What changed in this filing

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Item 1. Financial Statements

2021-08-02 compared with 2021-05-03 · 244 added, 142 removed, 553 unchanged (41% of the section changed)

34 unchanged sentences

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

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

163.3 and 162.5 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

Additional paid-in capital 1,245.8 1,207.2

Accumulated other comprehensive income 0.3 0.7

Accumulated other comprehensive income (loss) ( 0.1 ) 0.7

Accumulated deficit ( 195.7 ) ( 352.1 )

5 unchanged sentences

(unaudited, in millions, except per share amounts)

Three Months Ended

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Product $ 298.3 $ 211.9 $ 539.0 $ 404.2

16 unchanged sentences

OPERATING INCOME 147.5 118.8 269.1 235.5

INTEREST INCOME (EXPENSE)—NET ( 0.2 ) 9.2

OTHER EXPENSE—NET ( 2.0 ) ( 8.0 )

INTEREST INCOME 1.2 4.0 2.3 13.2

INTEREST EXPENSE ( 4.5 ) — ( 5.8 ) —

OTHER INCOME (EXPENSE)—NET 0.8 0.9 ( 1.2 ) ( 7.1 )

INCOME BEFORE INCOME TAXES 145.0 123.7 264.4 241.6

11 unchanged sentences

(unaudited, in millions)

Three Months Ended

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Net income $ 137.5 $ 113.8 $ 244.7 $ 218.4

2 unchanged sentences

tax benefit related to change in unrealized gains (losses) on investments — 1.7 ( 0.2 ) 0.7

Other comprehensive loss ( 0.4 ) ( 4.2 )

Other comprehensive income (loss) ( 0.4 ) 5.6 ( 0.8 ) 1.4

Comprehensive income $ 137.1 $ 119.4 $ 243.9 $ 219.8

3 unchanged sentences

(unaudited, in millions)

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

Common Stock Additional

3 unchanged sentences

Shares Amount

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

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

Issuance of common stock in connection with equity incentive plans - net of tax withholding 0.5 — ( 28.7 ) — — ( 28.7 )

Repurchase and retirement of common stock ( 0.5 ) ( 3.3 ) ( 88.3 ) ( 91.6 )

Stock-based compensation expense — — 52.6 — — 52.6

1 unchanged sentence

Net income — — — — 137.5 137.5

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

Three Months Ended March 31, 2020

BALANCE—June 30, 2021 163.3 $ 0.2 $ 1,245.8 $ ( 0.1 ) $ ( 195.7 ) $ 1,050.2

Three Months Ended June 30, 2020

Common Stock Additional

3 unchanged sentences

Shares Amount

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

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

Issuance of common stock in connection with equity incentive plans - net of tax withholding 0.6 — ( 12.9 ) — — ( 12.9 )

3 unchanged sentences

Net income — — — — 113.8 113.8

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

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

See notes to condensed consolidated financial statements.

Six Months Ended June 30, 2021

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 1.3 — ( 60.2 ) — — ( 60.2 )

Repurchase and retirement of common stock ( 0.5 ) — ( 3.3 ) — ( 88.3 ) ( 91.6 )

Stock-based compensation expense — — 102.1 — — 102.1

Net unrealized gain on investments - net of tax — — — ( 0.8 ) — ( 0.8 )

Net income — — — — 244.7 244.7

BALANCE—June 30, 2021 163.3 $ 0.2 $ 1,245.8 $ ( 0.1 ) $ ( 195.7 ) $ 1,050.2

Six Months Ended June 30, 2020

Common Stock Additional

Capital Accumulated

Comprehensive Income (Loss) Accumulated Deficit Total

Stockholders’

Shares Amount

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

Issuance of common stock in connection with equity incentive plans - net of tax withholding 1.5 — ( 43.2 ) — — ( 43.2 )

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

Stock-based compensation expense — — 93.7 — — 93.7

Net unrealized gain on investments - net of tax — — — 1.4 — 1.4

Net income — — — — 218.4 218.4

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

FORTINET, INC.

1 unchanged sentence

(unaudited, in millions)

Three Months Ended

2021 March 31,

Six Months Ended

2021 June 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

29 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES:

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

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

Payments for debt issuance costs ( 2.4 ) —

8 unchanged sentences

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for income taxes—net $ 48.3 $ 18.3

Operating lease liabilities arising from obtaining right-of-use assets $ 21.1 $ 5.9

2 unchanged sentences

Liability for purchase of property and equipment $ 33.5 $ 24.9

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

The results of operations for the three and six months ended June 30, 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.

1 unchanged sentence

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 months ended March 31, 2021.

Except for the update to the range of useful lives for property and equipment discussed in Note 6 and our policy election for how we account for our share of financial results for a specific investment in privately held companies on a three-month lag basis as discussed in Note 7, there have been no material changes to our significant accounting policies as of and for the three and six months ended June 30, 2021.

Recently Adopted Accounting Standards

6 unchanged sentences

IMMATERIAL CORRECTION OF PRIOR PERIOD FINANCIAL STATEMENTS

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.

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 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.

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The corrections to our condensed consolidated statement of income for the three and six months ended June 30, 2020 were as follows (in millions, except per share amounts):

Three Months Ended June 30, 2020

As Previously Reported Corrections As Corrected

11 unchanged sentences

Diluted $ 0.68 $ 0.01 $ 0.69

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

Six Months Ended June 30, 2020

As Previously Reported Corrections As Corrected

Service $ 788.2 $ 2.9 $ 791.1

Total revenue $ 1,192.4 $ 2.9 $ 1,195.3

GROSS PROFIT:

Service $ 685.1 $ 2.9 $ 688.0

Total gross profit $ 928.6 $ 2.9 $ 931.5

OPERATING INCOME $ 232.6 $ 2.9 $ 235.5

INCOME BEFORE INCOME TAXES $ 238.7 $ 2.9 $ 241.6

PROVISION FOR INCOME TAXES $ 22.6 $ 0.6 $ 23.2

NET INCOME $ 216.1 $ 2.3 $ 218.4

Net income per share (Note 10):

Basic $ 1.30 $ 0.01 $ 1.31

Diluted $ 1.27 $ 0.02 $ 1.29

The corrections to our condensed consolidated statement of cash flows for the six months ended June 30, 2020 were as follows (in millions):

Six Months Ended June 30, 2020

As Previously Reported Corrections As Corrected

CASH FLOWS FROM OPERATING ACTIVITIES:

3 unchanged sentences

Deferred revenue 186.9 ( 2.9 ) 184.0

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

4 unchanged sentences

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

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Product $ 298.3 $ 211.9 $ 539.0 $ 404.2

4 unchanged sentences

Deferred Revenue

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.

During the three months ended June 30, 2021 and June 30, 2020, we recognized $ 371.2 million and $ 302.0 million in service revenue that was included in the deferred revenue balance as of December 31, 2020 and December 31, 2019, respectively.

During the six months ended June 30, 2021 and June 30, 2020, we recognized $ 789.1 million and $ 645.3 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 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.

As of June 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 2.91 billion, which was substantially comprised of deferred security subscription and technical support services revenue.

We expect to recognize approximately $ 1.53 billion as revenue over the next 12 months and the remainder thereafter.

7 unchanged sentences

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

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

The allowance for credit losses was $ 2.7 million and $ 2.5 million as of June 30, 2021 and December 31, 2020, respectively.

Provisions, write-offs and recoveries were not material during the six months ended June 30, 2021 and 2020.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred Contract Costs

Amortization of deferred contract costs during the three months ended June 30, 2021 and 2020 were $ 42.1 million and $ 33.2 million, respectively.

Amortization of deferred contract costs during the six months ended June 30, 2021 and 2020 were $ 81.8 million and $ 64.5 million, respectively.

FINANCIAL INSTRUMENTS AND FAIR VALUE

The following tables summarize our investments (in millions):

March 31, 2021

June 30, 2021

Cost Unrealized

Gains Unrealized

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

Commercial paper $ 658.4 $ 0.1 $ ( 0.3 ) $ 658.2

Corporate debt securities 485.6 0.3 ( 0.2 ) 485.7

Certificates of deposit and term deposits (1)

5 unchanged sentences

Gains Unrealized

Corporate debt securities $ 410.5 $ 1.0 $ — $ 411.5

Commercial paper $ 185.4 $ — $ — $ 185.4

Corporate debt securities 410.5 1.0 — 411.5

Certificates of deposit and term deposits (1)

4 unchanged sentences

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):

March 31, 2021

June 30, 2021

Less Than 12 Months 12 Months or Greater Total

2 unchanged sentences

Value Unrealized

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

Commercial paper $ 139.0 $ ( 0.3 ) $ — $ — $ 139.0 $ ( 0.3 )

Corporate debt securities 225.8 ( 0.2 ) — — 225.8 ( 0.2 )

Certificates of deposit and term deposits 19.4 — 5.5 — 24.9 —

government securities 37.3 — — — 37.3 —

Total available-for-sale securities $ 421.5 $ ( 0.5 ) $ 5.5 $ — $ 427.0 $ ( 0.5 )

4 unchanged sentences

Value Unrealized

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

Commercial paper $ 61.5 $ — $ — $ — $ 61.5 $ —

government securities 38.1 — — — 38.1 —

Corporate debt securities 111.3 — — — 111.3 —

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

government securities 38.1 — — — 38.1 —

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

7 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 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.

Accrued interest receivable of $ 3.2 million as of June 30, 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.

16 unchanged sentences

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

June 30, 2021 December 31, 2020

Assets Significant

4 unchanged sentences

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

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

Commercial paper $ 658.2 $ — $ 658.2 $ — $ 197.2 $ — $ 197.2 $ —

government securities 156.2 156.2 — — 184.9 184.9 — —

Corporate debt securities 485.7 — 485.7 — 413.7 — 413.7 —

Certificates of deposit and term deposits 187.8 — 187.8 — 112.0 — 112.0 —

government securities 148.8 148.8 — — 184.9 184.9 — —

Money market funds 80.6 80.6 — — 152.7 152.7 — —

4 unchanged sentences

Total $ 1,561.1 $ 1,060.5

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.

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2021 and year ended December 31, 2020.

Inventory consisted of the following (in millions):

9 unchanged sentences

Land $ 106.8 $ 93.3

Building and building improvements 153.8 150.6

Buildings and improvements 345.1 150.6

Computer equipment and software 155.3 137.2

6 unchanged sentences

Property and equipment—net $ 506.5 $ 448.0

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

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

We completed construction of a second building at our headquarters campus and it has been placed in service as of June 30, 2021.

In conjunction with the completion of the building, we evaluated the range of useful lives of our property and equipment.

The range of useful lives for buildings and improvements is now two to 40 years, an increase from two to 30 years, and for furniture and fixtures the range is now three to eight years , an increase from three to five years .

Depreciation expense was $ 15.3 million and $ 14.1 million during the three months ended June 30, 2021 and 2020, respectively.

Depreciation expense was $ 29.3 million and $ 27.7 million during the six months ended June 30, 2021 and 2020, respectively.

INVESTMENTS IN PRIVATELY HELD COMPANIES

1 unchanged sentence

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.

(“Linksys”) for a 32.6 % ownership interest.

Linksys provides router connectivity solutions to the consumer and small business markets.

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.

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

We record our share of Linksys’ financial results on a three-month lag basis.

Our share of the earnings of Linksys’ financial results, which are accounted for under the three-month lag basis, were not material and therefore our investment in Linksys was not adjusted for the equity method impacts during the three months ended June 30, 2021.

As of June 30, 2021, the investment was included in other assets on our condensed consolidated balance sheet.

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.

Our other investments in the equity securities of privately held companies without readily determinable fair values totaled $ 1.0 million as of June 30, 2021 and December 31, 2020.

BUSINESS COMBINATION

4 unchanged sentences

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.

Goodwill recorded in connection with this acquisition

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

2 unchanged sentences

Addition due to business combination 6.2

Balance—March 31, 2021 $ 99.2

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

Balance—June 30, 2021 $ 99.2

There were no impairments to goodwill during the six months ended June 30, 2021 or during prior periods.

Other Intangible Assets—Net

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

March 31, 2021

June 30, 2021

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

11 unchanged sentences

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

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

Amortization expense was $ 3.5 million and $ 3.7 million during the three months ended June 30, 2021 and 2020, respectively.

Amortization expense was $ 6.9 million and $ 7.7 million during the six months ended June 30, 2021 and 2020, respectively.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

2021 (the remainder of 2021) $ 6.9

NET INCOME PER SHARE

3 unchanged sentences

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

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Net income $ 137.5 $ 113.8 $ 244.7 $ 218.4

4 unchanged sentences

Effect of potentially dilutive securities:

RSUs 2.2 2.6 2.1 2.5

Stock options 1.6 1.2 1.4 1.2

3 unchanged sentences

Diluted $ 0.82 $ 0.69 $ 1.47 $ 1.29

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

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

RSUs 0.1 0.1 0.2 0.3

Stock options 0.5 0.6 0.4 0.5

1 unchanged sentence

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 six years .

Our leases have remaining terms that range from less than one year to approximately six 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.

2 unchanged sentences

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

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Operating lease expense $ 6.2 $ 4.4 $ 12.1 $ 8.7

Variable lease expense (1)

0.7 0.4 1.5 1.0

Short-term lease expense 0.9 1.0 1.7 1.9

Total lease expense $ 7.8 $ 5.8 $ 15.3 $ 11.6

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

(1) Variable lease expense for the three and six months ended June 30, 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 March 31,

Classification June 30,

2021 December 31,

5 unchanged sentences

Weighted average discount rate - operating leases 2.5 % 3.2 %

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Three Months Ended

2021 March 31,

Six Months Ended

2021 June 30,

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows used for operating leases $ 12.4 $ 8.7

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

Maturities of operating lease liabilities as of June 30, 2021 were as follows (in millions):

Year Ending December 31, Amount

3 unchanged sentences

Less imputed interest ( 2.5 )

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 .

As of June 30, 2021, we had additional minimum lease payments of $ 2.8 million relating to operating leases that had been signed but had not yet commenced.

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

3 unchanged sentences

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.

As of June 30, 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

Maturity Coupon Rate Effective Interest Rate June 30, 2021

2026 Senior Notes March 2026 1.0 % 1.3 % $ 500.0

3 unchanged sentences

Total long-term debt $ 987.5

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.

As of June 30, 2021 we accrued interest payable of $ 5.2 million, and there are no financial covenants with which we must comply.

During the three and six months ended June 30, 2021 we recorded $ 4.5 million and $ 5.8 million of total interest

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

expense in relation to these Senior Notes, respectively.

No interest costs were capitalized for the three and six months ended June 30, 2021, as the costs that qualified for capitalization were not material.

The total estimated fair value of the outstanding Senior Notes was approximately $ 999.9 million, including accrued and unpaid interest, as of June 30, 2021.

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

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

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.

During the three months ended June 30, 2021 and 2020, we recorded $ 1.2 million and $ 1.1 million gain on IP matter in our condensed consolidated statements of income, respectively.

During the six months ended June 30, 2021 and 2020, we recorded $ 2.3 million and $ 37.9 million gain on IP matter in our condensed consolidated statements of income, respectively.

We recorded $ 7.5 million and $ 9.8 million in accrued liabilities and other liabilities in our condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020, respectively.

COMMITMENTS AND CONTINGENCIES

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

The following table summarizes our inventory purchase commitments as of June 30, 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 March 31, 2021, we had $ 298.8 million of open purchase orders with our independent contract manufacturers that may not be cancelable.

As of June 30, 2021, we had $ 628.7 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 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.

As of June 30, 2021, we had $ 67.9 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.

For lawsuits where we are the defendant, we are in the process of defending these litigation matters, and while there can be no assurances and the outcome of certain of these matters is currently not determinable and not predictable, we currently are unaware of any existing claims or proceedings that we believe are likely to have a material adverse effect on our financial position.

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.

There are many uncertainties associated

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 IP litigation may require us to make royalty payments, which could adversely affect our gross margins in future periods.

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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.

Litigation loss contingency accruals were not material as of June 30, 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

STOCKHOLDERS’ EQUITY

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

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

As of June 30, 2021, there were a total of 11.5 million shares of common stock available for grant under the Amended Plan.

Restricted Stock Units

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Vested ( 1.4 ) 80.67

Balance—March 31, 2021 4.6 $ 107.37

Balance—June 30, 2021

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

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.

As of June 30, 2021, total compensation expense related to unvested RSUs granted to employees and non-employees under the Amended Plan, but not yet recognized, was $ 416.5 million, with a weighted-average remaining vesting period of 2.8 years.

RSUs settle into shares of common stock upon vesting.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Three Months Ended

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Shares withheld for taxes 0.2 0.2 0.5 0.5

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

Three Months Ended

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Expected term in years 4.4 4.4 4.4 4.4

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Dividend rate — % — % — % — %

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the stock option activity and related information for the periods presented below (in millions, except exercise prices and contractual life):

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Exercised ( 0.3 ) 52.40

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.

Balance—June 30, 2021 2.9 $ 87.60

Options vested and expected to vest—June 30, 2021 2.9 $ 87.60 4.4 $ 437.0

Options exercisable—June 30, 2021 1.6 $ 54.39 3.2 $ 289.9

The aggregate intrinsic value represents the difference between the exercise price of stock options and the quoted market price of our common stock on June 30, 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 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.

As of June 30, 2021, total compensation expense related to unvested stock options granted to employees but not yet recognized was $ 50.3 million, with a weighted-average remaining vesting period of 3.0 years.

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

Three Months Ended

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Weighted-average fair value per share granted $ 61.40 $ 46.92 $ 56.73 $ 35.51

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Fair value of options vested $ 3.7 $ 2.4 $ 10.7 $ 8.4

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation Expense

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

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Cost of product revenue $ 0.5 $ 0.4 $ 0.9 $ 0.8

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Total stock-based compensation expense $ 53.5 $ 49.6 $ 103.5 $ 94.9

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

RSUs $ 48.5 $ 45.9 $ 94.3 $ 88.1

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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

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Income tax benefit associated with stock-based compensation $ 11.8 $ 10.9 $ 22.8 $ 20.9

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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.

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.

During the three and six months ended June 30, 2021, we repurchased 0.5 million shares of common stock under the Repurchase Program in open-market transactions at a weighted-average price of $ 201.38 per share per share, for an aggregate purchase price of $ 91.6 million.

As of June 30, 2021, $ 921.1 million remained available for future share repurchases under the Repurchase Program.

Our effective tax rate was 5 % for the three months ended June 30, 2021, compared to an effective tax rate of 8 % for the same period last year.

Our effective tax rate was 7 % for the six months ended June 30, 2021, compared to an effective tax rate of 10 % 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, 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.

The tax rates for the three months ended June 30, 2021 and 2020 were composed of U.S.

federal and state taxes, withholding taxes and foreign taxes that amounted to

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ 38.0 million and $ 33.6 million, respectively.

The tax rate for the three months ended June 30, 2021 was impacted by a tax benefit of $ 7.1 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $ 18.2 million and release of reserves of $ 5.2 million on uncertain tax positions and the interest due to the expiration of the statute of limitations.

The tax rate for the three months ended June 30, 2020 was impacted by a tax benefit of $ 5.0 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $ 10.0 million and release of reserves of $ 8.7 million on uncertain tax positions and the interest due to the expiration of the statute of limitations.

The tax rates for the six months ended June 30, 2021 and 2020 were composed of U.S.

federal and state taxes, withholding taxes and foreign taxes that amounted to $ 75.4 million and $ 66.7 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.

The tax rate for the six months ended June 30, 2021 was impacted by a tax benefit of $ 15.2 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $ 35.3 million and release of reserves of $ 5.2 million on uncertain tax positions and the interest due to the expiration of the statute of limitations.

The tax rate for the six months ended June 30, 2020 was impacted by a tax benefit of $ 9.6 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $ 25.2 million and release of reserves of $ 8.7 million on uncertain tax positions and the interest due to the expiration of the statute of limitations.

As of June 30, 2021 and December 31, 2020, unrecognized tax benefits were $ 79.9 million and $ 77.3 million, respectively.

If recognized, $ 72.7 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 March 31, 2021 and December 31, 2020, accrued interest and penalties were $ 16.0 million and $ 14.5 million, respectively.

As of June 30, 2021 and December 31, 2020, accrued interest and penalties were $ 15.4 million and $ 14.5 million, respectively.

It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $ 12.1 million in the next 12 months, due to the lapse of the statute of limitations.

This decrease, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits.

This decrease, if recognized, would favorably impact our effective tax rate, and would be recognized as additional tax benefits.

We file income tax returns in the U.S.

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

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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.

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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 March 31, 2021 and 2020 were $ 2.7 million and $ 2.2 million, respectively.

Our matching contributions to our 401(k) Plan and the RRSP for the three months ended June 30, 2021 and 2020 were $ 2.7 million and $ 2.2 million, respectively.

Our matching contributions to our 401(k) Plan and the RRSP for the six months ended June 30, 2021 and 2020 were $ 5.4 million and $ 4.4 million, respectively.

SEGMENT INFORMATION

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

Three Months Ended

Revenue March 31,

2021 March 31,

Three Months Ended Six Months Ended

Revenue June 30,

2021 June 30,

2020 June 30,

2021 June 30,

United States $ 251.7 $ 201.2 $ 464.2 $ 383.1

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

Three Months Ended

2021 March 31,

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Exclusive Networks Group (“Exclusive”)

31 % 31 % 32 % 31 %

Ingram Micro, Inc.

(“Ingram Micro”) 12 % * 12 % *

* Represents less than 10%

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

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Ingram Micro 13 % 11 %

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SUBSEQUENT EVENTS

Investments in Linksys

As discussed in Note 7, on March 19, 2021 we invested $ 75.0 million in Linksys.

On August 2, 2021, we entered into a share purchase agreement with Linksys (the “Share Purchase Agreement”), whereby we would invest an additional $ 85.0 million in Linksys (the “Second Tranche Investment”), subject to certain closing conditions.

Following the closing of the Second Tranche Investment, we are expected to own 50.8 % of the issued and outstanding capital stock of Linksys.

We are evaluating the future accounting impact of this additional investment on our condensed consolidated financial statements.

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