What changed in this filing

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Item 1. Financial Statements

2021-05-03 compared with 2020-11-06 · 178 added, 340 removed, 517 unchanged (50% of the section changed)

3 unchanged sentences

(unaudited, in millions, except per share amounts)

September 30,

2021 December 31,

23 unchanged sentences

INCOME TAX LIABILITIES 97.7 90.3

LONG-TERM DEBT 987.0 —

OTHER LIABILITIES 56.5 56.2

3 unchanged sentences

Common stock, $ 0.001 par value— 300.0 shares authorized;

162.3 and 171.7 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

163.3 and 162.5 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

Additional paid-in capital 1,225.2 1,207.2

Accumulated other comprehensive income 0.3 0.7

Retained earnings (accumulated deficit) ( 466.9 ) 160.8

Accumulated deficit ( 244.9 ) ( 352.1 )

Total stockholders’ equity 980.8 856.0

4 unchanged sentences

(unaudited, in millions, except per share amounts)

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Product $ 240.7 $ 192.3

16 unchanged sentences

OPERATING INCOME 121.6 116.7

INTEREST INCOME—NET 2.5 11.4 15.7 32.6

INTEREST INCOME (EXPENSE)—NET ( 0.2 ) 9.2

OTHER EXPENSE—NET ( 2.0 ) ( 8.0 )

12 unchanged sentences

(unaudited, in millions)

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Net income $ 107.2 $ 104.6

Other comprehensive income (loss):

Other comprehensive loss:

Change in unrealized gains (losses) on investments ( 0.6 ) ( 5.2 )

tax provision (benefit) related to change in unrealized gains (losses) on investments ( 0.3 ) — 0.4 0.7

Other comprehensive income (loss) ( 1.1 ) 0.2 0.3 2.0

tax benefit related to change in unrealized gains (losses) on investments ( 0.2 ) ( 1.0 )

Other comprehensive loss ( 0.4 ) ( 4.2 )

Comprehensive income $ 106.8 $ 100.4

3 unchanged sentences

(unaudited, in millions)

Three Months Ended September 30, 2020

Three Months Ended March 31, 2021

Common Stock Additional

3 unchanged sentences

Shares Amount

BALANCE—June 30, 2020 161.8 $ 0.2 $ 1,154.3 $ 2.5 $ ( 590.3 ) $ 566.7

Issuance of common stock in connection with equity incentive plans - net of tax withholding 0.5 — ( 25.1 ) — — ( 25.1 )

Stock-based compensation expense — — 49.3 — — 49.3

Net unrealized loss on investments - net of tax — — — ( 1.1 ) — ( 1.1 )

Net income — — — — 123.4 123.4

BALANCE—September 30, 2020 162.3 $ 0.2 $ 1,178.5 $ 1.4 $ ( 466.9 ) $ 713.2

Three Months Ended September 30, 2019

Common Stock Additional

Capital Accumulated

Comprehensive Income Retained Earnings (Accumulated Deficit) Total

Stockholders’

Shares Amount

BALANCE—June 30, 2019 171.0 $ 0.2 $ 1,130.2 $ 0.9 $ 8.1 $ 1,139.4

Issuance of common stock in connection with equity incentive plans - net of tax withholding 0.6 — ( 17.8 ) — — ( 17.8 )

Repurchase and retirement of common stock ( 0.3 ) — ( 2.2 ) — ( 24.3 ) ( 26.5 )

Stock-based compensation expense — — 42.4 — — 42.4

Net unrealized gain on investments - net of tax — — — 0.2 — 0.2

Net income — — — — 80.2 80.2

BALANCE—September 30, 2019 171.3 $ 0.2 $ 1,152.6 $ 1.1 $ 64.0 $ 1,217.9

Nine Months Ended September 30, 2020

Common Stock Additional

Capital Accumulated

Comprehensive Income Retained Earnings (Accumulated Deficit) Total

Stockholders’

Shares Amount

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

Issuance of common stock in connection with equity incentive plans - net of tax withholding 0.8 — ( 31.5 ) — — ( 31.5 )

Repurchase and retirement of common stock ( 11.4 ) — ( 76.5 ) — ( 969.5 ) ( 1,046.0 )

Stock-based compensation expense — — 49.5 — — 49.5

Net unrealized gain on investments - net of tax — — — 0.3 — 0.3

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

Net income — — — — 107.2 107.2

BALANCE—September 30, 2020 162.3 $ 0.2 $ 1,178.5 $ 1.4 $ ( 466.9 ) $ 713.2

Nine Months Ended September 30, 2019

BALANCE—March 31, 2021 163.3 $ 0.2 $ 1,225.2 $ 0.3 $ ( 244.9 ) $ 980.8

Three Months Ended March 31, 2020

Common Stock Additional

7 unchanged sentences

Stock-based compensation expense — — 44.8 — — 44.8

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 unrealized loss on investments - net of tax — — — ( 4.2 ) — ( 4.2 )

Net income — — — — 104.6 104.6

BALANCE—September 30, 2019 171.3 $ 0.2 $ 1,152.6 $ 1.1 $ 64.0 $ 1,217.9

BALANCE—March 31, 2020 162.6 $ 0.2 $ 1,128.4 $ ( 3.1 ) $ ( 568.1 ) $ 557.4

See notes to condensed consolidated financial statements.

2 unchanged sentences

(unaudited, in millions)

Nine Months Ended

September 30,

2020 September 30,

Three Months Ended

2021 March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

24 unchanged sentences

Purchases of property and equipment ( 52.1 ) ( 27.6 )

Purchase of investment in privately held company ( 75.0 ) —

Payments made in connection with business combination, net of cash acquired ( 10.3 ) ( 3.1 )

Other — ( 0.4 )

Net cash used in investing activities ( 7.8 ) ( 402.7 )

Net cash provided by (used in) investing activities ( 473.5 ) 4.6

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from long-term debt, net of discount and underwriting fees 989.4 —

Payments for debt issuance costs ( 1.9 ) —

Repurchase and retirement of common stock — ( 889.9 )

1 unchanged sentence

Taxes paid related to net share settlement of equity awards ( 41.4 ) ( 37.8 )

Payments of debt assumed in connection with business combination ( 4.1 ) —

Other — ( 0.1 )

Net cash used in financing activities ( 1,119.6 ) ( 151.8 )

Net cash provided by (used in) financing activities 956.0 ( 920.4 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 798.4 ( 596.4 )

3 unchanged sentences

Operating lease liabilities arising from obtaining right-of-use assets $ 9.8 $ 2.4

Cash paid to settle liability incurred for repurchase of common stock $ — $ 4.2

NON-CASH INVESTING AND FINANCING ACTIVITIES:

2 unchanged sentences

Liability incurred for repurchase of common stock $ — $ 10.0

Liability incurred in connection with business acquisition $ 0.5 $ —

See notes to condensed consolidated financial statements.

8 unchanged sentences

All intercompany balances, transactions and cash flows have been eliminated.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the full year or for any future periods.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results for the full year or for any future periods.

The condensed consolidated balance sheet as of December 31, 2020 is derived from the audited consolidated financial statements for the year ended December 31, 2020.

For 2020, the amounts previously reported as Income taxes payable are included in Accrued liabilities.

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

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

Actual results could differ materially from those estimates.

There have been no material changes to our significant accounting policies as of and for the three and nine months ended September 30, 2020.

There have been no material changes to our significant accounting policies as of and for the three months ended March 31, 2021.

Recently Adopted Accounting Standards

Financial Instruments

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

Measurement of Credit Losses on Financial Instruments (“Topic 326”), 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 condensed consolidated financial statements.

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 Accounting Standards Codification (“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.

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

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recent Accounting Standards Not Yet Effective

In December 2019, the FASB issued ASU 2019-12—Income Taxes (Topic 740):

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12—Income Taxes (“Topic 740”):

Simplifying the Accounting for Income Taxes.

1 unchanged sentence

The amendments also improve consistent application and simplification of GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

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

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

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

The adoption of this guidance did not have any impact on our condensed consolidated financial statements and accompanying disclosures.

IMMATERIAL CORRECTION OF PRIOR PERIOD FINANCIAL STATEMENTS

Subsequent to the issuance of our condensed consolidated financial statements for the period ended June 30, 2020, we identified an immaterial error related to the commencement of revenue recognition for certain FortiCare standalone service contracts.

Rather than commencing recognition upon end user registration, we should have begun to recognize revenue over the service period 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 Bulletins No.

Subsequent to the issuance of our condensed consolidated financial statements for the period ended March 31, 2020, 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 condensed consolidated financial statements has been revised to reflect the correction of this error.

The corrections to our condensed 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 (accumulated deficit) 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

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The corrections to our condensed consolidated statements of income for the three and nine months ended September 30, 2019 were as follows (in millions, except per share amounts):

Three Months Ended September 30, 2019

As Previously Reported Corrections As Corrected

Service $ 350.4 $ 0.6 $ 351.0

Total revenue 547.5 0.6 548.1

GROSS PROFIT:

Service 305.3 0.6 305.9

Total gross profit 423.4 0.6 424.0

OPERATING INCOME 100.0 0.6 100.6

INCOME BEFORE INCOME TAXES 105.4 0.6 106.0

PROVISION FOR INCOME TAXES 25.6 0.2 25.8

NET INCOME $ 79.8 $ 0.4 $ 80.2

Net income per share (Note 10):

Basic $ 0.47 $ — $ 0.47

Diluted $ 0.46 $ — $ 0.46

Nine Months Ended September 30, 2019

The corrections to our condensed consolidated statement of income for the three months ended March 31, 2020 were as follows (in millions, except per share amounts):

Three Months Ended March 31, 2020

As Previously Reported Corrections As Corrected

11 unchanged sentences

Diluted $ 0.60 $ — $ 0.60

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The corrections to our condensed consolidated statements of cash flows for the nine months ended September 30, 2019 were as follows (in millions):

Nine Months Ended September 30, 2019

The corrections to our condensed consolidated statement of cash flows for the three months ended March 31, 2020 were as follows (in millions):

Three Months Ended March 31, 2020

As Previously Reported Corrections As Corrected

4 unchanged sentences

Deferred revenue 90.9 ( 0.8 ) 90.1

Net cash provided by operating activities $ 617.6 $ — $ 617.6

The results for the nine months ended September 30, 2020 include corrections to increase revenue, gross profit and operating income by $ 0.8 million and $ 2.1 million for the three months ended March 31, 2020 and June 30, 2020, respectively, and to increase net income by $ 0.6 million and $ 1.7 million for the three months ended March 31, 2020 and June 30, 2020, respectively.

The correction did no t change diluted net income per share for the three months ended March 31, 2020 but did increase diluted net income per share by $ 0.01 for the three months ended June 30, 2020.

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

For the period in which we corrected net income, we made corresponding corrections to net income and comprehensive income in our condensed consolidated statement of comprehensive income and to net income, retained earnings (accumulated deficit) and total stockholders’ equity in our condensed 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 businesses.

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 our FortiGate network security appliances, 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.

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 consists of our FortiGuard security solutions, as well as our FortiCare technical support services and other services.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Disaggregation of Revenue

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

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Product $ 240.7 $ 192.3

4 unchanged sentences

Deferred Revenue

During the three months ended September 30, 2020 and September 30, 2019, we recognized $ 263.1 million and $ 211.8 million in service revenue that was included in the deferred revenue balance as of December 31, 2019 and December 31, 2018, respectively.

During the nine months ended September 30, 2020 and September 30, 2019, we recognized $ 921.7 million and $ 754.5 million in service revenue that was included in the deferred revenue balance as of December 31, 2019 and December 31, 2018, respectively.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the three months ended March 31, 2021 and March 31, 2020, we recognized $ 417.9 million and $ 343.3 million in service revenue that was included in the deferred revenue balance as of December 31, 2020 and December 31, 2019, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 2.39 billion, which was substantially comprised of deferred security subscription and technical support services revenue.

As of March 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 2.75 billion, which was substantially comprised of deferred security subscription and technical support services revenue.

We expect to recognize approximately $ 1.47 billion as revenue over the next 12 months and the remainder thereafter.

1 unchanged sentence

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.

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.

2 unchanged sentences

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

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.

The allowance for credit losses was $ 2.2 million as of September 30, 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 nine months ended September 30, 2020.

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

The allowance for credit losses was $ 3.1 million and $ 2.5 million as of March 31, 2021 and December 31, 2020, respectively.

Provisions, write-offs and recoveries were not material during the three months ended March 31, 2021 and 2020.

Deferred Contract Costs

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

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

Amortization of deferred contract costs during the three months ended September 30, 2020 and September 30, 2019 were $ 35.3 million and $ 27.5 million, respectively.

Amortization of deferred contract costs during the nine months ended September 30, 2020 and September 30, 2019 were $ 99.8 million and $ 78.5 million, respectively.

Amortization of deferred contract costs during the three months ended March 31, 2021 and 2020 were $ 39.7 million and $ 31.3 million, respectively.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FINANCIAL INSTRUMENTS AND FAIR VALUE

The following tables summarize our investments (in millions):

September 30, 2020

March 31, 2021

Cost Unrealized

1 unchanged sentence

Corporate debt securities $ 482.1 $ 0.5 $ ( 0.2 ) $ 482.4

government securities 166.3 0.1 — 166.4

Commercial paper 426.4 0.1 — 426.5

1 unchanged sentence

162.7 — — 162.7

government securities 156.2 — — 156.2

Total available-for-sale securities $ 1,227.4 $ 0.6 $ ( 0.2 ) $ 1,227.8

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2020

2 unchanged sentences

Corporate debt securities $ 410.5 $ 1.0 $ — $ 411.5

government securities 195.0 0.2 — 195.2

Commercial paper 185.4 — — 185.4

1 unchanged sentence

112.0 — — 112.0

government securities 184.9 — — 184.9

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

1 unchanged sentence

The following tables show the gross unrealized losses and the related fair values of our investments that have been in a continuous unrealized loss position (in millions):

September 30, 2020

March 31, 2021

Less Than 12 Months 12 Months or Greater Total

3 unchanged sentences

Corporate debt securities $ 272.2 $ ( 0.2 ) $ — $ — $ 272.2 $ ( 0.2 )

government securities 42.1 — — — 42.1 —

Commercial paper 164.1 — — — 164.1 —

7 unchanged sentences

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

government securities 47.1 — — — 47.1 —

Commercial paper 61.5 — — — 61.5 —

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 $ —

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

September 30,

2021 December 31,

3 unchanged sentences

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.

Accrued interest of $ 3.2 million as of September 30, 2020 is excluded from both the fair value and the amortized cost of our available-for-sale securities and is recorded in Prepaid expenses and other current assets in our condensed consolidated balance sheet.

We have elected to not record an allowance for credit losses for accrued interest for available-for-sale 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Prior to 2020, we followed the guidance in ASC 320 Investments—Debt and Equity Securities in determining whether unrealized losses were other than temporary.

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 available-for-sale securities as of September 30, 2020 and as of December 31, 2019 were caused by fluctuations in market value and interest rates as a result of the economic environment.

We concluded that an allowance for credit losses was unnecessary as of September 30, 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.

Realized gains and 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.

Accrued interest receivable of $ 2.6 million as of March 31, 2021 was excluded from the fair value of our available-for-sale securities and was recorded in prepaid expenses and other current assets in our condensed 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.

14 unchanged sentences

Assets Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 (in millions):

September 30, 2020 December 31, 2019

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

March 31, 2021 December 31, 2020

Assets Significant

5 unchanged sentences

Corporate debt securities $ 489.6 $ 489.6 $ — $ 413.7 $ — $ 413.7 $ —

government securities 166.4 166.4 — — 195.2 195.2 — —

Commercial paper 463.2 — 463.2 — 197.2 — 197.2 —

government securities 156.2 156.2 — — 184.9 184.9 — —

Certificates of deposit and term deposits 169.2 — 169.2 — 112.0 — 112.0 —

5 unchanged sentences

Total $ 1,561.0 $ 1,060.5

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2020 and year ended December 31, 2019.

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2021 and year ended December 31, 2020.

Inventory consisted of the following (in millions):

September 30,

2021 December 31,

6 unchanged sentences

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

September 30,

2021 December 31,

10 unchanged sentences

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

Depreciation expense was $ 13.9 million and $ 12.8 million during the three months ended September 30, 2020 and September 30, 2019, respectively.

Depreciation expense was $ 41.6 million and $ 37.8 million during the nine months ended September 30, 2020 and September 30, 2019, respectively.

Depreciation expense was $ 14.0 million and $ 13.6 million during the three months ended March 31, 2021 and 2020, respectively.

INVESTMENTS IN PRIVATELY HELD COMPANIES

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 September 30, 2020 and December 31, 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 condensed consolidated balance sheets and would be measured at fair value if indicators of an increase in value or impairment existed.

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 condensed 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 through September 30, 2020.

As of September 30, 2020, no other events have occurred that would affect the carrying value of these investments.

Linksys Holdings, Inc.

On March 19, 2021, we invested $ 75.0 million in cash for shares of the Series A Preferred Stock of Linksys Holdings, Inc.

(“Linksys”), which provides router connectivity solutions, for a 32.6 % ownership interest in the outstanding capital stock of Linksys.

We concluded that our investment is an in-substance common-stock investment, and, though we do not hold a controlling financial interest in Linksys, we have the ability to exercise significant influence over the operating and financial policies of Linksys.

Therefore, we will account for this investment using the equity method of accounting.

As of March 31, 2021, the investment was included in other assets on our condensed consolidated balance sheet.

Our share of the earnings of Linksys subsequent to the acquisition date was not material for the quarter ended March 31, 2021.

Transaction costs related to this investment were not material.

Our other investments in the equity securities of privately held companies without readily determinable fair values totaled $ 1.0 million as of March 31, 2021 and December 31, 2020.

BUSINESS COMBINATION

OPAQ Networks, Inc.

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

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

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 goodwill is non-deductible for tax purposes.

ShieldX Networks, Inc.

On March 10, 2021, we closed an acquisition of certain assets and liabilities of ShieldX Networks Inc.

( “ ShieldX ” ) for $ 10.8 million in cash.

This acquisition was accounted for as a business combination using the acquisition method of accounting.

Of the purchase price, $ 6.2 million was allocated to goodwill, $ 4.1 million was allocated to developed technology intangible asset and $ 0.5 million was allocated to other net assets acquired.

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.

All acquired goodwill is expected to be deductible for tax purposes.

Acquisition-related costs related to this acquisition were not material and were recorded as general and administrative expense.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our estimates and assumptions are subject to change within the measurement period, which is up to 12 months after the acquisition date.

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.

The operating results of the acquired company are included in our condensed consolidated statement of income from the date of acquisition.

Acquisition-related costs for this acquisition were not material.

Pro forma information has not been presented as the impact of this acquisition was not material to our condensed consolidated financial statements.

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

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Addition due to business combination 6.2

Balance—September 2020 $ 68.2

There were no impairments to goodwill during the nine months ended September 30, 2020 or during prior periods.

Balance—March 31, 2021 $ 99.2

There were no impairments to goodwill during the three months ended March 31, 2021 or during prior periods.

Other Intangible Assets—Net

The following tables present other intangible assets—net as of September 30, 2020 and December 31, 2019 (in millions, except years):

September 30, 2020

The following tables present other intangible assets—net (in millions, except years):

March 31, 2021

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

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

Amortization expense was $ 2.8 million and $ 2.2 million during the three months ended September 30, 2020 and September 30, 2019, respectively.

Amortization expense was $ 10.5 million and $ 8.1 million during the nine months ended September 30, 2020 and September 30, 2019, respectively.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization expense was $ 3.4 million and $ 4.0 million during the three months ended March 31, 2021 and 2020, respectively.

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

2021 (the remainder of 2021) $ 10.5

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NET INCOME PER SHARE

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A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is as follows (in millions, except per share amounts):

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Net income $ 107.2 $ 104.6

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Effect of potentially dilutive securities:

RSUs 2.3 2.4 2.4 2.9

Stock options 1.4 1.2

3 unchanged sentences

Diluted $ 0.64 $ 0.60

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following weighted-average shares of common stock were excluded from the computation of diluted net income per share for the periods presented, as their effect would have been antidilutive (in millions):

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

RSUs 0.3 0.2 0.3 0.3

Three Months Ended

2021 March 31,

Stock options 0.3 0.3

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

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Operating lease expense $ 5.9 $ 4.3

Variable lease expense (1)

0.7 0.7 1.7 1.9

Short-term lease expense 0.8 0.9

Total lease expense $ 7.5 $ 5.8

(1) Variable lease expense for the nine months ended September 30, 2020 and September 30, 2019 predominantly included common area maintenance charges and parking expense.

(1) Variable lease expense for the three months ended March 31, 2021 and 2020 predominantly included common area maintenance charges and parking expense.

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

Classification September 30,

Classification March 31,

2021 December 31,

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Weighted average discount rate - operating leases 2.8 % 3.2 %

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Nine Months Ended Nine Months Ended

September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows used for operating leases $ 6.1 $ 4.6

Maturities of operating lease liabilities as of September 30, 2020 were as follows (in millions):

Maturities of operating lease liabilities as of March 31, 2021 were as follows (in millions):

Year Ending December 31, Amount

3 unchanged sentences

Less imputed interest ( 2.7 )

As of September 30, 2020, we had additional minimum lease payments of $ 3.8 million relating to 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 terms of approximately three to five years .

As of March 31, 2021, we had additional minimum lease payments of $ 2.7 million relating to operating leases for colocation space that had been signed but had not yet commenced.

These leases will commence during 2021 and will have lease

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

terms of three years .

On March 5, 2021, we issued $ 1.0 billion aggregate principal amount of senior notes (collectively, the “Senior Notes”), consisting of $ 500.0 million aggregate principal amount of 1.0 % notes due March 15, 2026 (the “2026 Senior Notes”) and $ 500.0 million aggregate principal amount of 2.2 % notes due March 15, 2031 (the “2031 Senior Notes”), in an underwritten registered public offering.

The Senior Notes are senior unsecured obligations and rank equally with each other in right of payment and with our other outstanding obligations.

We may redeem the Senior Notes at any time in whole or in part for cash, at specified redemption prices that include accrued and unpaid interest, if any, and a make-whole premium.

However, no make-whole premium will be paid for redemptions of the 2026 Senior Notes on or after February 15, 2026, or the 2031 Senior Notes on or after December 15, 2030.

Interest on the Senior Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2021.

As of March 31, 2021, the Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective contractual terms of these notes using the effective interest method.

The total outstanding debt is summarized below (in millions, except percentages):

Maturity Coupon Rate Effective Interest Rate March 31, 2021

2026 Senior Notes March 2026 1.0 % 1.3 % $ 500.0

2031 Senior Notes March 2031 2.2 % 2.3 % 500.0

Total debt 1,000.0

Unamortized discount and debt issuance costs ( 13.0 )

Total long-term debt $ 987.0

As of March 31, 2021 we accrued interest payable of $ 1.2 million, and there are no financial covenants with which we must comply.

During the quarter ended March 31, 2021 we recorded $ 1.3 million of total interest expense in relation to these Senior Notes.

The total estimated fair value of the outstanding Senior Notes was approximately $ 975.6 million, including accrued and unpaid interest, as of March 31, 2021.

The fair value was determined based on observable market prices of identical instruments in less active markets.

The estimated fair values are based on Level 2 inputs.

MUTUAL COVENANT-NOT-TO-SUE AND RELEASE AGREEMENT

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

During the three and nine months ended September 30, 2020, we recorded $ 1.1 million and $ 39.0 million in Gain on IP matter in our condensed consolidated statements of income, respectively.

We recorded $ 11.0 million in Accrued liabilities and Other liabilities in our condensed consolidated balance sheet as of September 30, 2020.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the three months ended March 31, 2021 and 2020, we recorded $ 1.1 million and $ 36.8 million gain on IP matter in our condensed consolidated statements of income, respectively.

We recorded $ 8.7 million in accrued liabilities and other liabilities in our condensed consolidated balance sheet as of March 31, 2021.

COMMITMENTS AND CONTINGENCIES

The following table summarizes our inventory purchase commitments as of September 30, 2020 (in millions):

The following table summarizes our inventory purchase commitments as of March 31, 2021 (in millions):

Total 2021 2022 2023 2024 2025 Thereafter

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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 September 30, 2020, we had $ 284.7 million of open purchase orders with our independent contract manufacturers that may not be cancelable.

As of March 31, 2021, we had $ 298.8 million 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 September 30, 2020, we had $ 23.1 million in other contractual commitments having a remaining term in excess of one year that may not be cancelable.

As of March 31, 2021, we had $ 65.1 million 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.

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

Litigation loss contingency accruals were not material as of March 31, 2021 and December 31, 2020.

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.

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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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

STOCKHOLDERS’ EQUITY

2 unchanged sentences

2009 Equity Incentive Plan (the “Amended Plan”) pursuant to which we have granted RSUs and stock options.

As of September 30, 2020, there was a total of 12.1 million shares of common

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

stock available for grant under the Amended Plan.

We also previously had an Employee Stock Purchase Plan (“ESPP”) for eligible employees, which was terminated in February 2019.

As of March 31, 2021, there were a total of 11.4 million shares of common stock available for grant under the Amended Plan.

Restricted Stock Units

6 unchanged sentences

Vested ( 0.8 ) 79.95

Balance—September 30, 2020 5.3 $ 86.31

Balance—March 31, 2021 4.6 $ 107.37

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

As of September 30, 2020, total compensation expense related to unvested RSUs granted to employees and non-employees under the 2009 Plan, but not yet recognized, was $ 399.1 million, with a weighted-average remaining vesting period of 2.7 years.

As of March 31, 2021, total compensation expense related to unvested RSUs granted to employees and non-employees under the Amended Plan, but not yet recognized, was $ 450.7 million, with a weighted-average remaining vesting period of 2.9 years.

RSUs settle into shares of common stock upon vesting.

2 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Shares withheld for taxes 0.3 0.3

2 unchanged sentences

The following table summarizes the weighted-average assumptions relating to our employee stock options:

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Expected term in years 4.4 4.4

13 unchanged sentences

Exercised ( 0.2 ) 50.36

Balance—September 30, 2020 2.8 $ 66.72

Options vested and expected to vest—September 30, 2020 2.8 $ 66.72 4.4 $ 146.4

Options exercisable—September 30, 2020 1.5 $ 42.81 3.3 $ 109.6

The aggregate intrinsic value represents the difference between the exercise price of stock options and the quoted market price of our common stock on September 30, 2020 for all in-the-money stock options.

Balance—March 31, 2021 3.0 $ 85.66

Options vested and expected to vest—March 31, 2021 3.0 $ 85.66 4.5 $ 297.1

Options exercisable—March 31, 2021 1.5 $ 51.63 3.3 $ 205.8

The aggregate intrinsic value represents the difference between the exercise price of stock options and the quoted market price of our common stock on March 31, 2021 for all in-the-money stock options.

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

As of September 30, 2020, total compensation expense related to unvested stock options granted to employees but not yet recognized was $ 35.1 million, with a weighted-average remaining vesting period of 2.8 years.

As of March 31, 2021, total compensation expense related to unvested stock options granted to employees but not yet recognized was $ 54.6 million, with a weighted-average remaining vesting period of 3.2 years.

Additional information related to our stock options is summarized below (in millions, except per share amounts):

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Weighted-average fair value per share granted $ 56.49 $ 33.82

3 unchanged sentences

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):

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Cost of product revenue $ 0.4 $ 0.4

7 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

RSUs $ 45.8 $ 42.2

Stock options 4.2 3.1

ESPP — — — 1.3

Total stock-based compensation expense $ 50.0 $ 45.3

Total income tax benefit associated with stock-based compensation that is recognized in the condensed consolidated statements of income is as follows (in millions):

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Income tax benefit associated with stock-based compensation $ 11.0 $ 10.0

3 unchanged sentences

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.

During the nine months ended September 30, 2020, we repurchased 11.4 million shares of common stock under the Repurchase Program in open market transactions at an average price $ 91.55 per share, for an aggregate purchase price $ 1.05 billion.

As of September 30, 2020, $ 1.05 billion remained available for future share repurchases under the Repurchase Program.

Our effective tax rate was 4 % for the three months ended September 30, 2020, compared to an effective tax rate of 24 % for the same period last year.

Our effective tax rate was 8 % for the nine months ended September 30, 2020, compared to an effective tax rate of 16 % for the same period last year.

There were no shares repurchased under the Repurchase Program during the three months ended March 31, 2021.

As of March 31, 2021, $ 1.01 billion remained available for future share repurchases under the Repurchase Program.

Our effective tax rate was 10 % for the three months ended March 31, 2021, compared to an effective tax rate of 11 % for the same period last year.

The effective tax rates for the periods presented are primarily comprised of U.S.

federal and state taxes, withholding taxes, foreign taxes and excess tax benefits from stock-based compensation expense.

The tax rates for the three months ended September 30, 2020 and September 30, 2019 were impacted by U.S.

federal and state taxes, withholding taxes and foreign taxes that were $ 17.5 million and $ 32.7 million, respectively.

federal and state taxes included a tax benefit of $ 16.0 million from the foreign-derived intangible income deduction for the three months ended September 30, 2020.

The tax rates for the three months ended September 30, 2020 and September 30, 2019 were impacted by excess tax benefits from stock-based compensation expense of $ 12.5 million and $ 6.9 million, respectively.

The tax rates for the nine months ended September 30, 2020 and September 30, 2019 were impacted by U.S.

federal and state taxes, withholding taxes and foreign taxes of $ 74.8 million and $ 75.4 million, respectively.

federal and state taxes included a tax benefit of $ 25.6 million from the foreign-derived intangible income deduction for the nine months ended September 30, 2020.

The tax rates for the nine months ended September 30, 2020 and September 30, 2019 were impacted by excess tax benefits from stock-based compensation expense of $ 37.6 million and $ 34.6 million, respectively, and release of reserves of $ 9.0 million and $ 10.0 million, respectively, on uncertain tax positions and the interest due to the expiration of the statute of limitations.

The provision for income taxes for the nine months ended September 30, 2019 was further impacted by an increase in tax expense of $ 10.3 million for an unrecognized tax benefit related to the opinion of the U.S.

Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) in Altera Corporation and Subsidiaries vs.

Commissioner of Internal Revenue (“ Altera ”) described below, regarding stock-based compensation expense in cost sharing arrangements.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of September 30, 2020 and December 31, 2019, unrecognized tax benefits were $ 67.1 million and $ 67.5 million, respectively.

federal and state taxes, withholding taxes, foreign taxes, the tax benefit from foreign-derived intangible income deduction (the “FDII deduction”) and excess tax benefits from stock-based compensation expense.

The tax rates for the three months ended March 31, 2021 and 2020 were composed of U.S.

federal and state taxes, withholding taxes and foreign taxes that amounted to $ 35.7 million and $ 33.3 million, respectively.

The tax rate for the three months ended March 31, 2021 was impacted by a tax benefit of $ 7.3 million from the FDII deduction and by excess tax benefits from stock-based compensation expense of $ 16.2 million.

The tax rate for the three months ended March 31, 2020 was impacted by a tax benefit of $ 4.8 million from the FDII deduction and excess tax benefits from stock-based compensation expense of $ 15.2 million.

As of March 31, 2021 and December 31, 2020, unrecognized tax benefits were $ 81.6 million and $ 77.3 million, respectively.

If recognized, $ 74.6 million of the unrecognized tax benefits would favorably affect our effective tax rate.

It is our policy to include accrued interest and penalties related to unrecognized tax benefits in income tax expense.

As of September 30, 2020 and December 31, 2019, accrued interest and penalties were $ 13.1 million and $ 14.1 million, respectively.

As of March 31, 2021 and December 31, 2020, accrued interest and penalties were $ 16.0 million and $ 14.5 million, respectively.

It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $ 4.4 million in the next 12 months, due to the lapse of the statute of limitations.

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

We currently have ongoing tax audits in the United Kingdom, Canada and several other foreign jurisdictions.

We currently have ongoing tax audits in the United Kingdom, Canada, Germany and several other foreign jurisdictions.

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

On June 7, 2019, the Ninth Circuit overturned the U.S.

Tax Court’s decision in Altera and ruled in favor of the Commissioner, validating the regulations requiring that stock-based compensation be included in a cost sharing arrangement.

On June 22, 2020, the Supreme Court of the United States (the “Supreme Court”) issued an order declining the petition for certiorari 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 condensed consolidated financial statements.

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

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 condensed consolidated financial statements at this time and will continue to assess the implications of the CARES Act and its continuing developments and interpretations.

There is no material tax impact on our condensed consolidated financial statements.

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 foreign-derived intangible income deduction and global intangible low-taxed income.

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.

1 unchanged sentence

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.

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 Cuts and Jobs 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.

We are in the process of analyzing the tax impact from the final regulations on our foreign tax credit calculation.

DEFINED CONTRIBUTION PLANS

3 unchanged sentences

Our board of directors approved 50 % matching contributions on employee contributions up to 4 % of each employee’s eligible earnings.

Our matching contributions to our 401(k) Plan and the RRSP for the three months ended September 30, 2020 and September 30, 2019 were $ 2.1 million and $ 1.8 million, respectively.

Our matching contributions to our 401(k) Plan and the RRSP for the nine months ended September 30, 2020 and September 30, 2019 were $ 6.5 million and $ 5.2 million, respectively.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our matching contributions to our 401(k) Plan and the RRSP for the three months ended March 31, 2021 and 2020 were $ 2.7 million and $ 2.2 million, respectively.

SEGMENT INFORMATION

6 unchanged sentences

The following tables set forth revenue and property and equipment—net by geographic region (in millions):

Three Months Ended Nine Months Ended

Revenue September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

Revenue March 31,

2021 March 31,

United States $ 212.5 $ 181.9

5 unchanged sentences

Property and Equipment — net

September 30,

2021 December 31,

6 unchanged sentences

The following distributors accounted for 10% or more of our revenue:

Three Months Ended Nine Months Ended

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Three Months Ended

2021 March 31,

Exclusive Networks Group (“Exclusive”)

29 % 30 % 30 % 31 %

Ingram Micro, Inc.

(“Ingram Micro”) 11 % 10 %

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following distributors accounted for 10% or more of net accounts receivable:

September 30,

2021 December 31,

1 unchanged sentence

Ingram Micro 16 % 11 %

Tech Data Corporation 10 % *

* Represents less than 10%

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-Q

Item 1. Financial Statements