What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-11-08 compared with 2021-08-02 · 397 added, 273 removed, 524 unchanged (56% of the section changed)

3 unchanged sentences

(unaudited, in millions, except per share amounts)

September 30,

2021 December 31,

2 unchanged sentences

Short-term investments 1,228.1 775.5

Marketable equity securities 40.8 —

Accounts receivable—net 604.9 720.0

10 unchanged sentences

TOTAL ASSETS $ 5,970.6 $ 4,044.5

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES AND EQUITY

CURRENT LIABILITIES:

2 unchanged sentences

Accrued payroll and compensation 174.2 145.9

Current portion of long-term debt 17.6 —

Deferred revenue 1,616.1 1,392.8

6 unchanged sentences

COMMITMENTS AND CONTINGENCIES (Note 13)

STOCKHOLDERS’ EQUITY:

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

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

163.4 and 162.5 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

Additional paid-in capital 1,257.7 1,207.2

1 unchanged sentence

Accumulated deficit ( 138.6 ) ( 352.1 )

Total stockholders’ equity 1,050.2 856.0

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 5,558.9 $ 4,044.5

Total Fortinet, Inc.

stockholders’ equity 1,118.1 856.0

Non-controlling interests 17.5 —

Total equity 1,135.6 856.0

TOTAL LIABILITIES AND EQUITY $ 5,970.6 $ 4,044.5

See notes to condensed consolidated financial statements.

2 unchanged sentences

(unaudited, in millions, except per share amounts)

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Product $ 337.1 $ 223.8 $ 876.1 $ 628.0

18 unchanged sentences

INTEREST EXPENSE ( 4.6 ) — ( 10.4 ) —

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

INCOME BEFORE INCOME TAXES 145.0 123.7 264.4 241.6

PROVISION FOR INCOME TAXES 7.5 9.9 19.7 23.2

NET INCOME $ 137.5 $ 113.8 $ 244.7 $ 218.4

Net income per share (Note 10):

OTHER EXPENSE—NET ( 6.3 ) ( 1.0 ) ( 7.5 ) ( 8.1 )

INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENT 156.7 128.4 421.1 370.0

PROVISION FOR (BENEFIT FROM) INCOME TAXES ( 9.3 ) 5.0 10.4 28.2

LOSS FROM EQUITY METHOD INVESTMENT

( 2.8 ) — ( 2.8 ) —

NET INCOME INCLUDING NON-CONTROLLING INTERESTS 163.2 123.4 407.9 341.8

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS, NET OF TAX

NET INCOME ATTRIBUTABLE TO FORTINET, INC.

$ 163.1 $ 123.4 $ 407.8 $ 341.8

Net income per share attributable to Fortinet, Inc.

common stockholders (Note 9):

Basic $ 1.00 $ 0.76 $ 2.50 $ 2.07

Diluted $ 0.97 $ 0.75 $ 2.44 $ 2.03

Weighted-average shares outstanding:

Weighted-average shares used to compute net income per share attributable to Fortinet, Inc.

common stockholders

Basic 163.5 162.1 163.3 164.8

4 unchanged sentences

(unaudited, in millions)

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

Other comprehensive loss:

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Net income including non-controlling interests $ 163.2 $ 123.4 $ 407.9 $ 341.8

Other comprehensive income (loss):

Change in foreign currency translation ( 1.6 ) — ( 1.6 ) —

Change in unrealized gains (losses) on investments — ( 1.4 ) ( 1.0 ) 0.7

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

tax provision (benefit) related to items of other comprehensive income or loss ( 0.1 ) ( 0.3 ) ( 0.3 ) 0.4

Other comprehensive income (loss) ( 1.5 ) ( 1.1 ) ( 2.3 ) 0.3

Comprehensive income $ 137.1 $ 119.4 $ 243.9 $ 219.8

Comprehensive income including non-controlling interests 161.7 122.3 405.6 342.1

comprehensive loss attributable to non-controlling interests ( 0.3 ) — ( 0.3 ) —

Comprehensive income attributable to Fortinet, Inc.

$ 162.0 $ 122.3 $ 405.9 $ 342.1

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in millions)

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Common Stock Additional

Capital Accumulated

Comprehensive Income Accumulated Deficit Total

Stockholders’

Comprehensive Income (Loss) Accumulated Deficit Non-Controlling Interests Total

Shares Amount

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

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

Issuance of common stock in connection with equity incentive plans - net of tax withholding 0.4 — ( 38.0 ) — — — ( 38.0 )

1 unchanged sentence

Stock-based compensation expense — — 52.7 — — — 52.7

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

Recognition of non-controlling interests upon business combination — — — — — 17.8 17.8

Net unrealized gain on investments - net of tax — — — 0.1 — — 0.1

Foreign currency translation adjustment — — — ( 1.2 ) — ( 0.4 ) ( 1.6 )

Net income — — — — 163.1 0.1 163.2

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

Three Months Ended June 30, 2020

BALANCE—September 30, 2021 163.4 $ 0.2 $ 1,257.7 $ ( 1.2 ) $ ( 138.6 ) $ 17.5 $ 1,135.6

Three Months Ended September 30, 2020

Common Stock Additional

Capital Accumulated

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

Stockholders’

Comprehensive Income (Loss) Accumulated Deficit Non-Controlling Interests Total

Shares Amount

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

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

Repurchase and retirement of common stock ( 1.4 ) — ( 10.1 ) — ( 136.0 ) ( 146.1 )

Stock-based compensation expense — — 49.3 — — — 49.3

1 unchanged sentence

Net income — — — — 123.4 — 123.4

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

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

See notes to condensed consolidated financial statements.

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Common Stock Additional

Capital Accumulated

Comprehensive Income Retained Earnings (Accumulated Deficit) Total

Stockholders’

Comprehensive Income (Loss) Accumulated Deficit Non-Controlling Interests Total

Shares Amount

3 unchanged sentences

Stock-based compensation expense — — 154.8 — — — 154.8

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

Recognition of non-controlling interests upon business combination — — — — — 17.8 17.8

Net unrealized loss on investments - net of tax — — — ( 0.7 ) — — ( 0.7 )

Foreign currency translation adjustment — — — ( 1.2 ) — ( 0.4 ) ( 1.6 )

Net income — — — — 407.8 0.1 407.9

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

Six Months Ended June 30, 2020

BALANCE—September 30, 2021 163.4 $ 0.2 $ 1,257.7 $ ( 1.2 ) $ ( 138.6 ) $ 17.5 $ 1,135.6

Nine Months Ended September 30, 2020

Common Stock Additional

Capital Accumulated

Comprehensive Income (Loss) Accumulated Deficit Total

Stockholders’

Comprehensive Income Retained Earnings (Accumulated Deficit) Non-Controlling Interests Total

Shares Amount

5 unchanged sentences

Net income — — — — 341.8 — 341.8

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

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

See notes to condensed consolidated financial statements.

FORTINET, INC.

1 unchanged sentence

(unaudited, in millions)

Six Months Ended

2021 June 30,

Nine Months Ended

September 30,

2021 September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 244.7 $ 218.4

Net income including non-controlling interests $ 407.9 $ 341.8

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

2 unchanged sentences

Depreciation and amortization 59.1 52.1

Amortization of investment premiums (discounts) 2.9 ( 0.4 )

Amortization of investment premiums 4.8 0.2

Loss from equity method investment 2.8 —

Other 4.4 5.8

Changes in operating assets and liabilities:

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

Accounts receivable—net 130.6 ( 3.1 )

16 unchanged sentences

Purchase of investment in privately held company ( 160.0 ) —

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

Other — ( 0.4 )

Net cash provided by (used in) investing activities ( 751.7 ) 216.8

Payments made in connection with business combinations, net of cash acquired ( 73.4 ) ( 9.2 )

Purchases of marketable equity securities ( 42.5 ) ( 0.4 )

Net cash used in investing activities ( 1,059.2 ) ( 7.8 )

CASH FLOWS FROM FINANCING ACTIVITIES:

1 unchanged sentence

Payments for debt issuance costs ( 2.4 ) —

Payments of debt assumed in connection with business combination ( 2.2 ) ( 4.1 )

Repurchase and retirement of common stock ( 170.0 ) ( 1,046.0 )

3 unchanged sentences

Net cash provided by (used in) financing activities 716.4 ( 1,119.6 )

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 790.3 ( 340.2 )

7 unchanged sentences

Liability for purchase of property and equipment $ 23.8 $ 26.1

Liability incurred for repurchase of common stock $ 30.4 $ —

See notes to condensed consolidated financial statements.

3 unchanged sentences

Basis of Presentation and Preparation —The unaudited condensed consolidated financial statements of Fortinet, Inc.

and its wholly owned subsidiaries (collectively, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q pursuant to the rules and regulations of the U.S.

and its subsidiaries (collectively, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q pursuant to the rules and regulations of the U.S.

Securities and Exchange Commission (the “SEC”).

1 unchanged sentence

In the opinion of management, all adjustments, which includes normal recurring adjustments, considered necessary for a fair presentation have been included.

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

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 results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected 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.

The condensed consolidated financial statements include the accounts of Fortinet, Inc.

and its subsidiaries.

We consolidate all legal entities in which we have an absolute controlling financial interest.

All intercompany balances and transactions have been eliminated in consolidation.

Investments in common stock or in-substance common stock of entities that provide us with the ability to exercise significant influence, but not an absolute controlling financial interest, over the investee are accounted for under the equity method of accounting.

Investments accounted for under the equity method are initially recorded at cost.

Subsequently, we recognize our proportionate share of the entities’ net income or loss and the amortization of any basis differences through the condensed consolidated statements of income and as an adjustment to the investment balance.

We record our share of the results of equity method investments on a three-month lag basis as income or loss from equity method investments, net of tax in the condensed consolidated statements of income.

We evaluate our equity method investments at the end of each reporting period to determine whether events or changes in business circumstances indicate that the carrying value of the investment may not be recoverable.

As of September 30, 2021, our investment in Linksys Holdings, Inc.

(“Linksys”) was our only equity method investment.

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.

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.

There have been no other material changes to our significant accounting policies as of and for the three and nine months ended September 30, 2021.

Recently Adopted Accounting Standards

5 unchanged sentences

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 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.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Service $ 403.6 $ 2.1 $ 405.7

Total revenue $ 615.5 $ 2.1 $ 617.6

GROSS PROFIT:

Service $ 352.9 $ 2.1 $ 355.0

Total gross profit $ 480.4 $ 2.1 $ 482.5

OPERATING INCOME $ 116.7 $ 2.1 $ 118.8

INCOME BEFORE INCOME TAXES $ 121.6 $ 2.1 $ 123.7

PROVISION FOR INCOME TAXES $ 9.5 $ 0.4 $ 9.9

NET INCOME $ 112.1 $ 1.7 $ 113.8

Net income per share (Note 10):

Basic $ 0.69 $ 0.01 $ 0.70

Diluted $ 0.68 $ 0.01 $ 0.69

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:

Net income $ 216.1 $ 2.3 $ 218.4

Changes in operating assets and liabilities:

Deferred tax assets 13.0 0.6 13.6

Deferred revenue 186.9 ( 2.9 ) 184.0

Recent Accounting Standards Not Yet Effective

Business Combinations

In October 2021, the FASB issued ASU 2021-08—Business Combinations (“Topic 805”):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.

The amendments in ASU 2021-08 require that an entity

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.

recognizes and measures contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers (“Topic 606”).

At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts.

The amendments improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination.

ASU 2021-08 will be effective for us beginning on January 1, 2023.

We are currently evaluating the impact of ASU 2021-08 on our condensed consolidated financial statements.

REVENUE RECOGNITION

5 unchanged sentences

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

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Product $ 337.1 $ 223.8 $ 876.1 $ 628.0

4 unchanged sentences

Deferred Revenue

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.

During the three months ended September 30, 2021 and September 30, 2020, we recognized $ 309.2 million and $ 263.1 million in service revenue that was included in the deferred revenue balance as of December 31, 2020 and December 31, 2019, respectively.

During the nine months ended September 30, 2021 and September 30, 2020, we recognized $ 1.10 billion and $ 921.7 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 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.

As of September 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 3.11 billion, which was substantially comprised of deferred security subscription and technical support services revenue.

We expect to recognize approximately $ 1.62 billion as revenue over the next 12 months and the remainder thereafter.

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

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)

The allowance for credit losses was $ 2.6 million and $ 2.5 million as of September 30, 2021 and December 31, 2020, respectively.

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

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.

Amortization of deferred contract costs during the three months ended September 30, 2021 and 2020 were $ 45.1 million and $ 35.3 million, respectively.

Amortization of deferred contract costs during the nine months ended September 30, 2021 and 2020 were $ 126.9 million and $ 99.8 million, respectively.

FINANCIAL INSTRUMENTS AND FAIR VALUE

The following tables summarize our investments (in millions):

June 30, 2021

The following tables summarize our available-for-sale securities (in millions):

September 30, 2021

Cost Unrealized

5 unchanged sentences

government securities 174.7 — ( 0.1 ) 174.6

Municipal Bonds 5.5 — — 5.5

Total available-for-sale securities $ 1,526.3 $ 0.3 $ ( 0.3 ) $ 1,526.3

9 unchanged sentences

(1) The majority of our certificates of deposit and term deposits are foreign deposits.

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):

June 30, 2021

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

September 30, 2021

Less Than 12 Months 12 Months or Greater Total

6 unchanged sentences

government securities 80.6 ( 0.1 ) — — 80.6 ( 0.1 )

Municipal Bonds 5.4 — — — 5.4 —

Total available-for-sale securities $ 499.1 $ ( 0.3 ) $ — $ — $ 499.1 $ ( 0.3 )

9 unchanged sentences

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,

2 unchanged sentences

Total $ 1,526.3 $ 893.8

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 $ 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.

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 equity and in comprehensive income.

Accrued interest receivable of $ 2.4 million as of September 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.

Our marketable equity securities were $ 40.8 million as of September 30, 2021.

The changes in fair value of our marketable equity securities are recorded in other expense, net on the condensed consolidated statements of income.

We recognized $ 3.7 million loss and $ 0.1 million loss during the three months ended September 30, 2021 and 2020, respectively, and $ 2.9 million loss and $ 0.3 million gain during the nine months ended September 30, 2021 and 2020, respectively.

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

2 unchanged sentences

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Level 3—Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

The inputs require significant management judgment or estimation.

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

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

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

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

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

2 unchanged sentences

Investments are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value of Financial Instruments

1 unchanged sentence

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Assets Significant

9 unchanged sentences

Money market funds 32.3 32.3 — — 152.7 152.7 — —

Municipal Bonds 5.5 — 5.5 — — — — —

Marketable equity securities 40.8 40.8 — — — — — —

Total $ 1,603.4 $ 237.7 $ 1,365.7 $ — $ 1,060.5 $ 337.6 $ 722.9 $ —

Cash equivalents $ 36.3 $ 166.7

Marketable equity securities 40.8 —

Short-term investments 1,228.1 775.5

1 unchanged sentence

Total $ 1,603.4 $ 1,060.5

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.

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

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inventory consisted of the following (in millions):

September 30,

2021 December 31,

Raw materials $ 35.6 $ 13.8

Work in process 7.9 —

Finished goods 134.4 126.0

Inventory $ 177.9 $ 139.8

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PROPERTY AND EQUIPMENT—Net

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

September 30,

2021 December 31,

9 unchanged sentences

Property and equipment—net $ 556.6 $ 448.0

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.

In September 2021, we purchased certain real estate in Burnaby, Canada for $ 37.7 million.

The purchase was accounted for under the asset acquisition method.

The cost of the assets acquired was allocated to land and buildings based on their relative fair values.

The amounts allocated to land and buildings were $ 16.6 million and $ 21.1 million, respectively.

Depreciation expense was $ 18.1 million and $ 13.9 million during the three months ended September 30, 2021 and 2020, respectively.

Depreciation expense was $ 47.4 million and $ 41.6 million during the nine months ended September 30, 2021 and 2020, respectively.

INVESTMENTS IN PRIVATELY HELD COMPANIES

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”) for a 32.6 % ownership interest.

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

On September 24, 2021, we invested an additional $ 85.0 million in cash for shares of Series A Preferred Stock of Linksys, and as of September 30, 2021, we held 50.8 % of the outstanding common stock (on an as-converted basis) of Linksys.

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

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.

Our share of the earnings of Linksys’ financial results, which are accounted for under the three-month lag basis, was $ 2.8 million for the three and nine months ended September 30, 2021, and has been recorded in loss from equity method investment on the condensed consolidated statements of income.

As of September 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 June 30, 2021 and December 31, 2020.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other investments

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

BUSINESS COMBINATION

AlaxalA Networks Corporation

On August 31, 2021, we closed an acquisition of 75 % of equity interests in AlaxalA Networks Corporation (“AlaxalA”), a privately held network hardware equipment company in Japan, for $ 64.2 million in cash.

We acquired the equity interest in AlaxalA to help address the increasing need for secure switches integrated with FortiGate Firewalls and Security Fabric functionality, and, over time, to innovate and rebrand certain of AlaxalA’s switches to offer a broader suite of secure switches globally.

Under the acquisition method of accounting in accordance with ASC 805, the total preliminary purchase price was allocated to AlaxalA’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 following table provides the assets acquired and liabilities assumed as of the date of acquisition:

(in millions)

Estimated Fair Value

Accounts receivable—net 15.6

Inventory 33.4

Prepaid expenses and other current assets 2.9

Property and equipment 5.3

Goodwill 29.0

Other intangible assets 48.0

Other long-term assets 2.7

TOTAL ASSETS $ 138.0

Accounts payable $ 11.0

Current portion of long-term debt 20.2

Accrued and other current liabilities 14.7

Other long-term liabilities 10.1

TOTAL LIABILITIES $ 56.0

NON-CONTROLLING INTERESTS $ 17.8

Net purchase consideration $ 64.2

The excess of the purchase consideration and the fair value of non-controlling interests over the fair value of net tangible and identified intangible assets acquired was recorded as goodwill, which is not deductible for tax purposes.

Goodwill is primarily attributable to the assembled workforce of AlaxalA and the anticipated operational synergies.

The fair value of the non-controlling interests of $ 17.8 million was estimated based on the non-controlling interests ’ respective share of the AlaxalA business value.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Identified intangible assets acquired and their estimated useful lives (in years) as of August 31, 2021, were as follows (in millions, except years) :

Fair Value Estimated Useful Life (in years)

Developed technology $ 26.6 4

Customer relationships 10.0 10

Trade name 6.4 10

Backlog 5.0 1

Total identified intangible assets:

Developed technology relates to AlaxalA ’ s network equipment.

We valued the developed technology using the relief-from-royalty method under the income approach.

This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology.

The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.

Customer relationships represent the fair value of future projected revenue that will be derived from sales to existing customers of AlaxalA.

Customer contracts and related relationships were valued using the multi-period excess earnings method.

This method reflects the present value of the projected cash flows that are expected to be generated by the customer contracts and relationships less charges representing the contribution of other assets to those cash flows.

The economic useful life was determined based on historical customer turnover rates.

Trade name relates to the “AlaxalA” trade name.

The fair value was determined by applying the relief-from-royalty method under the income approach.

This method is based on the application of a royalty rate to forecasted revenue under the trade name.

The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecast period.

Customer backlog relates to the unfulfilled customer contract orders.

Backlog was valued using the multi-period excess earnings method.

This method reflects the present value of the projected cash flows that are expected to be generated by the execution of the unfulfilled customer contract orders less charges representing the contribution of other assets to those cash flows.

The economic useful life was determined based on the anticipated contract orders ’ execution timeframe.

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 were included in our condensed consolidated financial statements from the date of acquisition which was August 31, 2021.

For the period from September 1, 2021 through September 30, 2021, AlaxalA contributed revenue of $ 15.6 million.

Income before income taxes for the period from September 1, 2021 through September 30, 2021 was not material.

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

The following unaudited pro forma financial information presents the combined results of operations of Fortinet, Inc.

and AlaxalA, as if AlaxalA had been acquired as of the beginning of business on January 1, 2020.

The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business that would have been achieved if the acquisition had taken place at the beginning of business on January 1, 2020, or of the results of our future operations of the combined business.

The following unaudited pro forma financial information for all periods presented includes purchase accounting adjustments for amortization of acquired intangible assets, depreciation of acquired property and equipment, the purchase accounting effect on inventory acquired and related tax effects (in millions):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Pro forma revenue

$ 887.6 $ 684.3 $ 2,460.5 $ 1,939.6

Pro forma net income attributable to Fortinet, Inc.

$ 165.1 $ 122.8 $ 407.3 $ 334.8

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.

(“ShieldX”), a provider of a security platform focusing on protecting multi-cloud data centers from the risk of lateral movement that can lead to attacks such as ransomware, data loss and service disruption, 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

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.

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.

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Balance—December 31, 2020 $ 93.0

Addition due to business combination 6.2

Balance—June 30, 2021 $ 99.2

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

Additions due to business combinations 35.2

Foreign currency translation adjustments ( 0.6 )

Balance—September 30, 2021 $ 127.6

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

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Intangible Assets—Net

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

June 30, 2021

September 30, 2021

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

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Customer relationships 5.7 34.6 23.0 11.6

Trade name 10.0 6.3 0.1 6.2

Backlog 1.0 4.9 $ 0.4 4.5

Total other intangible assets—net $ 135.3 $ 64.3 $ 71.0

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

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)

Amortization expense was $ 4.8 million and $ 2.8 million during the three months ended September 30, 2021 and 2020, respectively.

Amortization expense was $ 11.7 million and $ 10.5 million during the nine months ended September 30, 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) $ 6.8

Thereafter 7.3

NET INCOME PER SHARE

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

Basic net income per share is computed by dividing net income attributable to Fortinet, Inc.

by the weighted-average number of shares of common stock outstanding during the period.

Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“RSUs”) and stock options.

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

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Net income $ 137.5 $ 113.8 $ 244.7 $ 218.4

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Net income including non-controlling interests $ 163.2 $ 123.4 $ 407.9 $ 341.8

Net income attributable to non-controlling interests 0.1 — 0.1 —

Net income attributable to Fortinet, Inc.

$ 163.1 $ 123.4 $ 407.8 $ 341.8

Basic shares:

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Stock options 1.8 1.2 1.6 1.2

Weighted-average shares used to compute diluted net income per share 167.1 165.4 166.7 169.8

Net income per share:

Weighted-average shares used to compute diluted net income per share attributable to Fortinet, Inc.

common stockholders 167.7 165.6 167.1 168.4

Net income per share attributable to Fortinet, Inc.

common stockholders:

Basic $ 1.00 $ 0.76 $ 2.50 $ 2.07

Diluted $ 0.97 $ 0.75 $ 2.44 $ 2.03

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 Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

RSUs 0.1 0.3 0.2 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 Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Operating lease expense $ 6.8 $ 4.8 $ 18.9 $ 13.5

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Total lease expense $ 8.6 $ 6.5 $ 23.9 $ 18.1

(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.

(1) Variable lease expense for the three and nine months ended September 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 June 30,

Classification September 30,

2021 December 31,

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Weighted average discount rate - operating leases 2.2 % 3.2 %

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Six Months Ended

2021 June 30,

Nine Months Ended

September 30,

2021 September 30,

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows used for operating leases $ 18.8 $ 13.8

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

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

Year Ending December 31, Amount

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Less imputed interest ( 2.2 )

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 .

As of September 30, 2021, we had additional minimum lease payments of $ 7.7 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 five years .

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2026 and 2031 Senior Notes

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.

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

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.

As of September 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 June 30, 2021

Maturity Coupon Rate Effective Interest Rate September 30, 2021

2026 Senior Notes March 2026 1.0 % 1.3 % $ 500.0

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Total long-term debt $ 988.0

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.

As of September 30, 2021 we accrued interest payable of $ 0.7 million, and there are no financial covenants with which we must comply.

During the three and nine months ended September 30, 2021 we recorded $ 4.4 million and $ 10.2 million of total interest expense in relation to these Senior Notes, respectively.

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

The total estimated fair value of the outstanding Senior Notes was approximately $ 991.1 million, including accrued and unpaid interest, as of September 30, 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.

In connection with our acquisition of AlaxalA, we assumed certain current debt liabilities of $ 20.2 million as of August 31, 2021.

We concluded that the fair value of debt approximated its book value as of the acquisition date.

We had $ 17.6 million of this debt outstanding and recorded as current portion of long-term debt on our condensed consolidated balance sheet as of September 30, 2021.

We repaid this balance in full in October 2021.

As of September 30, 2021, the accrued interest under the assumed AlaxalA debt obligations was not material.

During the post-acquisition period from September 1, 2021 through September 30, 2021, interest expense related to AlaxalA debt was not material.

MUTUAL COVENANT-NOT-TO-SUE AND RELEASE AGREEMENT

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

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

(1) the right to use our existing patents, and (2) the right to use any

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

patents that we develop over the term of the contract.

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

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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 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.

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

During the nine months ended September 30, 2021 and 2020, we recorded $ 3.4 million and $ 39.0 million gain on IP matter in our condensed consolidated statements of income, respectively.

We recorded $ 6.4 million and $ 9.8 million in accrued liabilities and other liabilities in our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, respectively.

COMMITMENTS AND CONTINGENCIES

The following table summarizes our inventory purchase commitments as of June 30, 2021 (in millions):

The following table summarizes our inventory purchase commitments as of September 30, 2021 (in millions):

Total 2021 2022 2023 2024 2025 Thereafter

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Inventory Purchase Commitments —Our independent contract manufacturers procure components and build our products based on our forecasts.

These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and marketing organizations, adjusted for overall market conditions.

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 June 30, 2021, we had $ 628.7 million of open purchase orders with our independent contract manufacturers that may not be cancelable.

In order to reduce manufacturing lead times, plan for adequate component supply and incentivize suppliers to deliver, we may issue purchase orders to some of our independent contract manufacturers, which are non-cancelable.

As of September 30, 2021, we had $ 868.0 million of open purchase orders with our independent contract manufacturers that are non-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 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.

As of September 30, 2021, we had $ 68.9 million in other contractual commitments having a remaining term in excess of one year that are non-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

FORTINET, INC.

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.

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

In addition, the resolution of any 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 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.

In October 2021, we held settlement discussions related to an existing patent infringement lawsuit.

Pursuant to such discussions, we may enter into an agreement that provides for the settlement and dismissal of the patent lawsuit and a mutual covenant not to sue for a defined duration of time.

As a result, we have determined that a loss in connection with such lawsuit is now probable.

We accrued $ 5 million as a loss contingency in the quarter ended September 30, 2021 and the associated charge was recorded against revenue in the income statement.

Litigation loss contingency accruals associated with other outstanding cases were not material as of September 30, 2021 and December 31, 2020.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

3 unchanged sentences

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.

STOCKHOLDERS’ EQUITY

Stock-Based Compensation Plans

1 unchanged sentence

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

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

As of September 30, 2021, there were a total of 11.7 million shares of common stock available for grant under the Amended Plan.

Restricted Stock Units

6 unchanged sentences

Vested ( 1.9 ) 81.15

Balance—June 30, 2021

Balance—September 30, 2021

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

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.

As of September 30, 2021, total compensation expense related to unvested RSUs granted to employees and non-employees under the Amended Plan, but not yet recognized, was $ 391.2 million, with a weighted-average remaining vesting period of 2.7 years.

RSUs settle into shares of common stock upon vesting.

1 unchanged sentence

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

FORTINET, INC.

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 Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Shares withheld for taxes 0.1 0.2 0.6 0.7

Amount withheld for taxes $ 42.9 $ 27.6 $ 119.0 $ 86.5

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Employee Stock Options

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

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Expected term in years 4.4 4.4 4.4 4.4

11 unchanged sentences

Exercised ( 0.4 ) 53.26

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.

Balance—September 30, 2021 2.8 $ 90.20

Options vested and expected to vest—September 30, 2021 2.8 $ 90.20 4.1 $ 567.2

Options exercisable—September 30, 2021 1.6 $ 56.62 3.1 $ 379.9

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

As of September 30, 2021, total compensation expense related to unvested stock options granted to employees but not yet recognized was $ 46.6 million, with a weighted-average remaining vesting period of 2.9 years.

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

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Weighted-average fair value per share granted $ 95.33 $ 43.80 $ 58.69 $ 35.76

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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 Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Cost of product revenue $ 0.4 $ 0.4 $ 1.3 $ 1.2

5 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 Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

RSUs $ 48.5 $ 46.4 $ 142.8 $ 134.5

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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 Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Income tax benefit associated with stock-based compensation $ 11.7 $ 11.0 $ 34.5 $ 31.9

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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.

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 June 30, 2021 and 2020 were composed of U.S.

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

Refer to Note 18.

Subsequent Events for information of the approved $ 1.25 billion increase in the authorized stock repurchase under the Repurchase Program in October 2021.

During the three and nine months ended September 30, 2021, we repurchased 0.3 million and 0.8 million shares of common stock, respectively, under the Repurchase Program in open-market transactions at a weighted-average price of $ 294.07 per share and $ 242.95 per share, respectively, for an aggregate purchase price of $ 108.8 million and $ 200.4 million, respectively.

As of September 30, 2021, $ 812.3 million remained available for future share repurchases under the Repurchase Program.

Our effective tax rate was negative 6 % for the three months ended September 30, 2021, compared to an effective tax rate of 4 % for the same period last year.

Our effective tax rate was 2 % for the nine months ended September 30, 2021, compared to an effective tax rate of 8 % for the same period last year.

The effective tax rates for the periods presented are

FORTINET, INC.

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.

primarily comprised of U.S.

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

federal and state taxes, withholding taxes and foreign taxes that amounted to $ 40.1 million and $ 33.8 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.

The tax rate for the three months ended September 30, 2021 was impacted by a tax benefit of $ 8.7 million from the FDII deduction and excess tax benefits from stock-based compensation expense of $ 25.0 million .

In addition, the tax rate for the three months ended September 30, 2021 was further impacted by a tax benefit of $ 15.7 million for a change in tax accounting positions in finalization of the prior year tax return.

The tax rate for the three months ended September 30, 2020 was impacted by a tax benefit of $ 16.3 million from the FDII deduction and excess tax benefits from stock-based compensation expense of $ 12.5 million .

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

federal and state taxes, withholding taxes and foreign taxes that amounted to $ 115.8 million and $ 100.7 million , respectively.

The tax rate for the nine months ended September 30, 2021 was impacted by a tax benefit of $ 23.9 million from the FDII deduction, excess tax benefits from stock-based compensation expense o f $ 60.3 million and release of reserves o f $ 5.5 million on uncertain tax positions and the interest due to the expiration of the statute of limitations.

In addition, the tax rate for the nine months ended September 30, 2021 was further impacted by a tax benefit of $ 15.7 million for a change in tax accounting positions in finalization of the prior year tax return.

The tax rate for the nine month s ended September 30, 2020 was impacted by a tax benefit of $ 25.9 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $ 37.6 million and release of reserves of $ 9.0 million on uncertain tax positions and the interest due to the expiration of the statute of limitations.

As of September 30, 2021 and December 31, 2020, unrecognized tax benefits were $ 80.7 million and $ 77.3 million , respectively.

If recognized, $ 73.3 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 June 30, 2021 and December 31, 2020, accrued interest and penalties were $ 15.4 million and $ 14.5 million, respectively.

As of September 30, 2021 and December 31, 2020, accrued interest and penalties were $ 16.2 million and $ 14.5 million, respectively.

It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $ 27.3 million in the next 12 months, due to the lapse of the statute of limitations.

21 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 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.

Our matching contributions to our 401(k) Plan and the RRSP for the three months ended September 30, 2021 and 2020 were $ 2.5 million and $ 2.1 million, respectively.

Our matching contributions to our 401(k) Plan and the RRSP for the nine months ended September 30, 2021 and 2020 were $ 7.9 million and $ 6.5 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 Six Months Ended

Revenue June 30,

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

Revenue September 30,

2021 September 30,

2020 September 30,

2021 September 30,

United States $ 258.4 $ 206.0 $ 722.6 $ 589.1

5 unchanged sentences

Property and Equipment — net

September 30,

2021 December 31,

4 unchanged sentences

EMEA 23.8 20.6

APAC 13.0 7.8

Total property and equipment—net $ 556.6 $ 448.0

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

Three Months Ended Six Months Ended

2021 June 30,

2020 June 30,

2021 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Exclusive Networks Group (“Exclusive”)

2 unchanged sentences

(“Ingram Micro”) 12 % 10 % 12 % 10 %

* Represents less than 10%

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

September 30,

2021 December 31,

Exclusive 30 % 34 %

TD Synnex 15 % *

Ingram Micro 11 % 11 %

* Represents less than 10%

FORTINET, INC.

1 unchanged sentence

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.

Debt Repayment

In October 2021, we fully repaid the outstanding $ 17.6 million of debt liabilities assumed in the AlaxalA transaction.

Building Purchase

In October 2021, we purchased real property in Texas totaling approximately 87,000 square feet for a cash payment of $ 22.5 million.

Share Repurchase Program

In October 2021, our board of directors approved a $ 1.25 billion increase in the authorized stock repurchase under the Repurchase Program and extended the term of the Repurchase Program to February 28, 2023, bringing the aggregate amount authorized to be repurchased to $ 4.25 billion of our outstanding common stock through February 28, 2023.

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