolidated financial statements.

Comprehensive Income

In February 2018, the FASB issued ASU 2018-02—Income Statement—Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “2017 Tax Act”) from accumulated other comprehensive income to retained earnings.

We adopted ASU 2018-02 on January 1, 2019 and elected to reclassify $ 0.1 million of stranded tax effects as of that date.

Stock Compensation

In June 2018, the FASB issued ASU 2018-07—Compensation—Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees subject to certain exceptions.

ASU 2018-07 expands the scope of Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock Compensation (“ASC 718”), to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505, Equity, by moving it to ASC 718.

Cloud Computing

In August 2018, the FASB issued ASU 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Topic 350, Intangibles—Goodwill and Other, to determine which implementation costs to capitalize as assets or expense as incurred.

We adopted ASU 2018-15 on January 1, 2020.

ASU 2018-07 did not have a material impact on our consolidated financial statements.

The adoption of this standard did not have a material impact on our consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements in ASC 820, Fair Value Measurement, as part of its disclosure framework project.

We adopted ASU 2018-13 on January 1, 2020.

The adoption of this standard did not have a material impact on our disclosures.

Recent Accounting Standards Not Yet Effective

4 unchanged sentences

ASU 2019-12 is effective for us beginning on January 1, 2021.

Early adoption of the amendments is permitted.

We are currently evaluating the impact of ASU 2019-12 on our consolidated financial statements.

We do not expect that ASC 2019-12 will have a material impact on our consolidated financial statements.

IMMATERIAL CORRECTION OF PRIOR PERIOD FINANCIAL STATEMENTS

Subsequent to the issuance of our consolidated financial statements for the period ended December 31, 2019, we identified an immaterial error related to the commencement of revenue recognition for certain FortiCare support service contracts.

Rather than commencing recognition upon end user registration, we should have commenced recognition when control had passed to the distributor, which we have determined is our customer.

We assessed the effect of this correction, individually and in the aggregate, on prior periods’ financial statements in accordance with the SEC’s Staff Accounting Bulletin Nos.

99 and 108 and, based on an analysis of quantitative and qualitative factors, determined that the correction was not individually material to any of our prior interim or annual consolidated financial statements.

All financial information contained in the accompanying notes to these consolidated financial statements has been revised to reflect the correction of this error.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cloud Computing

In August 2018, the FASB issued ASU 2018-15—Intangibles-Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Companies can choose to adopt the ASU 2018-15 prospectively or retrospectively.

ASU 2018-15 is effective for us beginning January 1, 2020.

The adoption of this standard will not have a material impact on our consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820):

ASU 2018-13 is effective for us beginning January 1, 2020.

The amendments in ASU 2018-13 that relate to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

All other amendments in ASU 2018-13 should be applied retrospectively to all periods presented upon their effective date.

The adoption of this standard will not have a material impact on our disclosures.

Financial Instruments

In June 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments and in November 2018, the FASB issued ASU 2018-19—Codification Improvements to Topic 326, Financial Instruments—Credit Losses, as a subsequent amendment to the initial guidance (collectively, Topic 326).

In April 2019, the FASB issued ASU 2019-04—Codification Improvements to Topic 326:

Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, in May 2019, the FASB issued ASU 2019-05—Financial Instruments—Credit Losses (Topic 326):

Targeted Transition Relief, and in November 2019, the FASB issued ASU 2019-11—Codification Improvements to Topic 326 to clarify and address certain items related to the amendments in ASU 2016-13.

Topic 326 requires a financial asset (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected.

The new approach to estimating credit losses (referred to as the current expected credit losses model) generally accelerates recognition of credit losses.

The new guidance is effective for us beginning on January 1, 2020.

The adoption of this standard will not have a material impact on our consolidated financial statements.

The corrections to our consolidated balance sheet as of December 31, 2019 were as follows (in millions):

December 31, 2019

As Previously Reported Corrections As Corrected

DEFERRED TAX ASSETS $ 232.6 $ ( 6.3 ) $ 226.3

TOTAL ASSETS 3,885.5 ( 6.3 ) 3,879.2

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Deferred revenue 1,173.6 ( 17.8 ) 1,155.8

Total current liabilities 1,473.6 ( 17.8 ) 1,455.8

DEFERRED REVENUE 962.3 ( 9.0 ) 953.3

Total liabilities 2,563.6 ( 26.8 ) 2,536.8

STOCKHOLDERS’ EQUITY:

Retained earnings 140.3 20.5 160.8

Total stockholders’ equity 1,321.9 20.5 1,342.4

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,885.5 $ ( 6.3 ) $ 3,879.2

The corrections to our consolidated statements of income for the year ended December 31, 2019 and December 31, 2018 were as follows (in millions, except per share amounts):

Year Ended December 31,

As Previously Reported Corrections As Corrected As Previously Reported Corrections As Corrected

Service $ 1,367.7 $ 6.8 $ 1,374.5 $ 1,126.8 $ 3.4 $ 1,130.2

Total revenue 2,156.2 6.8 2,163.0 1,801.2 3.4 1,804.6

GROSS PROFIT:

Service 1,186.4 6.8 1,193.2 967.4 3.4 970.8

Total gross profit 1,650.3 6.8 1,657.1 1,350.8 3.4 1,354.2

OPERATING INCOME 344.2 6.8 351.0 231.0 3.4 234.4

INCOME BEFORE INCOME TAXES 379.2 6.8 386.0 250.9 3.4 254.3

PROVISION FOR INCOME TAXES 52.7 1.6 54.3 ( 81.3 ) 0.7 ( 80.6 )

NET INCOME $ 326.5 $ 5.2 $ 331.7 $ 332.2 $ 2.7 $ 334.9

Net income per share (Note 10):

Basic $ 1.91 $ 0.03 $ 1.94 $ 1.96 $ 0.02 $ 1.98

Diluted $ 1.87 $ 0.03 $ 1.90 $ 1.91 $ 0.01 $ 1.92

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The corrections to our consolidated statements of cash flows for the year ended December 31, 2019 and December 31, 2018 were as follows (in millions):

Year Ended December 31,

As Previously Reported Corrections As Corrected As Previously Reported Corrections As Corrected

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 326.5 $ 5.2 $ 331.7 $ 332.2 $ 2.7 $ 334.9

Changes in operating assets and liabilities:

Deferred tax assets $ 17.8 $ 1.6 $ 19.4 $ ( 127.8 ) $ 0.7 $ ( 127.1 )

Deferred revenue $ 446.7 $ ( 6.8 ) $ 439.9 $ 352.1 $ ( 3.4 ) $ 348.7

For all periods in which we corrected net income, we made corresponding corrections to net income and comprehensive income in our consolidated statements of comprehensive income and to net income, retained earnings (accumulated deficit) and total stockholders’ equity in our consolidated statements of stockholders’ equity.

REVENUE RECOGNITION

We sell cybersecurity solutions to a variety of organizations, such as enterprises, communication service providers, government organizations and small to medium-sized enterprises.

Our revenue consists of product and service revenue.

Product revenue is generated by sales of our FortiGate products and other hardware and software solutions.

Service revenue relates to sales of our FortiGuard security subscription, FortiCare technical support services and other services.

Product revenue is generated by our FortiGate network security products, our Fortinet Security Fabric platform products and other products.

Service revenue relates to sales of our security subscription services, which mainly consist of our FortiGuard security solutions, as well as our FortiCare technical support services and other services.

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):

Year Ended December 31,

2020 2019 2018

Product $ 916.4 $ 788.5 $ 674.4

Security subscription 918.7 750.8 606.1

2 unchanged sentences

Total revenue $ 2,594.4 $ 2,163.0 $ 1,804.6

(1) December 31, 2017 amounts have not been adjusted under the modified retrospective method.

Deferred Revenue

Our deferred revenue consists of amounts that have been invoiced but have not been recognized as revenue as of period end.

During 2020, we recognized $ 1.15 billion in revenue that was included in the deferred revenue balance as of December 31, 2019.

During 2019, we recognized $ 935.0 million in revenue that was included in the deferred revenue balance as of December 31, 2018.

During 2018, we recognized $ 753.3 million in revenue that was included in the deferred revenue balance as of January 1, 2018.

Transaction Price Allocated to the Remaining Performance Obligations

1 unchanged sentence

We expect to recognize approximately $ 1.39 billion as revenue over the next 12 months and the remainder thereafter.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount.

Trade accounts receivable are reduced by an allowance for doubtful accounts which is determined based on our assessment of the collectability of customer accounts.

The allowance for doubtful accounts was $ 1.2 million as of December 31, 2019 and $ 0.9 million as of December 31, 2018.

Contract Assets

Contract assets represent amounts that have been recognized as revenue but for which we did not have the unconditional right to invoice the customer.

Our contract assets as of December 31, 2019 and December 31, 2018 were immaterial.

Deferred Contract Costs

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer.

Sales commissions for the sale of products and software licenses are recognized at the time of sale.

Sales commissions for initial service contracts are deferred and then amortized as an expense on a straight-line basis over the period of benefit which we have determined to be five years .

We determined the period of benefit taking into consideration our customer contracts, our technology and other factors.

Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the contractual period of the underlying contracts which ranges from one to three years and, to a lesser extent, five years .

The amortization of deferred contract costs is included in sales and marketing expense in our consolidated statements of income.

Amortization of deferred contract costs during 2019 and 2018 was $ 107.9 million and $ 90.9 million , respectively.

No impairment loss was recognized during 2019 and 2018.

FORTINET, INC.

3 unchanged sentences

December 31, 2020

Cost Unrealized

Gains Unrealized

Corporate debt securities $ 410.5 $ 1.0 $ — $ 411.5

Commercial paper 185.4 — — 185.4

government securities 184.9 — — 184.9

Certificates of deposit and term deposits (1)

government and agency securities

112.0 — — 112.0

Total available-for-sale securities $ 892.8 $ 1.0 $ — $ 893.8

December 31, 2019

Cost Unrealized

Gains Unrealized

Corporate debt securities $ 576.1 $ 1.0 $ ( 0.1 ) $ 577.0

Commercial paper 148.7 0.1 — 148.8

government securities 195.0 0.2 — 195.2

Certificates of deposit and term deposits (1)

government and agency securities

66.4 — — 66.4

Total available-for-sale securities $ 986.2 $ 1.3 $ ( 0.1 ) $ 987.4

2 unchanged sentences

December 31, 2020

Less Than 12 Months

12 Months or Greater

Less Than 12 Months 12 Months or Greater Total

Value Unrealized

Corporate debt securities $ 111.3 $ — $ — $ — $ 111.3 $ —

Certificates of deposit and term deposits

Commercial paper 61.5 — — — 61.5 —

government and agency securities

government securities 38.1 — — — 38.1 —

Certificates of deposit and term deposits 29.5 — — — 29.5 —

Total available-for-sale securities $ 240.4 $ — $ — $ — $ 240.4 $ —

December 31, 2019

Less Than 12 Months

12 Months or Greater

Less Than 12 Months 12 Months or Greater Total

Value Unrealized

Corporate debt securities $ 117.3 $ ( 0.1 ) $ 16.1 $ — $ 133.4 $ ( 0.1 )

Commercial paper 26.0 — — — 26.0 —

government securities 47.1 — — — 47.1 —

Certificates of deposit and term deposits 13.0 — — — 13.0 —

government and agency securities

Total available-for-sale securities $ 203.4 $ ( 0.1 ) $ 16.1 $ — $ 219.5 $ ( 0.1 )

2 unchanged sentences

The contractual maturities of our investments were as follows (in millions):

2020 December 31,

Due within one year $ 775.5 $ 843.1

Due within one to three years 118.3 144.3

Total $ 893.8 $ 987.4

Available-for-sale securities are reported at fair value, with unrealized gains and losses and the related tax impact included as a separate component of stockholders’ equity and in comprehensive income.

Realized losses on available-for-sale securities were insignificant in the periods presented and are included in Other income (expense)—net in our consolidated statements of income.

We use the specific identification method to determine the cost basis of investments sold.

The unrealized losses on our available-for-sale securities were caused by fluctuations in market value and interest rates as a result of the economic environment.

We consider these investments to be temporarily impaired as of December 31, 2019 because (i) the decline in market value was attributable to changes in market conditions and not credit quality, and (ii) we have concluded currently that neither do we intend to sell nor is it more likely than not that we will be required to sell these investments prior to recovery of their amortized cost basis.

Accrued interest of $ 2.8 million as of December 31, 2020 was excluded from both the fair value and the amortized cost of our available-for-sale securities and was recorded in prepaid expenses and other current assets in our consolidated balance sheet.

Realized gains and losses on available-for-sale securities were insignificant in the periods presented.

Fair Value Accounting—We apply the following fair value hierarchy for disclosure of the inputs used to measure fair value.

5 unchanged sentences

We measure the fair value of money market funds and certain U.S.

government and agency securities using quoted prices in active markets for identical assets.

government securities using quoted prices in active markets for identical assets.

The fair value of all other financial instruments was based on quoted prices for similar assets in active markets, or model-driven valuations using significant inputs derived from or corroborated by observable market data.

7 unchanged sentences

The following tables present the fair value of our financial assets measured at fair value on a recurring basis (in millions):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Assets Significant

Inputs Significant

Inputs Aggregate

Assets Significant

Inputs Significant

(Level 1) (Level 2) (Level 3) (Level 1) (Level 2) (Level 3)

Corporate debt securities $ 413.7 $ — $ 413.7 $ — $ 577.0 $ — $ 577.0 $ —

Commercial paper 197.2 — 197.2 — 165.8 — 165.8 —

government securities 184.9 184.9 — — 195.2 195.2 — —

Certificates of deposit and term deposits 112.0 — 112.0 — 66.4 — 66.4 —

Money market funds 152.7 152.7 — — 15.0 15.0 — —

Commercial paper

government and agency securities

Total $ 1,060.5 $ 337.6 $ 722.9 $ — $ 1,019.4 $ 210.2 $ 809.2 $ —

Cash equivalents $ 166.7 $ 32.0

1 unchanged sentence

Long-term investments 118.3 144.3

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2019 and December 31, 2018 .

Total $ 1,060.5 $ 1,019.4

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2020 and December 31, 2019.

Inventory consisted of the following (in millions):

2020 December 31,

Raw materials $ 13.8 $ 9.7

Finished goods 126.0 108.2

Inventory $ 139.8 $ 117.9

FORTINET, INC.

2 unchanged sentences

Property and equipment—net consisted of the following (in millions):

2020 December 31,

Land $ 93.3 $ 93.3

Building and building improvements 150.6 147.4

7 unchanged sentences

Property and equipment—net $ 448.0 $ 344.3

Construction-in-progress consists primarily of costs incurred in connection with the construction of a second building at our headquarters campus.

Depreciation expense was $ 55.5 million, $ 50.7 million and $ 46.7 million in 2020, 2019 and 2018, respectively.

INVESTMENTS IN PRIVATELY HELD COMPANIES

Our investments in the equity securities of privately held companies totaled $ 5.3 million and $ 9.1 million as of December 31, 2019 and 2018, respectively.

Our investments in the equity securities of privately held companies without readily determinable fair values totaled $ 1.0 million and $ 5.3 million as of December 31, 2020 and 2019, respectively.

These investments are accounted for at cost, adjusted for changes in observable prices minus impairment.

We own less than 20% of the voting securities in each of these investments and do not have the ability to exercise significant influence over operating and financial policies of the respective entities.

These investments are recorded as other assets in our consolidated balance sheets and would be measured at fair value if indicators of an increase in value or impairment existed.

During the third quarter of 2019, we determined that one of our investments was other-than-temporarily impaired.

As a result, we recognized a non-cash impairment charge of $ 3.8 million to Other income (expense)—net in our consolidated statements of income.

During the third quarter of 2018, we sold equity securities of a privately held company for $ 5.2 million and recognized a gain of $ 2.2 million to Other income (expense)—net in our consolidated statements of income.

In the first quarter of 2020 and in the third quarter of 2019, we recognized non-cash impairment charges of $ 4.3 million and $ 3.8 million in other expense—net in our consolidated statements of income, respectively.

Cumulative impairment adjustments to all equity securities without readily determinable fair values totaled $ 8.1 million since their respective acquisitions.

During the third quarter of 2018, we sold equity securities of a privately held company for $ 5.2 million and recognized a gain of $ 2.2 million to other expense—net in our consolidated statements of income.

As of December 31, 2020, no other events have occurred that would affect the carrying value of these investments.

1 unchanged sentence

2020 Acquisitions

Panopta Holdings LLC

On December 9, 2020, we acquired all outstanding shares of Panopta Holdings LLC (“Panopta”), a privately held SaaS platform innovator that provides visibility, automated management and alerting, and remediation for enterprise networks and infrastructure.

Under the acquisition method of accounting in accordance with ASC 805, the total preliminary purchase price was allocated to Panopta’s identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date.

The preliminary purchase price for Panopta was $ 31.9 million in cash, of which $ 24.8 million was allocated to goodwill and $ 9.0 million was allocated to identifiable intangible assets, the majority of which was developed technology, offset by $ 1.9 million of net liabilities assumed, which predominantly included cash and accounts payable.

Goodwill recorded in connection with this acquisition represents the value we expect to be created through expansion into markets within our existing business, and potential cost savings and synergies, and $ 16.9 million of goodwill is expected to be deductible for tax purposes.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation of certain assets and liabilities may occur as additional information becomes available.

The primary areas of the purchase price that are not yet finalized are related to income taxes and the valuation of acquired assets and assumed liabilities.

OPAQ Networks, Inc.

On July 20, 2020, we acquired all outstanding shares of OPAQ Networks, Inc.

(“OPAQ”), a privately held Secure Access Service Edge cloud provider.

Under the acquisition method of accounting in accordance with ASC 805, the total preliminary purchase price was allocated to OPAQ’s identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date.

The preliminary purchase price for OPAQ was $ 8.0 million in cash, of which $ 1.0 million was allocated to goodwill, $ 4.7 million was allocated to identifiable intangible assets, the majority of which was developed technology, and $ 2.3 million was allocated to other net assets acquired, which predominantly included cash, deferred tax assets, operating lease right-of-use assets and lease liabilities, accounts payable, accrued liabilities and assumed debt.

The preliminary purchase price included a $ 1.3 million indemnity fund held in escrow for 12 months after the transaction closing date.

The primary areas of the purchase price that are not yet finalized are related to income taxes and the valuation of acquired assets and assumed liabilities.

2019 Acquisitions

CyberSponse, Inc.

1 unchanged sentence

(“CyberSponse”), a provider of security orchestration, automation and response products and services.

We expect that the CyberSponse acquisition will further extend the automation and incident response capabilities of our FortiAnalyzer, FortiSIEM and FortiGate solutions.

Under the business combination method of accounting in accordance with ASC Topic 805, Business Combinations (“ASC 805”), the total preliminary purchase price was allocated to CyberSponse’s identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date.

The preliminary purchase price for CyberSponse was $ 26.1 million , of which $ 18.6 million was allocated to goodwill that was non-deductible for tax purposes and $ 9.1 million was allocated to identifiable intangible assets, the majority of which was developed technology, offset by $ 1.6 million of net liabilities assumed, which predominantly included cash, accounts receivable, accrued payroll and compensation liabilities and deferred tax liabilities.

We incurred a $ 4.1 million liability in connection with this business combination, the majority of which related to the settlement of CyberSponse’s equity awards in cash, which we included in accrued liabilities in our consolidated balance sheet as of December 31, 2019.

The preliminary purchase price included $ 3.0 million of this liability and the remaining $ 1.1 million was recognized as compensation cost in the consolidated statement of income for the year ended December 31, 2019.

The preliminary purchase price also included $ 3.8 million held in indemnity escrow, of which $ 2.8 million will be held for 12 months and the remaining $ 1.0 million will be held for 36 months after the transaction closing date.

The amount recognized for acquired indemnification assets as of the acquisition date was not material.

Our estimates and assumptions are subject to change within the measurement period.

The primary areas of the purchase price that are not yet finalized are related to income taxes and the valuation of acquired assets and assumed liabilities.

The purchase price for CyberSponse was $ 26.1 million, of which $ 18.6 million was allocated to goodwill that was non-deductible for tax purposes and $ 9.1 million was allocated to identifiable intangible assets, the majority of which was developed technology, offset by $ 1.6 million of net liabilities assumed.

The purchase price included $ 3.0 million of this liability and the remaining $ 1.1 million was recognized as compensation cost in the consolidated statements of income for the year ended December 31, 2019.

The purchase price also included $ 3.8 million held in indemnity escrow, of which $ 2.8 million was held for 12 months and released to CyberSponse shareholders during the year ended December 31, 2020, and the remaining $ 1.0 million will be held for 36 months after the transaction closing date.

enSilo Limited

On October 28, 2019, we acquired all outstanding shares of enSilo Limited (“enSilo”), a provider of endpoint detection and response products and services.

We expect that the enSilo acquisition will further enhance the Fortinet Security Fabric platform and strengthen endpoint and network security solutions by providing customers with advanced endpoint security.

Under the business combination method of accounting in accordance with ASC 805, the total preliminary purchase price was allocated to enSilo’s identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date.

The preliminary purchase price for enSilo was $ 15.8 million , of which $ 10.4 million was allocated to goodwill, $ 10.8 million was

The purchase price for enSilo was $ 15.8 million, of which $ 10.4 million was allocated to goodwill, $ 10.8 million was allocated to identifiable intangible assets, the majority of which was developed technology, offset by $ 5.4 million of net liabilities assumed.

The purchase price included $ 2.0 million held in indemnity escrow for 12 months after the transaction closing date, of which $ 1.7 million was received by Fortinet and the remainder was released to enSilo shareholders during the year ended December 31, 2020.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

allocated to identifiable intangible assets, the majority of which was developed technology, offset by $ 5.4 million of net liabilities assumed, which predominantly included cash, accounts receivable, operating lease right-of-use asset and liability, deferred revenue, accrued payroll and compensation liabilities, assumed debt and deferred tax liabilities.

The preliminary purchase price included $ 2.0 million held in indemnity escrow for 12 months after the transaction closing date.

The amount recognized for acquired indemnification assets as of the acquisition date was not material.

Our estimates and assumptions are subject to change within the measurement period.

The primary areas of the purchase price that are not yet finalized are related to income taxes and the valuation of acquired assets and assumed liabilities.

2018 Acquisitions

3 unchanged sentences

The acquisition included a $ 2.0 million cash earn-out that was subject in full to satisfaction of certain performance conditions.

The performance conditions were not met and the cash earn-out will not be paid.

The performance conditions were not met and the cash earn-out was not paid.

Bradford Networks, Inc.

3 unchanged sentences

The acquisition included a $ 2.0 million cash earn-out that was subject in full to satisfaction of certain performance conditions.

The performance conditions were not met and the cash earn-out will not be paid.

The performance conditions were not met and the cash earn-out was not paid.

Additional Acquisition-Related Information

1 unchanged sentence

Acquisition-related costs related to each acquisition were not material.

Pro forma information has not been presented as the impact of these acquisitions, individually and in the aggregate, were not material to our consolidated financial statements.

Pro forma information has not been presented as the impact of these acquisitions, individually and in the aggregate, in each year were not material to our consolidated financial statements.

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

3 unchanged sentences

Balance—December 31, 2020 $ 93.0

There were no impairments to goodwill during 2019, 2018, 2017 or any previous years.

There were no impairments to goodwill during 2020, 2019, and 2018, or any previous years.

Other Intangible Assets—Net

1 unchanged sentence

December 31, 2020

Weighted-Average Useful Life (in Years)

Accumulated Amortization

Weighted-Average Useful Life (in Years) Gross Accumulated Amortization Net

Other intangible assets—net:

3 unchanged sentences

Total other intangible assets—net $ 84.1 $ 52.5 $ 31.6

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2019

Weighted-Average Useful Life (in Years)

Accumulated Amortization

Weighted-Average Useful Life (in Years) Gross Accumulated Amortization Net

Other intangible assets—net:

Finite-lived intangible assets:

Developed technologies and other

Developed technologies 4.0 $ 50.2 $ 24.6 $ 25.6

Customer relationships 4.1 21.6 16.1 5.5

Total other intangible assets—net $ 71.8 $ 40.7 $ 31.1

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization expense of finite-lived intangible assets was $ 13.3 million, $ 10.9 million and $ 9.0 million in 2020, 2019, and 2018, respectively.

The following table summarizes estimated future amortization expense of finite-lived intangible assets (in millions):

Year Ending December 31, Amount

NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period.

Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“ RSU s”), stock options and our Employee Stock Purchase Plan (“ ESPP ”), which was terminated in February 2019 at the completion of the prior offering period.

Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“RSUs”), stock options and our Employee Stock Purchase Plan (“ESPP”), which was terminated in February 2019 at the completion of the prior offering period.

Dilutive shares of common stock are determined by applying the treasury stock method.

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

$ 488.5 $ 331.7 $ 334.9

Basic shares:

3 unchanged sentences

Effect of potentially dilutive securities:

RSUs 2.3 2.8 3.6

Stock options 1.2 1.2 1.4

1 unchanged sentence

Net income per share:

Basic $ 2.98 $ 1.94 $ 1.98

Diluted $ 2.91 $ 1.90 $ 1.92

FORTINET, INC.

2 unchanged sentences

Year Ended December 31,

2020 2019 2018

RSUs 0.3 0.3 0.5

Stock options 0.5 0.6 0.3

Total 0.8 0.9 0.9

We have operating leases for offices, research and development facilities and data centers.

Our leases have remaining terms that range from less than one year to approximately seven years , some of which include one or more options to renew, with renewal terms of up to five years .

We do not include renewal options in our lease terms for calculating our lease liability, as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these renewal options at the time of the lease commencement.

Our leases have remaining terms that range from less than one year to approximately seven years , some of which include one or more options to renew, with renewal terms of up to six years .

Unless and until we are reasonably certain we will exercise these renewal options, we do not include renewal options in our lease terms for calculating our lease liability, as the renewal options allow us to maintain operational flexibility.

During the year ended December 31, 2019, we entered into a finance lease with $ 3.6 million lease liabilities arising from obtaining right-of-use assets with a lease term of approximately two years .

1 unchanged sentence

The related assumptions and further disclosures for finance leases are not material.

The components of operating lease expense were as follows (in millions):

The components of lease expense were as follows (in millions):

Year Ended December 31,

Operating lease expense $ 18.5 $ 15.3

2 unchanged sentences

Total lease expense $ 24.6 $ 21.1

(1) Variable lease expense for the year ended December 31, 2019 predominantly included common area maintenance charges and parking expense.

Rent expense was $ 17.1 million and $ 16.7 million for 2018 and 2017, respectively.

(1) Variable lease expense for the year ended December 31, 2020 and December 31, 2019 predominantly included common area maintenance charges and parking expense.

Rent expense was $ 17.1 million for 2018.

Rent expense was recognized in accordance with Topic 840 using the straight-line method over the term of a lease.

Supplemental balance sheet information related to our operating leases was as follows (in millions, except lease term and discount rate):

Classification

Operating lease ROU assets – non-current

Operating lease liabilities – current

Accrued liabilities

Operating lease liabilities – non-current

Other liabilities

Classification December 31,

2020 December 31,

Operating lease ROU assets – non-current Other assets $ 49.3 $ 44.3

Operating lease liabilities – current Accrued liabilities $ 19.1 $ 15.5

Operating lease liabilities – non-current Other liabilities 34.0 30.6

Total operating lease liabilities $ 53.1 $ 46.1

4 unchanged sentences

Supplemental cash flow information related to leases was as follows (in millions):

Year Ended December 31,

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows used for operating leases $ 18.9 $ 16.2

Lease liabilities arising from obtaining right-of-use assets

Operating leases

Maturities of operating lease liabilities as of December 31, 2020 were as follows (in millions):

Year ending December 31,

Year Ending December 31, Amount

Thereafter 1.4

Total lease payments $ 56.1

Less imputed interest ( 3.0 )

As of December 31, 2019, we had additional minimum lease payments of $ 4.4 million relating to the operating leases that had been signed but had not yet commenced and therefore were excluded from the table above.

These leases will commence during 2020 and will have lease term of approximately five to seven years .

The following table summarizes our future principal contractual obligations for operating lease commitments as of December 31, 2018 (in millions):

Year ending December 31,

Total future principal contractual obligations for operating lease commitments as of December 31, 2018 exceeded our undiscounted lease liability as of the Topic 842 adoption date, primarily because the lease liability excluded short-term lease payments (due to the adoption of the short-term lease exemption) and excluded minimum lease payments relating to an operating lease that had been signed but had not yet commenced.

As of December 31, 2020, we had additional minimum lease payments of $ 4.7 million relating to the operating leases, primarily for colocation space, that had been signed but had not yet commenced.

These leases will commence during 2021 and will have lease terms of approximately three to four years .

MUTUAL COVENANT-NOT-TO-SUE AND RELEASE AGREEMENT

In January 2020, we entered into an agreement with a competitor in the network security industry whereby, in February 2020, the competitor party paid us a lump sum of $ 50.0 million for a seven-year mutual covenant-not-to-sue for patent claims.

Pursuant to this agreement, at the end of this first seven-year period, either party may extend the agreement for an additional seven-year mutual covenant-not-to-sue in return for this competitor paying us an additional $ 50.0 million.

This agreement arose after expiration of previous agreements between the parties whereby the competitor had paid us sums for a limited term license to certain of our intellectual property (“IP”) and a limited term mutual covenant-not-to-sue.

We concluded that the agreement was a 14 -year contract with a total transaction price of $ 100.0 million, and that it contained two material distinct performance obligations:

(1) the right to use our existing patents, and (2) the right to use any patents that we develop over the term of the contract.

We allocated $ 36.0 million to the functional patents, which was recognized upon commencement of the contract;

the remaining $ 64.0 million, representing the right to utilize future patents, will be recognized over the contract term.

We further concluded that our existing patents represent functional IP that should be recognized upon granting our competitor access.

We also concluded that the right to receive additional functional IP that we will develop in the future represents a stand ready obligation.

Therefore, the transaction price allocated to this obligation is recognized ratably over the 14 -year contract term.

We estimated the stand-alone selling price of each distinct performance obligation and allocated the $ 100.0 million transaction price.

During the year ended December 31, 2020, we recorded a $ 40.2 million gain on IP matter in our consolidated statements of income.

We recorded $ 9.8 million in accrued liabilities and other liabilities in our consolidated balance sheet as of December 31, 2020.

FORTINET, INC.

2 unchanged sentences

The following table summarizes our inventory purchase commitments as of December 31, 2020 (in millions):

Total 2021 Thereafter

Inventory purchase commitments $ 259.4 $ 259.4 $ —

2 unchanged sentences

In order to reduce manufacturing lead times and plan for adequate component supply, we may issue purchase orders to some of our independent contract manufacturers which may not be cancelable.

As of December 31, 2019 , we had $ 231.9 million of open purchase orders with our independent contract manufacturers that may not be cancelable.

As of December 31, 2020 and 2019, we had $ 259.4 million and $ 231.9 million, respectively, of open purchase orders with our independent contract manufacturers that may not be cancelable.

Other Contractual Commitments and Open Purchase Orders —In addition to commitments with contract manufacturers, we have open purchase orders and contractual obligations in the ordinary course of business for which we have not received goods or services.

As of December 31, 2019 , we had $ 12.8 million in other contractual commitments having a remaining term in excess of one year that may not be cancelable.

As of December 31, 2020 and 2019, we had $ 28.9 million and $ 12.8 million, respectively, in other contractual commitments having a remaining term in excess of one year that may not be cancelable.

Litigation —We are involved in disputes, litigation, and other legal actions.

1 unchanged sentence

There are many uncertainties associated with any litigation and these actions or other third-party claims against us may cause us to incur costly litigation fees, costs and substantial settlement charges, and possibly subject us to damages and other penalties.

In addition, the resolution of any intellectual property litigation may require us to make royalty payments, which could adversely affect our gross margins in future periods.

In addition, the resolution of any IP litigation may require us to make royalty payments, which could adversely affect our gross margins in future periods.

If any of those events were to occur, our business, financial condition, results of operations, and cash flows could be adversely affected.

1 unchanged sentence

We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss.

Indemnification and Other Matters —Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third-party claims asserting various allegations such as product defects and infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay judgments entered on such claims.

Litigation loss contingency accruals were not material as of December 31, 2020 and 2019.

Indemnification and Other Matters —Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third-party claims asserting various allegations such as product defects and infringement of certain IP rights, which may include patents, copyrights, trademarks or trade secrets, and to pay judgments entered on such claims.

In some contracts, our exposure under these indemnification provisions is limited by the terms of the contracts to certain defined limits, such as the total amount paid by our customer under the agreement.

However, certain agreements include covenants, penalties and indemnification provisions including and beyond indemnification for third-party claims of intellectual property infringement, that could potentially expose us to losses in excess of the amount received under the agreement, and in some instances to potential liability that is not contractually limited.

To date, although from time to time there are indemnification claims asserted against us and currently there are pending indemnification claims, there have been no material awards under such indemnification provisions.

Periodically we, like other security companies and companies in other industries, may experience cybersecurity threats, malicious activity directed against our information technology infrastructure and unauthorized attempts to gain access to our and our customers’ sensitive information and systems.

For example, as previously disclosed, in the second quarter of 2019, we discovered that an unauthorized party illegally targeted us using sophisticated techniques, such as stealing technical data in order to both impersonate our firewall update servers and possibly attempt other attack methodologies, in an effort to try to gain access to certain of our customers’ systems.

We have completed our investigation of this incident and we do not believe that it had a material impact on our or our customers’ businesses.

We are currently not aware of any claims arising from this matter.

However, certain agreements include covenants, penalties and indemnification provisions including and beyond indemnification for third-party claims of IP infringement that could potentially expose us to losses in excess of the amount received under the agreement, and in some instances to potential liability that is not contractually limited.

Although from time to time there are indemnification claims asserted against us and currently there are pending indemnification claims, to date there have been no material awards under such indemnification provisions.

Similar to other security companies and companies in other industries, we have in the past experienced, and we may in the future experience, cybersecurity threats, malicious activity directed against our information technology infrastructure or unauthorized attempts to gain access to our and our customers’ sensitive information and systems.

We currently are unaware of any existing claims or proceedings related to these types of matters, including any that we believe are likely to have a material adverse effect on our financial position.

FORTINET, INC.

2 unchanged sentences

Stock-Based Compensation Plans

We have one primary stock incentive plan, the 2009 Equity Incentive Plan, under which we have granted RSU s and stock options.

We have one primary stock incentive plan, the 2009 Equity Incentive Plan, under which we have granted RSUs and stock options.

We also previously had an ESPP for eligible employees, which was terminated in February 2019.

1 unchanged sentence

On June 21, 2019, our stockholders approved the Amended and Restated Fortinet, Inc.

2009 Equity Incentive Plan (the “Amended Plan”).

Among other things, the Amended Plan provided for a net decrease in the number of shares of common stock that were authorized and available for issuance pursuant to future awards granted on or following the effective date of the Amended Plan.

On June 28, 2019, we deregistered from various registration statements on Form S-8 an aggregate of 46.2 million shares of common stock that were originally registered for issuance under our 2009 Equity Incentive Plan.

The maximum aggregate number of shares that may be issued under the Amended Plan is 47,873,531 shares;

provided, however, that only 13,500,000 shares may be issued or transferred pursuant to new awards granted on or following the effective date of the Amended Plan.

2009 Equity Incentive Plan (the “2009 Plan”).

Among other things, the 2009 Plan provided for a net decrease in the number of shares of common stock that were authorized and available for issuance pursuant to future awards granted on or following the effective date of the 2009 Plan.

The maximum aggregate number of shares that may be issued under the 2009 Plan is 47,873,531 shares;

provided, however, that only 13,500,000 shares may be issued or transferred pursuant to new awards granted on or following the effective date of the 2009 Plan.

We may grant awards to employees, directors and other service providers.

2 unchanged sentences

Options granted to individuals owning less than 10 % of the total combined voting power of all classes of stock generally have a contractual term of no more than ten years and options generally vest over four years .

As of December 31, 2019, there were a total of 13.4 million shares of common stock available for grant under the Amended Plan.

As of December 31, 2020, there were a total of 12.3 million shares of common stock available for grant under the 2009 Plan.

2011 Employee Stock Purchase Plan —In June 2011, our stockholders approved the ESPP.

4 unchanged sentences

Restricted Stock Units

The following table summarizes the activity and related information for RSU s for the periods presented below (in millions, except per share amounts):

The following table summarizes the activity and related information for RSUs for the periods presented below (in millions, except per share amounts):

Restricted Stock Units Outstanding

Number of Shares

Weighted-Average Grant Date Fair Value per Share

Number of Shares Weighted-Average Grant Date Fair Value per Share

Balance—December 31, 2017 8.5 $ 34.79

Granted 4.1 57.37

Forfeited ( 0.9 ) 39.29

Vested ( 3.9 ) 34.67

Balance—December 31, 2018 7.8 46.07

Granted 2.7 87.09

Forfeited ( 0.7 ) 55.13

Vested ( 3.7 ) 43.31

Balance—December 31, 2019 6.1 64.56

Granted 1.9 121.16

Forfeited ( 0.4 ) 79.83

Vested ( 2.9 ) 58.20

Balance—December 31, 2020 4.7 $ 90.46

As of December 31, 2019 , total compensation expense related to unvested RSU s granted to employees and non-employees under the 2009 Plan, but not yet recognized, was $ 341.1 million .

This expense is expected to be amortized on a straight-line basis over a weighted-average vesting period of 2.7 years.

Stock compensation expense is recognized on a straight-line basis over the vesting period of each RSU.

As of December 31, 2020, total compensation expense related to unvested RSUs granted to employees and non-employees under the 2009 Plan, but not yet recognized, was $ 360.5 million, with a weighted-average remaining vesting period of 2.6 years.

RSUs settle into shares of common stock upon vesting.

Upon the vesting of the RSU s, we net-settle the RSU s and withhold a portion of the shares to satisfy minimum statutory employee withholding tax requirements.

Total payment of the employees’ tax obligations to the tax authorities is reflected as a financing activity within the consolidated statements of cash flows.

Upon the vesting of the RSUs, we net-settle the RSUs and withhold a portion of the shares to satisfy employee withholding tax requirements.

The payment of the withheld taxes to the tax authorities is reflected as a financing activity within the consolidated statements of cash flows.

The following summarizes the number and value of the shares withheld for employee taxes (in millions):

Year Ended December 31,

2020 2019 2018

Shares withheld for taxes 0.9 1.1 1.2

1 unchanged sentence

Employee Stock Options

In determining the fair value of our employee stock options, we use the Black-Scholes option pricing model, which employs the following assumptions.

In determining the fair value of our employee stock options, we use the Black-Scholes model, which employs the following assumptions.

Expected Term —The expected term represents the period that our stock-based awards are expected to be outstanding.

1 unchanged sentence

Expected Volatility —The expected volatility of our common stock is based on our weighted-average implied and historical volatility.

Fair Value of Common Stock —The fair value of our common stock is the closing sales price of the common stock effective on the date of grant.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value of Common Stock —The fair value of our common stock is the closing sales price of the common stock effective on the date of grant.

Risk-Free Interest Rate —We base the risk-free interest rate on the implied yield available on U.S.

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

Expected term in years 4.4 4.4 4.4

Volatility 34.8 % 34.3 % 31.8 %

Risk-free interest rate 1.1 % 2.4 % 2.7 %

2 unchanged sentences

Options Outstanding

of Shares Weighted-

Price Weighted-

Life (Years) Aggregate

Balance—December 31, 2017 4.3 $ 27.50 3.2 $ 70.9

Granted 0.8 52.09

Forfeited ( 0.2 ) 32.24

Exercised ( 1.9 ) 24.96

Balance—December 31, 2018 3.0 35.53 4.0 105.6

Granted 0.7 85.02

Forfeited ( 0.1 ) 62.93

Exercised ( 0.9 ) 30.21

Balance—December 31, 2019 2.7 50.37 4.5 150.3

Granted 0.6 118.80

Forfeited ( 0.1 ) 91.52

Exercised ( 0.5 ) 41.49

Balance—December 31, 2020 2.7 $ 67.53

2 unchanged sentences

The aggregate intrinsic value represents the difference between the exercise price of stock options and the quoted market price of our common stock on December 31, 2020 for all in-the-money stock options.

As of December 31, 2019 , total compensation expense related to unvested stock options granted to employees but not yet recognized was $ 23.9 million .

This expense is expected to be amortized on a straight-line basis over a weighted-average period of 2.7 years.

Stock compensation expense is recognized on a straight-line basis over the vesting period of each stock option.

As of December 31, 2020, total compensation expense related to unvested stock options granted to employees but not yet recognized was $ 31.3 million, with a weighted-average remaining vesting period of 2.6 years.

FORTINET, INC.

2 unchanged sentences

Year Ended December 31,

2020 2019 2018

Weighted-average fair value per share granted $ 35.79 $ 27.19 $ 16.03

2 unchanged sentences

The following table summarizes information about outstanding and exercisable stock options as of December 31, 2020, as follows (in millions, except exercise prices and contractual life):

Options Outstanding

Options Exercisable

Range of Exercise Prices

Options Outstanding Options Exercisable

Range of Exercise Prices Number

Outstanding Weighted-

Life (Years) Weighted-

Exercisable Weighted-

$ 20.76 -$ 24.51

2 unchanged sentences

0.4 2.8 35.98 0.4 35.90

$ 48.83 -$ 72.75

0.6 3.9 50.25 0.4 49.84

$ 76.22 -$ 145.62

1.3 5.7 101.91 0.3 85.51

Employee Stock Purchase Plan

There were no grants under the ESPP during the year ended December 31, 2019.

There were no grants under the ESPP during the year ended December 31, 2020 and December 31, 2019.

In determining the grant date fair value of the ESPP, we used the Black-Scholes option pricing model.

2 unchanged sentences

Expected term in years 0.5

Volatility 28.9 %

Risk-free interest rate 2.0 %

13 unchanged sentences

Stock-Based Compensation Expense

Stock-based compensation expense is included in costs and expenses as follows (in millions):

Stock-based compensation expense, including stock-based compensation expense related to awards classified as liabilities, is included in costs and expenses as follows (in millions):

Year Ended December 31,

2020 2019 2018

Cost of product revenue $ 1.6 $ 1.5 $ 1.5

4 unchanged sentences

Total stock-based compensation expense $ 193.8 $ 174.1 $ 162.9

The following table summarizes stock-based compensation expense by award type (in millions):

The following table summarizes stock-based compensation expense, including stock-based compensation expense related to awards classified as liabilities, by award type (in millions):

Year Ended December 31,

2020 2019 2018

RSUs $ 179.7 $ 160.2 $ 143.9

Stock options 14.1 12.6 8.8

ESPP — 1.3 10.2

Total stock-based compensation expense $ 193.8 $ 174.1 $ 162.9

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

Income tax benefit associated with stock-based compensation $ 42.1 $ 38.3 $ 24.9

1 unchanged sentence

In January 2016, our board of directors approved the Share Repurchase Program (the “Repurchase Program”), which authorized the repurchase of up to $ 200.0 million of our outstanding common stock through December 31, 2017.

In 2016 and 2017, our board of directors approved the increases in the aggregate authorized repurchase amount under the Repurchase Program by $ 100.0 million and $ 700.0 million , respectively, to a total of $ 1.0 billion .

In July 2018, our board of directors approved a $ 500.0 million increase in the authorized stock repurchase under the Repurchase program and extended the term of the Repurchase Program to December 31, 2019, bringing the aggregate amount authorized to be repurchased to $ 1.5 billion of our outstanding common stock through December 31, 2019.

In November 2019, our board of directors approved a $ 1 billion increase in the authorized stock repurchase under the Repurchase program and extended the term of the Repurchase Program to

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2021, bringing the aggregate amount authorized to be repurchased to $ 2.5 billion of our outstanding common stock through February 28, 2021.Under the Repurchase Program, share repurchases may be made by us from time to time in privately negotiated transactions or in open market transactions.

From 2016 through 2019, our board of directors approved increases to our Repurchase Program by various amounts, bringing the aggregated amount authorized to $ 2.5 billion.

In July 2020, our board of directors approved a $ 500.0 million increase and extended the term to February 28, 2022, bringing the aggregate amount authorized to be repurchased to $ 3.0 billion.

Under the Repurchase Program, share repurchases may be made by us from time to time in privately negotiated transactions or in open market transactions.

The Repurchase Program does not require us to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without prior notice.

In 2019, we repurchased 1.9 million shares of common stock under the Repurchase Program in open market transactions for an aggregate purchase price of $ 140.9 million .

In 2020, we repurchased 11.7 million shares of common stock under the Repurchase Program in open market transactions for an aggregate purchase price of $ 1.08 billion.

As of December 31, 2020, $ 1.01 billion remained available for future share repurchases under the Repurchase Program.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income before income taxes consisted of the following (in millions):

Year Ended December 31,

2020 2019 2018

Domestic $ 490.6 $ 371.7 $ 3.7

Foreign 51.1 14.3 250.6

Total income before income taxes $ 541.7 $ 386.0 $ 254.3

2 unchanged sentences

Year Ended December 31,

2020 2019 2018

Federal $ 38.6 $ 11.0 $ ( 12.6 )

State 8.1 0.1 2.0

Foreign 13.6 11.4 36.9

Total current $ 60.3 $ 22.5 $ 26.3

Federal $ ( 8.1 ) $ 40.6 $ ( 124.8 )

State ( 0.8 ) ( 6.0 ) 14.4

Foreign 1.8 ( 2.8 ) 3.5

Total deferred ( 7.1 ) 31.8 ( 106.9 )

2 unchanged sentences

GAAP to local tax return book to tax differences and return to provision adjustments that create a permanent addback including but not limited to stock compensation, meals and entertainment, and settlement of prior year tax audits with foreign jurisdiction adjustments.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The provision for (benefit from) income taxes differs from the amount computed by applying the statutory federal income tax rate as follows (in millions):

Year Ended December 31,

2020 2019 2018

Tax at federal statutory tax rate $ 113.8 $ 81.2 $ 53.4

8 unchanged sentences

Impact of the 2017 Tax Act:

Deferred tax asset remeasurement due to reduction in the federal corporate income tax rate

One-time transition tax 2.6 ( 2.1 ) 32.6

Global Intangible Low-Taxed Income — — 20.5

Foreign-Derived Intangible Income ( 44.3 ) — —

Book-to-Tax Basis differences — — ( 164.0 )

Other 6.3 4.0 1.1

Total provision for (benefit from) income taxes $ 53.2 $ 54.3 $ ( 80.6 )

There are permanent differences that arise from the portion of stock-based compensation expense that is not expected to generate a tax deduction, such as stock-based compensation expense on stock grants to certain foreign employees.

This is offset by the actual tax benefits in the current periods from shares held by our U.S.

and certain foreign employees.

In 2019 and 2018, this excess tax benefit was greater than the non-deductible stock-based compensation expense.

We have realigned our tax structure in order to maximize the tax efficiency of our group structure and better align with our business operations as a result of the 2017 Tax Act.

1 unchanged sentence

The basis differences resulted in a $ 164.0 million benefit to the 2018 tax provision.

In the fourth quarter of 2018, we completed our analysis to determine the effect of the 2017 Tax Act within the measurement period under the SEC guidance, and reflected an additional $ 32.6 million increase related to the transition tax in the 2018 income tax expense.

In the fourth quarter of 2019, we recorded a $ 2.1 million tax benefit related to the transition tax due to the adjustments on prior 2018 foreign tax amounts.

The 2017 Tax Act also created a new requirement that Global Intangible Low-Taxed Income (“GILTI”) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of a CFC’s U.S.

In 2018, we completed our analysis to determine the effect of the 2017 Tax Act within the measurement period under the SEC guidance, and reflected an additional $ 32.6 million increase related to the transition tax in the 2018 income tax expense.

In 2019, we recorded a $ 2.1 million tax benefit related to the transition tax due to the adjustments on prior 2018 foreign tax amounts.

The 2017 Tax Act also created a new requirement that GILTI earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of a CFC’s U.S.

In 2018, there was also a $ 20.5 million expense for the GILTI tax regime that was introduced by the 2017 Tax Act.

In 2019, we were not subject to GILTI.

In 2019 and 2020, we were not subject to GILTI.

We will continue to monitor and assess the impact of the 2017 Tax Act and ongoing guidance and accounting interpretations issued in response to the 2017 Tax Act.

3 unchanged sentences

A rehearing of the case was requested, but the rehearing request was denied by the Ninth Circuit on November 12, 2019.

A petition for Writ of Certiorari was filed with the U.S.

A petition was filed with the U.S.

Supreme Court on February 10, 2020.

Due to the uncertainty surrounding the status of the current regulations and questions related to the scope of potential benefits or obligations, we incurred an unrecognized tax benefit of $ 10.1 million related to the Ninth Circuit’s Altera decision regarding stock-based compensation in cost sharing arrangements.

We continue to monitor developments in this case and any impact it could have on our tax provision.

On June 22, 2020, the Supreme Court of the United States issued an order declining the petition in Altera.

As a result, the Ninth Circuit’s decision requiring that stock-based compensation be included in cost sharing arrangements is the controlling law at present.

However, as we are no longer part of a cost sharing arrangement, this does not impact our future income tax provisions.

The Ninth Circuit’s decision, together with Supreme Court’s order, did not have a material impact on our consolidated financial statements.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020.

The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property and the creation of certain refundable employee retention credits.

We do not expect there to be a material tax impact on our consolidated financial statements at this time and will continue to assess the implications of the CARES Act and its continuing developments and interpretations.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On July 9, 2020, the United States Department of the Treasury (the “U.S.

Treasury”) and the Internal Revenue Service (the “IRS”) released final Section 250 regulations, providing guidance on the foreign-derived intangible income deduction and the global intangible low-taxed income.

Generally, the final regulations are applicable for taxable years beginning on or after January 1, 2021.

However, taxpayers may apply the final regulations for taxable years beginning on or after January 1, 2018.

We have elected to apply the final regulations to the year ending December 31, 2020 and included the tax impact from the final regulations on our foreign-derived intangible income deduction calculation.

In 2020, we recorded a $ 44.3 million tax benefit related to the foreign-derived intangible income deduction.

On September 29, 2020, the U.S.

Treasury and the IRS released final regulations related to foreign tax credits that were the subject of proposed regulations issued in December 2019 and proposed certain provisions in proposed regulations issued in December 2019.

The final and proposed regulations provide administrative guidance for the foreign tax credit regime, which was updated in the 2017 Tax Act.

Generally, the provisions that were included in the 2019 proposed regulations apply to taxable years ending on or after December 16, 2019, except as otherwise specified.

The final regulations did not have a material impact on our consolidated financial statements.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets as of the years ended are presented below (in millions):

2020 December 31,

Deferred tax assets:

20 unchanged sentences

We also believe that it is more likely than not that the deferred tax assets for impairment losses, foreign tax credits from foreign disregarded entities and acquired foreign tax attributes will not be realized.

As a result, we recorded a valuation allowance of $ 43.0 million against deferred tax assets for California R&D credits carryforwards (net of the unrecognized tax benefits), impairment losses, certain foreign tax credits and certain acquired tax attributes.

As of December 31, 2019 , we had $ 46.7 million in federal net operating loss carryforwards to offset future income, which are limited by Section 382 of the Internal Revenue Code (“Section 382”) due to the acquisition of Meru, AccelOps and Bradford.

With the acquisition of Meru, we had $ 22.6 million in federal net operating loss carryforwards which are limited by Section 382 available from year 2020.

With the acquisition of AccelOps, we had $ 16.3 million in federal net operating loss carryforwards from 2016 that are limited by Section 382.

With the acquisition of Bradford, we had $ 7.8 million in federal net operating loss carryforwards from 2018 that are limited by Section 382 available from July 2018.

In 2019, it is estimated that a federal net operating loss of $ 169.4 million will be generated.

We had $ 14.7 million in federal tax credits to offset future federal taxes.

As of December 31, 2019 , we had $ 35.5 million in California net operating loss carryforwards including $ 10.7 million from Meru and $ 13.4 million from AccelOps, both of which are limited by Section 382.

In 2019, it is estimated that a California net operating loss of $ 11.3 million will be generated.

We had state tax credit carryforwards of $ 30.6 million available to offset our future state taxes.

The state credits carry forward indefinitely.

As of December 31, 2020, we recorded a valuation allowance of $ 54.9 million against deferred tax assets for California R&D credits carryforwards (net of the unrecognized tax benefits), impairment losses, certain foreign tax credits and certain acquired tax attributes.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2020, our federal and California net operating loss carryforwards for income tax purpose were $ 83.5 million and $ 20.8 million, respectively.

All the net operating loss carryforwards were from acquisitions which were limited by Section 382 of the Internal Revenue Code.

If not utilized, the federal net operating loss carryforwards will begin to expire in 2022, and California net operating loss carryforwards will begin to expire in 2034.

As of December 31, 2020, we had state tax credit carryforwards of $ 33.3 million.

The state credits can be carried forward indefinitely.

Under the 2017 Tax Act, starting on January 1, 2018, we are no longer subject to federal income tax on earnings remitted from our foreign subsidiaries.

2 unchanged sentences

For those investments from which we were not able to make a reasonable estimate, we have not recorded any deferred taxes.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We operate under a tax incentive agreement in Singapore, which is effective through December 31, 2020.

5 unchanged sentences

Year Ended December 31,

2020 2019 2018

Unrecognized tax benefits, beginning of year $ 67.5 $ 63.5 $ 72.5

8 unchanged sentences

We recorded a net increase of gross unrecognized tax benefits of approximately $ 9.8 million during the year ended December 31, 2020.

The net increase was primarily due to the increase in gross unrecognized tax benefits related to the Altera case, offset by the reversal of gross unrecognized tax benefits in connection with the lapse of statutes of limitations and the settlement of tax audits in foreign jurisdictions.

The net increase was primarily due to the increase in benefits related to the foreign taxes, offset by the reversal of gross unrecognized tax benefits in connection with the lapse of statutes of limitations and the settlement of tax audits in foreign jurisdictions.

It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $ 4.2 million in the next 12 months, primarily due to the lapse of the statute of limitations.

4 unchanged sentences

Generally, we are no longer subject to U.S.

state and non-U.S.

income tax examinations by tax authorities for tax years prior to 2009.

state and foreign income tax examinations by tax authorities for tax years prior to 2010.

We are no longer subject to examination by U.S federal income tax authorities for tax years prior to 2015.

1 unchanged sentence

The focus of these audits is the inter-company profit allocation.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DEFINED CONTRIBUTION PLANS

5 unchanged sentences

SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our chief operating decision maker is our chief executive officer.

5 unchanged sentences

Year Ended December 31,

Revenue 2020 2019 2018

United States $ 813.3 $ 695.5 $ 578.3

4 unchanged sentences

Total revenue $ 2,594.4 $ 2,163.0 $ 1,804.6

(1) In 2019, Canada and Latin America revenue were combined and presented as Other Americas.

Prior periods have been reclassified to conform with current period presentation.

Property and Equipment — net

2020 December 31,

United States $ 296.3 $ 197.4

Canada 121.3 120.5

Latin America 2.0 5.5

Total Americas 419.6 323.4

EMEA 20.6 15.2

Total property and equipment—net $ 448.0 $ 344.3

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) (in millions):

Year Ended December 31, 2019

Unrealized Gains (Losses) on Investments

Tax provision (benefit) related to unrealized gains or losses on investments

Beginning balance

Other comprehensive income before reclassifications

Amounts reclassified from accumulated other comprehensive income (loss)

Net current-period other comprehensive income

Ending balance

We adopted ASU 2018-02 on January 1, 2019, and elected to reclassify the income tax effects of the 2017 Tax Act to retained earnings at the beginning of the period.

Other amounts reclassified from accumulated other comprehensive income (loss) for unrealized losses on investments and tax provision related to unrealized gains or losses on investments are recorded in other income (expense)—net and in provision for (benefit from) income taxes, respectively.

We did not have any material changes to accumulated other comprehensive income (loss) during 2018.

SUBSEQUENT EVENT

In January 2020, we entered into an agreement with a competitor in the network security industry, whereby, in February 2020, this party paid us a lump sum of $ 50.0 million for a seven-year mutual covenant-not-to-sue for patent claims.

This agreement arose after expiration of previous agreements between the parties whereby the competitor had paid us additional sums for a limited term license to certain of our intellectual property and a limited term mutual covenant-not-to-sue.

Building Purchase

In February 2021, we purchased two properties in California totaling approximately 97,000 square feet for an aggregate cash payment of $ 15.5 million.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data