What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-25 compared with 2021-02-19 · 415 added, 364 removed, 840 unchanged (48% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets as of December 31, 202 1 and 20 20

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Consolidated Statements of Comprehensive Income for the year ended December 31, 202 1 , 20 20 and 20 19

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

Consolidated Statements of Consolidated Statements of Equity for the year ended December 31, 202 1 , 20 20 and 20 19

Consolidated Statements of Cash Flows for the year ended December 31, 202 1 , 20 20 and 20 19

Notes to Consolidated Financial Statements

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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We have audited the accompanying consolidated balance sheets of Fortinet, Inc.

and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).

and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Litigation Contingencies–Refer to Note 13 to the financial statements

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Litigation – Refer to Note 13 to the financial statements

Critical Audit Matter Description

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Claims from third parties may result in a requirement to pay substantial damages and could prevent the Company from selling certain of their products.

An estimated loss from a loss contingency is accrued by a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Where a range of loss can be reasonably estimated with no best estimate in the range, management records the minimum estimated liability.

The determination of litigation contingency accruals is subject to significant management judgement in assessing the likelihood of a loss being incurred and when determining whether a reasonable estimate of the loss or range of loss can be made.

The Company accrues for a loss contingency if a loss is probable and the amount of the loss can be reasonably estimated.

These accruals are generally based on a range of possible outcomes that require significant management judgement.

Given the inherent uncertainty of the outcome of identified current matters, auditing the valuation assertion of litigation contingencies required a high degree of auditor judgment and an increased extent of effort when performing audit procedures.

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Our audit procedures related to the litigation contingencies included the following, among others:

• We tested the effectiveness of controls over management’s litigation contingency accrual analysis and assessment of matters with potential impact.

• We tested the effectiveness of controls over management’s litigation contingency accrual analysis and assessment of matters

with potential impact.

• We obtained and evaluated legal letters from internal and external legal counsel, and we discussed with internal legal counsel the pending litigation matters.

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• We evaluated the assumptions used by the Company to estimate the litigation contingency, including corroborating the assumptions with internal legal counsel.

• We evaluated the Company’s litigation contingencies disclosure for consistency with our knowledge of the Company’s litigation matters.

Investments in Privately Held Companies – Refer to Notes 1 and 6 to the financial statements

Critical Audit Matter Description

In fiscal year 2021, the Company invested $160 million in cash for shares of the Series A Preferred Stock of Linksys Holdings, Inc.

(“Linksys”), for a 50.8% ownership interest.

The Company accounts for its investment in Linksys using the equity method of accounting based on its determination that it does not hold an absolute controlling financial interest but has the ability to exercise significant influence over the operating and financial policies of Linksys.

Determining that the Company does not control but exercises significant influence over the operating and financial policies of Linksys required significant management judgement when considering many factors, including but not limited to, the ownership interest in Linksys, board representation, participation in policy-making processes, and participation rights in certain significant financial and operating decisions of Linksys in the ordinary course of business.

We identified the Company’s conclusion to account for its investment in Linksys using the equity method of accounting as a critical audit matter because of the complex judgments involved in determining that the Company does not hold a controlling financial interest but exercises significant influence.

This required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals with expertise in the accounting for equity method investments and consolidation accounting, when performing audit procedures to evaluate the appropriateness of the accounting conclusion.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the Company’s conclusion to account for its investment in Linksys using the equity method of accounting included the following, among others:

• We tested the effectiveness of controls over management’s assessment of the appropriateness of the accounting conclusion for the investment in Linksys under the equity method of accounting.

• We obtained and read the executed Linksys investment agreement to evaluate the accuracy and completeness of the terms used in management’s assessment that the Company does not control but has significant influence over Linksys.

• With the assistance of professionals in our firm having expertise in accounting for equity method investments and consolidation accounting, we evaluated management’s conclusion to account for the investment in Linksys as an equity method investment, including the appropriateness of the accounting policies applied and the determination that the Company does not control, but has significant influence over the operating and financial policies of Linksys.

/s/ DELOITTE & TOUCHE LLP

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Short-term investments 1,194.0 775.5

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

Marketable equity securities 38.6 —

Accounts receivable—Net of allowance for credit losses of $ 2.4 million and $ 2.5 million at December 31, 2021 and 2020, respectively

Inventory 175.8 139.8

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DEFERRED TAX ASSETS 342.3 245.2

OTHER INTANGIBLE ASSETS—NET 31.6 31.1

GOODWILL 125.1 93.0

OTHER INTANGIBLE ASSETS—NET 63.6 31.6

OTHER ASSETS 235.8 63.2

TOTAL ASSETS $ 5,919.1 $ 4,044.5

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES AND EQUITY

CURRENT LIABILITIES:

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INCOME TAX LIABILITIES 79.5 90.3

LONG-TERM DEBT 988.4 —

OTHER LIABILITIES 59.2 56.2

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COMMITMENTS AND CONTINGENCIES (Note 13)

STOCKHOLDERS’ EQUITY:

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

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Additional paid-in capital 1,254.2 1,207.2

Accumulated other comprehensive income 0.7 1.1

Retained earnings (accumulated deficit) ( 352.1 ) 160.8

Total stockholders’ equity 856.0 1,342.4

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 4,044.5 $ 3,879.2

Accumulated other comprehensive income (loss) ( 4.8 ) 0.7

Accumulated deficit ( 467.9 ) ( 352.1 )

Total Fortinet, Inc.

stockholders’ equity 781.7 856.0

Non-controlling interests 16.7 —

Total equity 798.4 856.0

TOTAL LIABILITIES AND EQUITY $ 5,919.1 $ 4,044.5

See notes to consolidated financial statements.

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OPERATING INCOME 650.4 531.8 351.0

INTEREST INCOME—NET 17.7 42.5 26.5

INTEREST INCOME 4.5 17.7 42.5

INTEREST EXPENSE ( 14.9 ) — —

OTHER EXPENSE—NET ( 11.6 ) ( 7.8 ) ( 7.5 )

INCOME BEFORE INCOME TAXES 541.7 386.0 254.3

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

NET INCOME $ 488.5 $ 331.7 $ 334.9

Net income per share (Note 10):

INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENT 628.4 541.7 386.0

PROVISION FOR INCOME TAXES 14.1 53.2 54.3

LOSS FROM EQUITY METHOD INVESTMENT

NET INCOME INCLUDING NON-CONTROLLING INTERESTS 606.7 488.5 331.7

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

NET INCOME ATTRIBUTABLE TO FORTINET, INC.

$ 606.8 $ 488.5 $ 331.7

Net income per share attributable to Fortinet, Inc.

Basic $ 3.72 $ 2.98 $ 1.94

Diluted $ 3.63 $ 2.91 $ 1.90

Weighted-average shares outstanding:

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

Basic 163.2 164.2 171.0

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2021 2020 2019

Net income $ 488.5 $ 331.7 $ 334.9

Net income including non-controlling interests $ 606.7 $ 488.5 $ 331.7

Other comprehensive income (loss):

Change in foreign currency translation ( 3.8 ) — —

Change in unrealized gains (losses) on investments ( 3.5 ) ( 0.2 ) 2.5

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

tax provision (benefit) related to items of other comprehensive income or loss ( 0.8 ) 0.2 0.5

Other comprehensive income (loss) ( 6.5 ) ( 0.4 ) 2.0

Comprehensive income $ 488.1 $ 333.7 $ 334.9

Comprehensive income including non-controlling interests 600.2 488.1 333.7

comprehensive loss attributable to non-controlling interests ( 1.1 ) — —

Comprehensive income attributable to Fortinet, Inc.

$ 601.3 $ 488.1 $ 333.7

See notes to consolidated financial statements.

FORTINET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF EQUITY

(in millions)

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Capital Accumulated

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

Stockholders’

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

Shares Amount

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Stock-based compensation expense — — 173.0 — — — 173.0

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

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

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

Net income — — — — 331.7 — 331.7

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Stock-based compensation expense — — 191.7 — — — 191.7

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

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

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

Net income — — — — 488.5 — 488.5

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Stock-based compensation expense — — 207.9 — — — 207.9

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

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

Net unrealized loss on investments - net of tax — — — ( 2.7 ) — — ( 2.7 )

Foreign currency translation adjustment — — — ( 2.8 ) — ( 1.0 ) ( 3.8 )

Net income — — — — 606.8 ( 0.1 ) 606.7

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CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 488.5 $ 331.7 $ 334.9

Net income including non-controlling interests $ 606.7 $ 488.5 $ 331.7

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

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Amortization of investment premiums (discounts) 6.9 1.3 ( 6.0 )

Loss from equity method investment 7.6 — —

Other 7.9 6.0 5.7

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

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

Accounts receivable—net ( 72.5 ) ( 176.4 ) ( 96.7 )

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Purchases of property and equipment ( 295.9 ) ( 125.9 ) ( 92.2 )

Purchases of investment in privately held company ( 160.0 ) — —

Payments made in connection with business combinations, net of cash acquired ( 74.9 ) ( 40.2 ) ( 34.6 )

Purchases of marketable equity securities ( 42.5 ) — —

Other 0.4 1.3 —

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CASH FLOWS FROM FINANCING ACTIVITIES:

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

Payments for debt issuance costs ( 2.4 ) — —

Payments of debt assumed in connection with business combination ( 19.5 ) ( 4.1 ) ( 3.7 )

Repurchase and retirement of common stock ( 741.8 ) ( 1,080.1 ) ( 145.1 )

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Taxes paid related to net share settlement of equity awards ( 167.9 ) ( 108.2 ) ( 96.0 )

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

Other ( 1.0 ) ( 1.3 ) ( 0.3 )

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

Net cash provided by (used in) financing activities 82.8 ( 1,171.6 ) ( 195.6 )

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ( 0.1 ) — —

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 257.3 ( 160.7 ) 110.1

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Liability for purchase of property and equipment $ 21.9 $ 30.8 $ 16.0

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

Liability incurred in connection with business combination $ 0.9 $ 0.4 $ 3.0

See notes to consolidated financial statements.

Table of Conten ts

FORTINET, INC.

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

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

Basis of Presentation and Preparation —The consolidated financial statements of Fortinet and its wholly owned subsidiaries (collectively, the “Company,” “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

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

Basis of Presentation and Preparation —The consolidated financial statements of Fortinet and its subsidiaries (collectively, the “Company,” “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

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

All intercompany transactions and balances have been eliminated in consolidation.

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

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

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

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

Actual results could differ materially from those estimates.

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

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

Our cash balances are maintained as deposits with various large financial institutions in the United States and around the world.

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

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

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

We maintain our cash equivalents and investments in money market funds, corporate debt securities, U.S.

government and agency securities, commercial paper, certificates of deposit and term deposits and municipal bonds with major financial institutions that our management believes are financially sound.

Our accounts receivable are derived from our customers in various geographic locations.

We perform ongoing credit evaluations of our customers.

We generally do not require collateral on accounts receivable, and we maintain reserves for estimated potential credit losses.

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

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

We generally do not require collateral on accounts receivable, and we maintain reserves for estimated credit losses.

As of December 31, 2021, Exclusive Networks Group (“Exclusive”), TD Synnex and Ingram Micro Inc.

(“Ingram Micro”) accounted for 33 %, 13 % and 13 % of total net accounts receivable, respectively.

As of December 31, 2020, Exclusive and Ingram Micro accounted for 34 % and 11 % of total net accounts receivable, respectively.

During 2021, Exclusive and Ingram Micro accounted for 31 % and 12 % of total revenue, respectively.

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

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

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

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

Our proprietary Application-Specific Integrated Circuits are built by contract manufacturers located in Japan and Taiwan;

other integrated circuits are provided by other chip manufacturers and are currently in short supply.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

Accordingly, monetary assets and liabilities denominated in foreign currencies have been remeasured into U.S.

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

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

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

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

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

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

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

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

For our international subsidiary whose functional currency is the local currency, we translate the financial statements of these subsidiaries to U.S.

dollars using the exchange rates in effect at the balance sheet dates for assets and liabilities, and average monthly rates of exchange for revenues, costs, and expenses.

We record translation gains and losses in accumulated other comprehensive income as a component of equity.

We reflect net forei gn exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency as a component of foreign currency exchange gain (loss) in other expense, net.

We recognized a foreign currency loss of $ 8.2 million, $ 5.5 million and $ 4.7 million in other expense, net, for 2021, 2020, and 2019, respectively.

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

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

Available-for-Sale Investments —We hold investment grade securities consisting of commercial paper, corporate debt securities, U.S.

government and agency securities, certificates of deposit and term deposits, money market funds and municipal bonds that our management believes are financially sound.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The unrealized losses on our AFS debt securities as of December 31, 2021 and 2020 were caused by fluctuations in market value and interest rates as a result of the market conditions.

We concluded that an allowance for credit losses was unnecessary as of December 31, 2021 and 2020 and that the unrealized losses as of December 31, 2019 were temporary because (i) the decline in market value was attributable to changes in market conditions and not credit quality, and (ii) we concluded that neither do we intend to sell nor is it more likely than not that we will be required to sell these investments prior to recovery of their amortized cost basis.

As a result, we had no credit losses recorded for the year ended December 31, 2021 and 2020, and there was no impairment charge for any unrealized losses in 2019.

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

We have elected to not record an allowance for credit losses for accrued interest for AFS investments in debt

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

securities and will reverse the accrued interest against interest income in the period in which we determine the accrued interest to be uncollectible.

Marketable Equity Securities —Our marketable equity investments with readily determinable fair values are accounted for at fair value through net income.

Realized gains and losses on these securities are reported in other income (expense)-net, and are determined using the specific identification method.

Investments in privately held companies —Our investments in privately held companies consist of investments in common stock or in-substance common stock of entities.

Certain of these investments provide us with the ability to exercise significant influence over the investee, but not an absolute controlling financial interest.

These investments are accounted for under the equity method of accounting and were initially recorded at cost.

Subsequently, we recognize our proportionate share of the entities’ net income or loss and the amortization of any basis differences as gain or loss from equity method investments in the consolidated statements of income and as an adjustment to the investment balance.

We record our proportionate share of the results of equity method investments on a three-month lag basis.

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 December 31, 2021, our investment in Linksys Holdings, Inc.

(“Linksys”) was our only equity method investment and was recorded in other assets.

Our remaining investments in privately held companies are recorded at cost and are not material.

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

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

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

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

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

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

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

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

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

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

The allowance for credit losses was $ 2.4 million and $ 2.5 million as of December 31, 2021 and 2020, respectively.

Provisions, write-offs and recoveries were not material during the years ended December 31, 2021, 2020 and 2019.

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

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Leasehold improvements Shorter of useful life or lease term

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

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

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

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

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

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

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

We allocate the fair value of the purchase price of our business acquisitions to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values.

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

Our estimates and assumptions are subject to change

The excess of the purchase price over the fair

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

values of these identifiable assets and liabilities is recorded as goodwill.

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

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

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

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

There were no impairments in 2021, 2020 and 2019.

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

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Then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount.

Any excess in the carrying value of a reporting unit’s goodwill over its fair value is recognized as an impairment loss, limited to the total amount of goodwill allocated to that reporting unit.

Any excess in the carrying value of a reporting unit over its fair value is recognized as an impairment loss in goodwill, limited to the total amount of goodwill allocated to that reporting unit.

We performed our annual goodwill impairment analysis and did not identify any impairment indicators as a result of the review.

As of December 31, 2020, we had one reporting unit.

As of December 31, 2021, we h ad one reporti ng unit.

Other Intangible Assets —Intangible assets with finite lives are carried at cost, less accumulated amortization.

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

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

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

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Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

We recognize tax benefits from an uncertain tax position only if it is more likely than not, based on the technical merits of the position, that the tax position will be sustained on examination by the tax authorities.

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

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

subsidiaries not previously subject to U.S.

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

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We have elected to account for Global Intangible Low-Taxed Income (“GILTI”), which was introduced in the 2017 Tax Act, as a current period expense.

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

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

Leases —We rent certain facilities under operating lease agreements.

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

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

The ROU assets and the short and long-term lease liabilities from our operating leases are included in other assets, accrued liabilities and other liabilities in our consolidated balance sheets, respectively.

The corresponding assets, the short and long-term lease liabilities from our finance leases are included in property and equipment, accrued liabilities and other liabilities in our consolidated balance sheets, respectively.

Leases —We determine if an arrangement is a lease at inception.

The right-of-use (“ROU”) assets and the short and long-term lease liabilities from our operating leases are included in other assets, accrued liabilities and other liabilities in our consolidated balance sheets, respectively.

The corresponding assets and, the short and long-term lease liabilities from our finance leases are included in property and equipment, accrued liabilities and other liabilities in our consolidated balance sheets, respectively.

The ROU assets represent our right to use an underlying asset for the lease term.

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We determine our incremental borrowing rate for each lease using indicative bank borrowing rates, adjusted for various factors including level of collateralization, term and currency to align with the terms of a lease.

The operating lease ROU asset also includes any lease prepayments, net of lease incentives.

The operating lease ROU asset also includes any lease prepayments and initial direct costs, net of lease incentives.

Certain leases include options to extend or terminate the lease.

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For our finance leases, we recognize amortization expense from the amortization of the corresponding assets and interest expense on the related lease liabilities.

Prior to 2019, leases were recognized under FASB Topic 840, Leases (“Topic 840”).

Under Topic 840, related rent expense was recognized on a straight-line basis over the term of the lease.

Rent holidays and scheduled rent increases were included in the determination of rent expense to be recorded over the lease term.

Lease incentives were recognized as a reduction of rent expense on a straight-line basis over the term of the lease.

Renewals were not assumed in the determination of the lease term unless they were deemed to be reasonably assured at the inception of the lease.

We began recognizing rent expense on the date that we obtained the legal right to use and control the leased space.

Advertising Expense —Advertising costs are expensed when incurred and are included in operating expenses in the accompanying consolidated statements of income.

Our advertising expenses were not significant for any periods presented.

Our advertising expenses were not material for any periods presented.

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

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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

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

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No impairment loss was recognized during 2021, 2020 and 2019.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

Our typical subscription and contractual support term is one to five years .

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

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

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

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

We establish standalone

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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Our estimate for refund liabilities, which include sales returns reserve and customer rebates, was $ 49.2 million and $ 43.0 million as of December 31, 2021 and 2020, respectively, and is included in current liabilities in our consolidated balance sheet.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

Standard payment terms are generally no more than 60 days, though we continue to offer extended payment terms to certain distributors.

We also invoice certain services on a monthly basis.

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Shipping and handling fees charged to our customers are recognized as revenue in the period shipped and the related costs for providing these services are recorded in cost of revenue.

Shipping and handling fees recognized were not significant during 2020, 2019 and 2018.

Warranties —We generally provide a one-year warranty on most hardware products and a 90 -day warranty on software.

Shipping and handling fees recognized were not material during 2021, 2020 and 2019.

Warranties —We generally provide a one-year warranty for most hardware products and a 90 -day warranty for software.

We also provide extended warranties under the terms of our support agreements.

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

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

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

Estimates can change as individual claims develop.

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Recently Adopted Accounting Standards

Financial Instruments

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

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

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

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

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

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

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cloud Computing

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

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

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

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

Fair Value Measurements

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

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

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

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

Recent Accounting Standards Not Yet Effective

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

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

Simplifying the Accounting for Income Taxes.

The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

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

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

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

IMMATERIAL CORRECTION OF PRIOR PERIOD FINANCIAL STATEMENTS

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

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

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

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

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

December 31, 2019

As Previously Reported Corrections As Corrected

DEFERRED TAX ASSETS $ 232.6 $ ( 6.3 ) $ 226.3

TOTAL ASSETS 3,885.5 ( 6.3 ) 3,879.2

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Deferred revenue 1,173.6 ( 17.8 ) 1,155.8

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

DEFERRED REVENUE 962.3 ( 9.0 ) 953.3

Total liabilities 2,563.6 ( 26.8 ) 2,536.8

STOCKHOLDERS’ EQUITY:

Retained earnings 140.3 20.5 160.8

Total stockholders’ equity 1,321.9 20.5 1,342.4

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

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

Year Ended December 31,

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

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

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

GROSS PROFIT:

Service 1,186.4 6.8 1,193.2 967.4 3.4 970.8

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

OPERATING INCOME 344.2 6.8 351.0 231.0 3.4 234.4

INCOME BEFORE INCOME TAXES 379.2 6.8 386.0 250.9 3.4 254.3

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

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

Net income per share (Note 10):

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

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

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

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

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

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 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.

We early adopted ASU 2021-08 on January 1, 2021 on a retrospective basis for all business combinations for which the acquisition date occurred subsequent to January 1, 2021.

The adoption of ASU 2021-08 resulted in the increase of goodwill by $ 3.0 million attributable mainly to the acquisition of Alaxala in 2021, as a result of the revised measurement of the assumed deferred revenue balance.

The adoption of ASU 2021-08 did not have a material impact to our consolidated statement of income or consolidated statement of cash flows.

The adoption did not have a material impact on the other acquisitions in 2021.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Year Ended December 31,

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

CASH FLOWS FROM OPERATING ACTIVITIES:

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

Changes in operating assets and liabilities:

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

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

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

REVENUE RECOGNITION

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Our revenue consists of product and service revenue.

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

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

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

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

Disaggregation of Revenue

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During 2021, we recognized $ 1.37 billion in revenue that was included in the deferred revenue balance as of December 31, 2020.

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

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

Transaction Price Allocated to the Remaining Performance Obligations

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FINANCIAL INSTRUMENTS AND FAIR VALUE

The following tables summarize our investments (in millions):

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

December 31, 2021

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Gains Unrealized

Corporate debt securities $ 410.5 $ 1.0 $ — $ 411.5

Commercial paper $ 566.0 $ — $ ( 0.2 ) $ 565.8

government securities 184.9 — — 184.9

Corporate debt securities 540.7 — ( 1.2 ) 539.5

government and agency securities 356.1 — ( 1.0 ) 355.1

Certificates of deposit and term deposits (1)

169.1 — ( 0.1 ) 169.0

Municipal Bonds 5.4 — — 5.4

Total available-for-sale securities $ 1,637.3 $ — $ ( 2.5 ) $ 1,634.8

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Gains Unrealized

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

Commercial paper $ 185.4 $ — $ — $ 185.4

Corporate debt securities 410.5 1.0 — 411.5

government securities 184.9 — — 184.9

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(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):

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):

December 31, 2021

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Value Unrealized

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

Commercial paper $ 288.0 $ ( 0.2 ) $ — $ — $ 288.0 $ ( 0.2 )

government securities 38.1 — — — 38.1 —

Corporate debt securities 494.4 ( 1.2 ) — — 494.4 ( 1.2 )

government and agency securities 334.2 ( 1.0 ) — — 334.2 ( 1.0 )

Certificates of deposit and term deposits 93.1 ( 0.1 ) — — 93.1 ( 0.1 )

Municipal Bonds 5.3 — — — 5.3 —

Total available-for-sale securities $ 1,215.0 $ ( 2.5 ) $ — $ — $ 1,215.0 $ ( 2.5 )

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Value Unrealized

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

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

Corporate debt securities 111.3 — — — 111.3 —

government securities 38.1 — — — 38.1 —

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Total $ 1,634.8 $ 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 of $ 2.8 million as of December 31, 2020 was excluded from both the fair value and the amortized cost of our available-for-sale securities and was recorded in prepaid expenses and other current assets in our consolidated balance sheet.

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.

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

Our marketable equity securities were $ 38.6 million as of December 31, 2021.

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

We recognized $ 5.1 million of losses in 2021.

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

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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 and agency 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.

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

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

Commercial paper $ 580.3 $ — $ 580.3 $ — $ 197.2 $ — $ 197.2 $ —

government securities 184.9 184.9 — — 195.2 195.2 — —

Corporate debt securities 542.5 — 542.5 — 413.7 — 413.7 —

government and agency securities 355.1 345.2 9.9 — 184.9 184.9 — —

Certificates of deposit and term deposits 259.0 — 259.0 — 112.0 — 112.0 —

Money market funds 57.5 57.5 — — 152.7 152.7 — —

Municipal bonds 5.4 — 5.4 — — — — —

Marketable equity securities 38.6 38.6 — — — — — —

Total $ 1,838.4 $ 441.3 $ 1,397.1 $ — $ 1,060.5 $ 337.6 $ 722.9 $ —

Cash equivalents $ 165.0 $ 166.7

Marketable equity securities 38.6 —

Short-term investments 1,194.0 775.5

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Total $ 1,838.4 $ 1,060.5

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

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

Inventory consisted of the following (in millions):

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Raw materials $ 40.2 $ 13.8

Work in process

Finished goods 125.8 126.0

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Land $ 204.5 $ 93.3

Building and building improvements 150.6 147.4

Buildings and improvements 416.2 150.6

Computer equipment and software 176.1 137.2

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Property and equipment—net $ 687.6 $ 448.0

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

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 forty years , an increase from two to thirty years , and for furniture and fixtures the range is now three to eight years , an increase from three to five years .

During 2021, we purchased certain real estate in the United States, Canada and France totaling $ 180.9 million.

The purchases were accounted for under the asset acquisition method.

The cost of the assets acquired was allocated to land, buildings, and construction-in-progress based on their relative fair values.

The amounts allocated to land, buildings, and construction-in-progress were $ 111.1 million, $ 68.9 million and $ 0.9 million, respectively.

Depreciation expense was $ 65.9 million, $ 55.5 million and $ 50.7 million in 2021, 2020 and 2019, respectively.

INVESTMENTS IN PRIVATELY HELD COMPANIES

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

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

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

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

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

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

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

Linksys Holdings, Inc.

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.

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.

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

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.

Determining that we have significant influence but not control over the operating and financial policies of Linksys required significant judgement when considering many factors, including but not limited to the ownership interest in Linksys, board representation, participation in policy-making processes, and participation rights in certain significant financial and operating decisions of Linksys in the ordinary course of business.

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.

We determined that there was a basis difference between the cost of our investment in Linksys and the amount of underlying equity in net assets of Linksys.

Our share of loss of Linksys’ financial results as well as our share of the amortization of the basis differences, in total was $ 7.6 million in 2021, and has been recorded in loss from equity method investment on the consolidated statements of income.

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

Transaction costs related to this investment were not material.

Other investments

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

BUSINESS COMBINATIONS

2021 Acquisitions

Panopta Holdings LLC

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

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

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

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

Alaxala Networks Corporation

On August 31, 2021, we closed an acquisition of 75 % of equity interests as controlling interests in Alaxala , a privately held network hardware equipment company in Japan, for $ 64.2 million in cash.

We acquired the equity interest in Alaxala to broaden our offering of 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 25.5

Other intangible assets 48.0

Other long-term assets 5.2

TOTAL ASSETS $ 137.0

Accounts payable $ 11.0

Current portion of long-term debt 20.2

Accrued and other current liabilities 17.1

Other long-term liabilities 6.7

TOTAL LIABILITIES $ 55.0

NON-CONTROLLING INTERESTS $ 17.8

Net purchase consideration $ 64.2

The fair values assigned were updated to reflect the retrospective adoption of ASU 2021-08, which resulted in increases to the fair values assigned to goodwill, a ccrued and other current liabilities and o ther long-term liabilities as of the acquisition date.

Refer to Note 1 for further discussion.

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 fair value of Alaxala.

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NOTES TO 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 cost savings that are expected to be realized by the owner of the need to pay a royalty to another party in exchange for the use of the asset.

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.

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 this debt approximated its book value as of the acquisition date.

We repaid this debt in full in September and October 2021.

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

The operating results of the acquired company were included in our consolidated financial statements from the date of acquisition which was August 31, 2021.

For the period from September 1, 2021 through December 31, 2021, Alaxala contributed revenue of $ 44.4 million.

Income before income taxes for the period from September 1, 2021 through December 31, 2021 was not material.

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

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 CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Year Ended December 31,

Pro forma revenue

$ 3,424.3 $ 2,714.7

Pro forma net income attributable to Fortinet, Inc.

$ 608.2 $ 480.0

ShieldX Networks, Inc.

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

(“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 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.

2020 Acquisitions

Panopta Holdings LLC

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

$ 15.8 million of goodwill is expected to be deductible for tax purposes.

OPAQ Networks, Inc.

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

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

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

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

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

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

The purchase price included a $ 1.3 million indemnity fund held in escrow for 12 months after the transaction closing date, of which $ 0.4 million was received by Fortinet and the remainder was released to OPAQ shareholders during the year ended December 31, 2021.

2019 Acquisitions

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

enSilo Limited

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2018 Acquisitions

ZoneFox Holdings Limited

On October 22, 2018, we acquired all outstanding shares of ZoneFox Holdings Limited (“ZoneFox”), a privately held cloud-based company providing insider threat detection and response.

The purchase price for ZoneFox was $ 16.1 million, of which $ 12.5 million was allocated to goodwill that was non-deductible for tax purposes and $ 6.8 million was allocated to identifiable intangible assets, the majority of which was developed technology, offset by $ 3.2 million of net liabilities assumed.

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

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

Bradford Networks, Inc.

On June 4, 2018, we acquired all outstanding shares of Bradford Networks, Inc.

(“Bradford”), a provider of network access control security products and services.

The purchase price for Bradford was $ 6.8 million, of which $ 11.1 million was allocated to goodwill that was non-deductible for tax purposes and $ 8.0 million was allocated to identifiable intangible assets, the majority of which was developed technology, offset by $ 12.3 million of net liabilities assumed.

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

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

Additional Acquisition-Related Information

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

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

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

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

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Additions due to business combinations 30.2

Adjustment due to adoption of ASU 2021-08 3.0

Foreign currency translation adjustments ( 1.1 )

Balance—December 31, 2021 $ 125.1

There were no impairments to goodwill during 2021, 2020 and 2019, or any previous years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Intangible Assets—Net

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Customer relationships 6.0 22.2 11.9 10.3

Trade name 10.0 6.1 0.2 5.9

Backlog 1.0 4.8 1.6 3.2

Total other intangible assets—net $ 115.3 $ 51.7 $ 63.6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2020

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Year Ending December 31, Amount

Thereafter 7.2

NET INCOME PER SHARE

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

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

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.

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):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share attributable to Fortinet, Inc.

is as follows (in millions, except per share amounts):

Year Ended December 31,

2021 2020 2019

Net income including non-controlling interests $ 606.7 $ 488.5 $ 331.7

Net loss attributable to non-controlling interests ( 0.1 ) — —

Net income attributable to Fortinet, Inc.

$ 606.8 $ 488.5 $ 331.7

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Stock options 1.7 1.2 1.2

Weighted-average shares used to compute diluted net income per share 167.7 175.0 174.2

Net income per share:

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

167.1 167.7 175.0

Net income per share attributable to Fortinet, Inc.:

Basic $ 3.72 $ 2.98 $ 1.94

Diluted $ 3.63 $ 2.91 $ 1.90

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NOTES TO 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):

The following weighted-average shares of common stock were excluded from the computation of diluted net income per share attributable to Fortinet, Inc.

for the periods presented, as their effect would have been antidilutive (in millions):

Year Ended December 31,

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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.

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

Our remaining finance leases were not material to our consolidated financial statements.

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

Our finance leases were not material to our consolidated financial statements.

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

Year Ended December 31,

2021 2020 2019

Operating lease expense $ 26.5 $ 18.5 $ 15.3

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Total lease expense $ 33.3 $ 24.6 $ 21.1

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

Rent expense was $ 17.1 million for 2018.

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

(1) Variable lease expense for the year ended December 31, 2021, 2020 and 2019 predominantly included common area maintenance charges and parking expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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Weighted average discount rate – operating leases 2.1 % 3.2 %

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Year Ended December 31,

2021 2020 2019

Cash paid for amounts included in the measurement of lease liabilities

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Less imputed interest ( 2.1 )

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

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

As of December 31, 2021, we had additional minimum lease payments of $ 11.4 million relating to operating leases that had been signed but had not yet commenced.

These leases will commence during 2022 and will have lease terms of approximately one to six years .

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NOTES TO 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.

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

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

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

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

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

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

Maturity Coupon Rate Effective Interest Rate December 31,

2026 Senior Notes March 2026 1.0 % 1.3 % $ 500.0

2031 Senior Notes March 2031 2.2 % 2.3 % 500.0

Total debt 1,000.0

Unamortized discount and debt issuance costs 11.6

Total long-term debt $ 988.4

As of December 31, 2021 we accrued interest payable of $ 4.7 million, and there are no financial covenants with which we must comply.

In 2021, we recorded $ 14.7 million of total interest expense in relation to these Senior Notes and repaid $ 8.4 million of interest in cash.

No interest costs were capitalized in 2021, as the costs that qualified for capitalization were not material.

The total estimated fair value of the outstanding Senior Notes was approximately $ 980.5 million, including accrued and unpaid interest, as of December 31, 2021.

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

The estimated fair values are based on Level 2 inputs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MUTUAL COVENANT-NOT-TO-SUE AND RELEASE AGREEMENT

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the year ended December 31, 2021 and 2020, we recorded $ 4.6 million and $ 40.2 million gain on IP matter in our consolidated statements of income, respectively.

We had $ 5.2 million and $ 9.8 million in accrued liabilities and other liabilities in our consolidated balance sheets as of December 31, 2021 and 2020, respectively.

COMMITMENTS AND CONTINGENCIES

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Inventory purchase commitments $ 1,140.5 $ 1,075.0 $ 65.5

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

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

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

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

In order to attempt to control 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 December 31, 2021 and 2020, we had $ 1.14 billion and $ 259.4 million, respectively, 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 and certain component suppliers, we have open purchase orders and contractual obligations in the ordinary course of business for which we have not received goods or services.

A significant portion of our reported purchase commitments consist of firm and non-cancelable commitments.

In certain instances, contractual commitments allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed.

As of December 31, 2021 and 2020, we had $ 126.7 million and $ 28.9 million, respectively, 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.

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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 December 31, 2020 and 2019.

These accruals are generally

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

based on a range of possible outcomes that require significant management judgement.

If no amount within a range is a better estimate than any other, the Company accrues the minimum amount.

In December 2021, we entered into an agreement that provided for settlement and dismissal of an existing patent infringement lawsuit and a mutual covenant-not-to-sue for a defined duration of time.

We have settled and paid $ 10.0 million in cash, of which $ 5.6 million related to the dismissal of lawsuit and was expensed as a general and administrative expense, and $ 4.4 million was deferred and will be expensed over time as royalty cost of revenue.

Litigation loss contingency accruals associated with other outstanding cases were not material as of December 31, 2021 and 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 CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

STOCKHOLDERS’ EQUITY

Stock-Based Compensation Plans

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

The ESPP permitted eligible employees to purchase common stock through regular, systematic payroll deductions, up to a maximum of 15 % of employees’ compensation for each purchase period at purchase prices equal to 85 % of the lesser of the fair market value of our common stock at the first trading date of the applicable offering period or the purchase date, subject to purchase limits of 4,000 shares for each purchase period or $ 25,000 worth of stock for each calendar year.

Our board of directors voluntarily determined to terminate the ESPP, effective February 2019 at the completion of the prior offering period.

The ESPP permitted eligible employees to purchase common stock through regular, systematic payroll deductions, up to a maximum of 15 % of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

employees’ compensation for each purchase period at purchase prices equal to 85 % of the lesser of the fair market value of our common stock at the first trading date of the applicable offering period or the purchase date, subject to purchase limits of 4,000 shares for each purchase period or $ 25,000 worth of stock for each calendar year.

Our board of directors voluntarily determined to terminate the ESPP, effective February 2019 at the completion of the prior offering period.

Restricted Stock Units

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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Employee Stock Purchase Plan

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

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

The following table summarizes the assumptions used and the resulting grant-date fair values of our ESPP:

Year Ended December 31,

Expected term in years 0.5

Volatility 28.9 %

Risk-free interest rate 2.0 %

Dividend rate — %

Weighted-average fair value per share granted $ 14.14

There were no grants under the ESPP during the year ended December 31, 2021, 2020 and 2019, respectively.

Additional information related to the ESPP is provided below (in millions, except per share amounts):

Year Ended December 31,

Shares issued under the ESPP 0.3

Weighted-average price per share issued $ 64.79

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Shares Reserved for Future Issuances

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Total common stock reserved for future issuances 17.7

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation Expense

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Stock options 19.4 14.1 12.6

ESPP — 1.3 10.2

Total stock-based compensation expense $ 211.2 $ 193.8 $ 174.1

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From 2016 through 2020, our board of directors approved increases to our Repurchase Program by various amounts, bringing the aggregated amount authorized to $ 3.0 billion.

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

In October 2021, our board of directors approved a $ 1.25 billion increase and extended the term to February 28, 2023, bringing the aggregate amount authorized to be repurchased to $ 4.25 billion.

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

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

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

In 2021, we repurchased 2.6 million shares of common stock under the Repurchase Program in open market transactions for an aggregate purchase price of $ 741.8 million.

As of December 31, 2021, $ 1.52 billion remained available for future share repurchases under the Repurchase Program.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Income before income taxes and loss from equity method investment consisted of the following (in millions):

Year Ended December 31,

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Foreign 60.7 51.1 14.3

Total income before income taxes $ 541.7 $ 386.0 $ 254.3

Due to the realignment of our tax structure, income before income taxes moved from foreign jurisdictions to domestic jurisdiction in the year ended December 31, 2019.

Total income before income taxes and loss from equity method investment $ 628.4 $ 541.7 $ 386.0

The provision for (benefit from) income taxes consisted of the following (in millions):

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Total deferred ( 92.4 ) ( 7.1 ) 31.8

Provision for (benefit from) income taxes $ 53.2 $ 54.3 $ ( 80.6 )

Provision for income taxes $ 14.1 $ 53.2 $ 54.3

The foreign tax provision included the tax impacts from U.S.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

Year Ended December 31,

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Valuation allowance 20.0 11.9 22.0

Dividend distribution — — ( 3.8 )

Impact of the 2017 Tax Act:

One-time transition tax 5.8 2.6 ( 2.1 )

Global Intangible Low-Taxed Income — — 20.5

Foreign-Derived Intangible Income ( 33.6 ) ( 44.3 ) —

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

Other ( 6.7 ) 6.3 4.0

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

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

This realignment resulted in a book-to-tax basis difference for previously taxed off-shore deferred revenue as well as other book-to-tax difference.

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

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

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

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

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

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

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

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

Tax Court’s decision on Altera Corporation and Subsidiaries vs.

Commissioner of Internal Revenue and ruled in favor of the Commissioner, validating the regulations requiring stock-based compensation to be included in a cost sharing arrangement.

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

A petition was filed with the U.S.

Supreme Court on February 10, 2020.

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

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

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

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

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

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

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

Total provision for income taxes $ 14.1 $ 53.2 $ 54.3

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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

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

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

On September 29, 2020, the U.S.

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

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

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

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

The final and proposed regulations provide administrative guidance for the foreign tax credit regime, which was updated in the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”).

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

On December 28, 2021, the U.S.

Treasury and the IRS released final regulations addressing various aspects of the foreign tax credit regime.

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

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

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Depreciation and amortization 17.0 6.3

Capitalized research expenditures 64.2 16.6

Operating lease liabilities 13.1 11.6

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Operating lease ROU assets ( 11.9 ) ( 10.8 )

Acquired intangibles ( 15.7 ) ( 5.7 )

Total deferred tax liabilities ( 125.0 ) ( 90.5 )

Net deferred tax assets $ 334.3 $ 237.2

As of December 31, 2020, we recorded a deferred tax asset of $ 245.2 million and a deferred tax liability of $ 8.0 million.

As of December 31, 2021, we had a deferred tax asset of $ 342.3 million and a deferred tax liability of $ 7.9 million.

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

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We concluded that it is more likely than not that we will be able to realize the benefits of our deferred tax assets in the future except for our California research and development (“R&D”) credits carryforward, certain impairment losses in business investments, certain foreign tax credits from foreign disregarded entities and certain tax attributes from business acquisitions.

We anticipate having sufficient current year generated California R&D credits to cover the same year California tax liability for tax year 2019 and subsequent years.

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

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

As of December 31, 2021, we had a valuation allowance of $ 75.0 million against deferred tax assets for California R&D credits carryforwards (net of the unrecognized tax benefits), impairment losses, certain foreign tax credits and certain acquired tax attributes.

As of December 31, 2021, our federal and California net operating loss carryforwards for income tax purposes were $ 78.4 million and $ 20.8 million, respectively.

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

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The state credits can be carried forward indefinitely.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

2 unchanged sentences

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

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

The tax incentive agreement is conditional upon our meeting certain employment and investment thresholds.

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

The tax incentive agreement was conditional upon our meeting certain employment and investment thresholds.

As of December 31, 2021, we had $ 73.3 million of unrecognized tax benefits, of which, if recognized, $ 65.5 million would favorably affect our effective tax rate.

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Unrecognized tax benefits, end of year $ 73.3 $ 77.3 $ 67.5

We recorded a net decrease of gross unrecognized tax benefits of approximately $ 4.0 million during the year ended December 31, 2021.

The net decrease was primarily due to the reversal of gross unrecognized tax benefits in connection with the lapse of statutes of limitations.

As of December 31, 2021, 2020 and 2019, $ 79.5 million, $ 90.3 million and $ 82.8 million, respectively, of the amounts reflected above were recorded as income tax liabilities—non-current in our consolidated balance sheets.

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

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

It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $ 18.5 million in the next 12 months, primarily due to the lapse of the statute of limitations.

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

These adjustments, 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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state and foreign jurisdictions.

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

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

We are no longer subject to U.S.

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

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

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

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

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DEFINED CONTRIBUTION PLANS

4 unchanged sentences

Our matching contributions to our 401(k) Plan and the RRSP for 2021, 2020 and 2019 were $ 10.0 million, $ 8.3 million and $ 6.6 million, respectively.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEGMENT INFORMATION

21 unchanged sentences

EMEA 31.0 20.6

APAC 11.7 7.8

Total property and equipment—net $ 687.6 $ 448.0

SUBSEQUENT EVENT

Building Purchase

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

Real property purchase

In February 2022, we purchased real property in Chicago totaling approximately 90,000 square feet for a cash payment of $ 20.8 million.

Share repurchase

Subsequent to December 31, 2021 and through the filing of this Annual Report on Form 10-K, we repurchased 1.8 million shares of our common stock, for an aggregate purchase price of $ 547.6 million at an average price of $ 310.05 per share, under the Repurchase Program.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data