What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-24 compared with 2022-02-25 · 299 added, 326 removed, 929 unchanged (40% of the section changed)

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Consolidated Statements of Comprehensive Income for the year ended December 31, 202 2 , 202 1 and 2020

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

Consolidated Statements of Equity (Deficit) for the year ended December 31, 202 2 , 202 1 and 2020

Consolidated Statements of Cash Flows for the year ended December 31, 202 2 , 202 1 and 2020

Notes to Consolidated Financial Statements

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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, 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”).

and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

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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

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 Series A Preferred Stock of Linksys Holdings, Inc.

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

This investment is accounted for under the equity method of accounting and is evaluated for events or changes in business circumstances that indicate that it’s carrying value might not be recoverable and whether any estimated decline in value is considered to be other-than-temporary.

Evaluating whether the investment is other-than-temporarily impaired requires management to evaluate several qualitative and quantitative factors including, among others, Linksys financial results and operating history, the Company’s ability and intent to hold the investment until its fair value recovers, the implied revenue valuation multiples compared to guideline public companies, Linksys’ ability to achieve milestones and any notable operational and strategic changes (collectively, “impairment indicators”).

In the fourth quarter of fiscal year 2022, management concluded that such investment was other-than-temporarily impaired and recorded an impairment charge.

Concluding on whether the presence of impairment indicators indicates that an investment is other-than-temporarily impaired, involves significant and complex management judgment.

Therefore, a high degree of auditor judgment and an increased extent

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of effort was required when performing audit procedures to evaluate the appropriateness of management’s assessment of identified impairment indicators and the conclusions reached around whether these impairment indicators result in an other-than-temporary impairment.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s assessment of identified impairment indicators and the conclusions reached around whether these impairment indicators result in an other-than-temporary impairment included, among others:

• We tested the effectiveness of controls over management’s assessment of identified impairment indicators and the conclusions reached around whether these impairment indicators result in an other-than-temporary impairment.

• We evaluated management’s other-than-temporary impairment analysis of its Linksys investment by assessing whether certain indicators were present and whether those indications implied an other-than-temporary loss of value.

These procedures included but were not limited to:

◦ We evaluated the reasonableness of the estimated cash flows by comparing such estimated cash flows to historical results and other internal and external information.

◦ With the assistance of our fair value specialists, we evaluated the discount rates and revenue valuation multiples by testing the source information used in determining discount rates and revenue valuation multiples.

◦ We tested the mathematical accuracy of the discounted cash flows analysis and the resulting estimated fair value of Linksys.

◦ We compared Linksys’ estimated undiscounted cash flows and estimated fair value to Fortinet’s carrying amount.

◦ We performed inquiries with relevant members of management to obtain an understanding of their current and expected performance for Linksys, including their understanding of any operational and strategic changes.

◦ We performed a retrospective review of Linksys’ performance by comparing actual Linksys results to the performance expected by management when the Company initially invested in Linksys.

◦ We evaluated the length of time Linksys has incurred losses.

◦ We evaluated Linksys’ performance relative to its peers and to the economy by performing a comparison to peer company results and macro-economic trends.

• We tested the mathematical accuracy of the Linksys impairment as the excess of the investment’s carrying value over its estimated fair value.

Litigation – Refer to Notes 1 and 12 to the financial statements

Critical Audit Matter Description

The Company is involved in disputes, litigation and other legal actions in the normal course of business.

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

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

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.

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

How the Critical Audit Matter Was Addressed in the Audit

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.

Our audit procedures related to 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 obtained and evaluated legal letters from internal and external legal counsel, and we discussed with internal legal counsel the pending litigation matters.

• We made inquiries with management to obtain an understanding of litigation matters that the Company is currently undergoing.

• We made inquiries with management to obtain an understanding of litigation matters that the Company is currently

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• We read available court filings for litigation matters to search for contradictory information.

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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.

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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We have served as the Company’s auditor since 2002.

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FORTINET, INC.

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Accounts receivable—Net of allowance for credit losses of $ 3.6 million and $ 2.4 million at December 31, 2022 and 2021, respectively

1,261.7 807.7

Inventory 264.6 175.8

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TOTAL ASSETS $ 6,228.0 $ 5,919.1

LIABILITIES AND EQUITY

LIABILITIES AND EQUITY (DEFICIT)

CURRENT LIABILITIES:

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COMMITMENTS AND CONTINGENCIES (Note 12)

EQUITY (DEFICIT):

Common stock, $ 0.001 par value— 1,500.0 shares authorized;

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Additional paid-in capital 1,284.2 1,253.6

Accumulated other comprehensive income (loss) ( 4.8 ) 0.7

Accumulated other comprehensive loss ( 20.2 ) ( 4.8 )

Accumulated deficit ( 1,546.4 ) ( 467.9 )

Total Fortinet, Inc.

stockholders’ equity 781.7 856.0

stockholders’ equity (deficit) ( 281.6 ) 781.7

Non-controlling interests — 16.7

Total equity 798.4 856.0

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

Total equity (deficit) ( 281.6 ) 798.4

TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 6,228.0 $ 5,919.1

See notes to consolidated financial statements.

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FORTINET, INC.

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LOSS FROM EQUITY METHOD INVESTMENT

( 68.1 ) ( 7.6 ) —

NET INCOME INCLUDING NON-CONTROLLING INTERESTS 856.6 606.7 488.5

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

( 0.7 ) ( 0.1 ) —

NET INCOME ATTRIBUTABLE TO FORTINET, INC.

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See notes to consolidated financial statements.

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FORTINET, INC.

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Net income including non-controlling interests $ 856.6 $ 606.7 $ 488.5

Other comprehensive income (loss):

Other comprehensive loss:

Change in foreign currency translation ( 9.7 ) ( 3.8 ) —

Change in unrealized gains (losses) on investments ( 6.2 ) ( 3.5 ) ( 0.2 )

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

tax provision (benefit) related to items of other comprehensive loss ( 1.4 ) ( 0.8 ) 0.2

Other comprehensive loss ( 14.5 ) ( 6.5 ) ( 0.4 )

Comprehensive income including non-controlling interests 842.1 600.2 488.1

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

comprehensive income (loss) attributable to non-controlling interests 0.2 ( 1.1 ) —

Comprehensive income attributable to Fortinet, Inc.

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See notes to consolidated financial statements.

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FORTINET, INC.

CONSOLIDATED STATEMENTS OF EQUITY

CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

(in millions)

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Capital Accumulated

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

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

Shares Amount

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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

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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Stock-based compensation expense — — 217.3 — — — 217.3

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

Acquisition of the non-controlling interests

— — 3.4 — — ( 16.9 ) ( 13.5 )

Net unrealized loss on investments - net of tax — — — ( 4.8 ) — — ( 4.8 )

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See notes to consolidated financial statements.

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FORTINET, INC.

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Purchases of property and equipment ( 281.2 ) ( 295.9 ) ( 125.9 )

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

Investment in privately held company — ( 160.0 ) —

Payments made in connection with business combinations, net of cash acquired ( 30.8 ) ( 74.9 ) ( 40.2 )

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Other — 0.4 1.3

Net cash used in investing activities ( 1,325.1 ) ( 72.8 ) ( 502.3 )

Net cash provided by (used in) investing activities 763.9 ( 1,325.1 ) ( 72.8 )

CASH FLOWS FROM FINANCING ACTIVITIES:

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Finance lease liabilities arising from obtaining right-of-use assets $ 0.7 $ 0.1 $ —

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

NON-CASH INVESTING AND FINANCING ACTIVITIES:

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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 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”).

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

Basis of Presentation and Preparation —The consolidated financial statements of Fortinet and its subsidiaries (collectively, “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.

On April 14, 2022, our board of directors approved a five -for-one forward stock split of our common stock (the “Forward Stock Split”), which was conditioned upon obtaining stockholder approval for the Forward Stock Split, and to increase the number of our authorized shares of common stock.

On June 17, 2022, at our 2022 Annual Meeting of Stockholders, our stockholders approved the Forward Stock Split and the amendment and restatement of our amended and restated certificate of incorporation to increase the number of authorized shares of common stock from 300.0 million to 1.5 billion.

The par value of our common stock was not adjusted as a result of the Forward Stock Split.

Effective June 22, 2022, we filed our amended and restated certification of incorporation and completed the Forward Stock Split.

All share and per share amounts and related stockholders’ equity (deficit) balances presented herein have been retroactively adjusted to reflect the Forward Stock Split.

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 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.

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 evaluation of the equity method investments for OTTI, 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.

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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.

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

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

Segment Information for distributor customers that accounted for 10% or more of our revenue or net accounts receivable.

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.

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When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which to transact and the market-based risk.

We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

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

We apply fair value accounting for

FORTINET, INC.

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, cumulative foreign currency translation adjustments, unrealized gains and losses on available-for-sale investments and the related tax impact.

all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

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.

For our international subsidiary whose functional currency is the local currency, we translate the financial statements of this subsidiary 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 record translation gains and losses in accumulated other comprehensive income as a component of equity (deficit).

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.

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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.

Cash and cash equivalents consist of balances with banks and highly liquid investments in commercial paper, corporate debt, U.S.

government and agency securities, term deposits and money market funds.

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

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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 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 equity.

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

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

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

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

We 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, 2022, 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

We concluded that an allowance for credit losses was unnecessary as of December 31, 2022, 2021 and 2020 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, 2022, 2021 and 2020.

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

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Realized gains and losses as well as changes in fair value of these securities are recognized and reported in other 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.

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

The investment is accounted for under the equity method of accounting and was initially recorded at cost.

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

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

We evaluate if there are material transactions or events that occur during the intervening period that materially affect the financial position or results of operations.

As of December 31, 2022 and 2021, our investment in 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 as of December 31, 2022 and 2021 were not material.

We evaluate our equity method investment 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.

Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.

This evaluation consists of several qualitative and quantitative factors including recent financial results, projected financial results and operating trends of the investee and other publicly available information that may affect the value of our investment.

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

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

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

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

Our accounts receivable balance is reduced by an allowance for expected credit losses.

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

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We do not depreciate the allocated cost of land.

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

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

Estimated Useful Lives

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Leasehold improvements Shorter of useful life or lease term

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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 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.

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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 were no impairments in 2021, 2020 and 2019.

There were no impairments to long-lived assets in 2022, 2021 and 2020.

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

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

As of December 31, 2022 and 2021, we h ad one reporti ng unit.

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

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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.

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.

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

We evaluate the classification of leases at commencement and, as necessary, at modification.

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.

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An option to terminate is considered unless it is reasonably certain we will not exercise the option.

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

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

Payments under our lease arrangements are primarily fixed;

however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease ROU assets and liabilities.

Variable lease payments primarily include common area maintenance charges, real estate taxes, certain parking expense and insurance costs.

Lease expense for lease payments for our operating leases is recognized on a straight-line basis over the term of the lease.

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

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

The costs to develop software for internal use are capitalized based on qualifying criteria.

These costs consist of internal compensation related costs and external direct costs incurred during the application development stage.

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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No impairment loss was recognized during 2022, 2021 and 2020.

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

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

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

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

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

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

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 five years .

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

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

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

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

Additionally, in limited circumstances, we may permit end-customers, distributors and resellers to return our products, subject to varying limitations, for a refund within a reasonably short period from the date of purchase.

Additionally, in limited circumstances, we may permit end-customers, distributors and resellers to return our products, subject

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

to varying limitations, for a refund within a reasonably short period from the date of purchase.

These amounts are accounted for as variable consideration that can decrease the transaction price.

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Our estimate for refund liabilities, which include sales returns reserve and customer rebates, was $ 92.0 million and $ 49.2 million as of December 31, 2022 and 2021, respectively, and is included in current liabilities in our consolidated balance sheet.

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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.

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

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

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In the event we change our warranty reserve estimates, the resulting charge against future cost of revenue or reversal of previously recorded charges may materially affect our gross margins and operating results.

Accrued warranty was not significant as of December 31, 2021 and 2020.

Accrued warranty liability was not material as of December 31, 2022 and 2021.

Contingent Liabilities —From time to time, we are involved in disputes, litigation, and other legal actions.

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

Recently Adopted Accounting Standards

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 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.

Recently Adopted and Recently Issued Accounting Standards

There were no recently adopted accounting standards which would have a material effect on our consolidated financial statements and accompanying disclosures, and no recently issued accounting standards that are expected to have a material impact on our consolidated financial statements and accompanying disclosures.

FORTINET, INC.

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REVENUE RECOGNITION

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

Our revenue consists of product and service revenue.

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

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

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

During 2022 and 2021, we recognized $ 1.73 billion and $ 1.37 billion in revenue that was included in the deferred revenue balance as of December 31, 2021 and 2020, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 3.45 billion, which was substantially comprised of deferred security subscription and technical support services.

As of December 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 4.65 billion, which was substantially comprised of deferred security subscription and technical support services revenue as well as unbilled contract revenue from non-cancellable contracts that will be recognized in future periods.

We expect to recognize approximately $ 2.36 billion as revenue over the next 12 months and the remainder thereafter.

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FINANCIAL INSTRUMENTS AND FAIR VALUE

Available-for-Sale Securities

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

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Gains Unrealized

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

Corporate debt securities $ 293.0 $ — $ ( 4.1 ) $ 288.9

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Certificates of deposit and term deposits 34.2 — — 34.2

169.1 — ( 0.1 ) 169.0

Commercial paper 26.5 — ( 0.1 ) 26.4

Municipal Bonds 5.1 — ( 0.1 ) 5.0

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Gains Unrealized

Commercial paper $ 185.4 $ — $ — $ 185.4

Corporate debt securities $ 540.7 $ — $ ( 1.2 ) $ 539.5

government securities 184.9 — — 184.9

government and agency securities 356.1 — ( 1.0 ) 355.1

Certificates of deposit and term deposits 169.1 — ( 0.1 ) 169.0

112.0 — — 112.0

Commercial paper 566.0 — ( 0.2 ) 565.8

Municipal Bonds 5.4 — — 5.4

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

(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 available-for-sale securities that have been in a continuous unrealized loss position (in millions):

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Value Unrealized

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

Corporate debt securities $ 90.5 $ ( 0.8 ) $ 190.0 $ ( 3.3 ) $ 280.5 $ ( 4.1 )

government and agency securities 3.9 ( 0.1 ) 189.8 ( 4.3 ) 193.7 ( 4.4 )

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

Commercial paper 26.4 ( 0.1 ) — — 26.4 ( 0.1 )

Municipal Bonds 5.0 ( 0.1 ) — — 5.0 ( 0.1 )

Total available-for-sale securities $ 125.8 $ ( 1.1 ) $ 379.8 $ ( 7.6 ) $ 505.6 $ ( 8.7 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2021

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Value Unrealized

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

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

government securities 38.1 — — — 38.1 —

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 )

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

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

2022 December 31,

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Total $ 548.1 $ 1,634.8

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 equity and in comprehensive income.

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 (deficit) and in comprehensive income.

We do not intend to sell any of the securities in an unrealized loss position and it is not more likely than not that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity.

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.

Marketable Equity Securities

Our marketable equity securities were $ 25.5 million and $ 38.6 million as of December 31, 2022 and December 31, 2021, respectively.

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.

We recognized $ 13.1 million and $ 5.1 million of losses in 2022 and 2021, respectively.

Fair Value of Financial Instruments

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

This hierarchy prioritizes the inputs into three broad levels as follows:

This hierarchy prioritizes the inputs into three broad levels:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

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We classify investments within Level 1 if quoted prices are available in active markets for identical securities.

We classify items within Level 2 if the investments are valued using model-driven valuations using observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency.

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

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Fair Value of Financial Instruments

reasonable levels of price transparency.

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

Assets Measured at Fair Value on a Recurring Basis

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

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

Corporate debt securities $ 288.9 $ — $ 288.9 $ — $ 542.5 $ — $ 542.5 $ —

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Certificates of deposit and term deposits 50.4 — 50.4 — 259.0 — 259.0 —

Commercial paper 115.8 — 115.8 — 580.3 — 580.3 —

Money market funds 593.9 593.9 — — 57.5 57.5 — —

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There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2022 and December 31, 2021.

Inventory consisted of the following (in millions):

Inventory consisted of (in millions):

2022 December 31,

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PROPERTY AND EQUIPMENT—Net

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

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

2022 December 31,

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Property and equipment—net $ 898.5 $ 687.6

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

We completed construction of a second building at our headquarters campus and it was placed in service on 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.

During 2022, we purchased certain real estate in the United States and Canada totaling $ 174.0 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.

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

The amounts allocated to land, buildings, and furniture and fixtures were $ 105.5 million, $ 67.7 million, and $ 0.8 million, respectively.

Depreciation expense was $ 81.0 million, $ 65.9 million and $ 55.5 million in 2022, 2021 and 2020, respectively.

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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.

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 in this privately held company.

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 December 31, 2022 and December 31, 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.

Determining that we have significant influence but not control over the operating and financial policies of Linksys required significant judgement of 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 record our share of Linksys’ financial results on a three-month lag basis, with the exception of material transactions or events that occur during the intervening period that materially affect the financial position or results of operations.

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.

Due to the presence of impairment indicators, such as a series of operating losses, current expected performance relative to expected performance when we initially invested, performance relative to peers, and the results of a discounted cash flows analysis, we evaluated our equity method investment for an OTTI during 2022.

We considered various factors in determining whether an OTTI has occurred, including Linksys financial results and operating history, our ability and intent to hold the investment until its fair value recovers, the implied revenue valuation multiples compared to guideline public companies, Linksys’ ability to achieve milestones and any notable operational and strategic changes.

After the evaluation, we noted that certain factors were present that indicate that the equity method investment’s decline in value is other-than-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

temporary, primarily driven by Linksys’ continuous losses, decrease in revenue and operating results, current forecasted results for the foreseeable future as compared to the expected performance at the time of the investments, and the results of a discounted cash flows analysis.

To determine the fair value of our investment in Linksys, we utilized a market approach referencing revenue multiples from publicly traded peer companies and concluded that the estimated fair value of the investment was lower than its carrying value.

During the three months ended December 31, 2022, we recorded a non-cash charge of $ 22.2 million related to impairment recognized on our equity method investment in Linksys.

Our loss related to Linksys in fiscal 2022 totaled $ 68.1 million, which comprised of our proportionate share of Linksys’ financial results as well as the amortization of the basis differences of $ 45.9 million, which included a $ 17.5 million charge in connection with a valuation allowance established on deferred tax assets at Linksys, and the OTTI charge of $ 22.2 million recorded during the three months ended December 31,2022.

This amount has been recorded in loss from equity method investment on the consolidated statements of income.

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, recorded in the same financial statement line item.

As of December 31, 2022 and 2021, our investment in Linksys was our only equity method investment and was recorded in other assets on our consolidated balance sheets.

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, 2022 and 2021.

BUSINESS COMBINATIONS

2022 Acquisitions

Network Detection and Response Business

On December 22, 2022, we closed an acquisition of certain assets and liabilities of a business specializing in network detection and response for $ 18.0 million in cash.

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

Of the purchase price, $ 5.8 million was allocated to goodwill, $ 10.5 million was allocated to developed technology intangible asset, $ 10.0 million was allocated to customer relationships intangible asset and $ 8.3 million was allocated to other net liabilities assumed, which predominantly include deferred revenue.

Goodwill recorded in connection with this acquisition is primarily attributable to the assembled workforce acquired and the anticipated operational 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.

Alaxala Networks Corporation

On October 3, 2022, we acquired the remaining 25 % of equity interests in Alaxala for $ 13.5 million in cash, and Alaxala became our wholly owned subsidiary.

2021 Acquisitions

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.

We acquired the equity interests in Alaxala to broaden our offering of secure switches integrated with our Core Platform and Enhanced Platform Technology (previously referred to as Platform Extension) 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 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:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in millions)

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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.

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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) :

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

Fair Value Estimated Useful Life (in years)

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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.

This method reflects the present value of the projected cost savings that are expected to be realized by avoiding the royalty that otherwise would be granted 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.

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

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Trade name relates to the “Alaxala” trade name.

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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.

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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.

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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,

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$ 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

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

OPAQ Networks, Inc.

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

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

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

CyberSponse, Inc.

On December 12, 2019, we acquired all outstanding shares of CyberSponse, Inc.

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

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

We incurred a $ 4.1 million liability in connection with this business combination, the majority of which related to the settlement of CyberSponse’s equity awards in cash, which we included in accrued liabilities in our consolidated balance sheet as of December 31, 2019, and paid during the year ended December 31, 2020.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

enSilo Limited

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

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

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

Additional Acquisition-Related Information

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

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Additions due to business combinations 5.8

Adjustment due to adoption of ASU 2021-08 3.0

Foreign currency translation adjustments ( 2.9 )

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There were no impairments to goodwill during 2022, 2021 and 2020, 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)

Amortization expense of finite-lived intangible assets was $ 23.3 million, $ 18.5 million and $ 13.3 million in 2022, 2021, and 2020, respectively.

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

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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):

is (in millions, except per share amounts):

Year Ended December 31,

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Diluted $ 1.06 $ 0.73 $ 0.58

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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 attributable to Fortinet, Inc.

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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 six 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 seven years , some of which include one or more options to renew, with renewal terms of up to seven 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.

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

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

The components of lease expense were (in millions):

Year Ended December 31,

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Total lease expense $ 46.4 $ 33.3 $ 24.6

(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):

(1) Variable lease expense for the year ended December 31, 2022, 2021 and 2020 predominantly included common area maintenance charges, real estate taxes, certain parking expense and insurance costs.

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

Classification December 31,

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Weighted average discount rate – operating leases 3.5 % 2.1 %

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

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

Year Ended December 31,

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Operating cash flows used for operating leases $ 33.8 $ 25.8 $ 18.9

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Maturities of operating lease liabilities as of December 31, 2022 were (in millions):

Year Ending December 31, Amount

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As of December 31, 2022, we had additional minimum lease payments of $ 2.1 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 .

These leases will commence during 2023 and will have lease terms of approximately two to six years .

FORTINET, INC.

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Total long-term debt $ 990.4

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.

As of December 31, 2022 and 2021, we accrued interest payable of $ 4.7 million, and there are no financial covenants with which we must comply.

In 2022 and 2021, we recorded $ 17.9 million and $ 14.7 million of total interest expense in relation to these Senior Notes and repaid $ 16.0 million and $ 8.4 million of interest in cash, respectively.

No interest costs were capitalized in 2022 and 2021, as the costs that qualified for capitalization were not material.

The total estimated fair value of the outstanding Senior Notes was approximately $ 829.5 million, including accrued and unpaid interest, as of December 31, 2022.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MUTUAL COVENANT-NOT-TO-SUE AND RELEASE AGREEMENT

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

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

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

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

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

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

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

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

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

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

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

During the year ended December 31, 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 $ 1,335.0 $ 1,270.7 $ 64.3

Inventory Purchase Commitments —Our independent contract manufacturers procure certain 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 supply chain matters and other market conditions.

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.

Inventory Purchase Commitments —Our independent contract manufacturers and certain component suppliers procure components and build our products based on our forecasts, the availability of various components and their capacity.

In order to manage 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, 2022, we had $ 1.34 billion of open purchase orders with our independent contract manufacturers that consisted of non-cancelable commitments.

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

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.

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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.

As of December 31, 2022, we had $ 108.1 million in other contractual commitments having a remaining term in excess of one year that are non-cancelable.

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

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

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

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

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

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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.

These accruals are generally

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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.

These accruals are generally 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, we accrue the minimum amount.

Litigation loss contingency accruals associated with outstanding cases were not material as of December 31, 2022 and 2021.

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

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

We currently are unaware of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

EQUITY PLANS AND SHARE REPURCHASE PROGRAM

Stock-Based Compensation Plans

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

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

2009 Equity Incentive Plan —Our board of directors approved the 2009 Equity Incentive Plan in 2009.

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

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

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

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

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

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

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

Our board of directors approved the 2009 EIP in 2009 and amended the plan in 2019.

The maximum aggregate number of shares that may be issued under the 2009 EIP is 239,367,655 shares;

provided, however, that only 67,500,000 shares may be issued or transferred pursuant to new awards granted on or following the effective date of the 2009 EIP.

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

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

As of December 31, 2021, there were a total of 11.8 million shares of common stock available for grant under the 2009 Plan.

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

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.

As of December 31, 2022, there were a total of 57.2 million shares of common stock available for grant under the 2009 EIP.

Restricted Stock Units

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

As of December 31, 2021, total compensation expense related to unvested RSUs granted to employees and non-employees under the 2009 Plan, but not yet recognized, was $ 367.8 million, with a weighted-average remaining vesting period of 2.6 years.

As of December 31, 2022, total compensation expense related to unvested RSUs granted to employees and non-employees under the 2009 EIP, but not yet recognized, was $ 374.4 million, with a weighted-average remaining vesting period of 2.6 years.

RSUs settle into shares of common stock upon vesting.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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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.

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Dividend rate — % — % — %

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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Options exercisable—December 31, 2022 9.1 $ 16.10 2.7 $ 300.0

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

The aggregate intrinsic value represents the difference between the exercise price of stock options and the quoted market price of our common stock at the date of balance sheet for all in-the-money stock options.

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

As of December 31, 2022, total compensation expense related to unvested stock options granted to employees but not yet recognized was $ 53.7 million, with a weighted-average remaining vesting period of 2.6 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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Fair value of options vested $ 24.9 $ 17.2 $ 13.5

The following table summarizes information about outstanding and exercisable stock options as of December 31, 2021, as follows (in millions, except exercise prices and contractual life):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes information about outstanding and exercisable stock options as of December 31, 2022, (in millions, except exercise prices and contractual life):

Options Outstanding Options Exercisable

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1.9 6.1 59.79 0.1 56.72

Employee Stock Purchase Plan

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):

Shares issued under the ESPP 0.3

Weighted-average price per share issued $ 64.79

Shares Reserved for Future Issuances

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Total common stock reserved for future issuances 80.9

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation Expense

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

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

Year Ended December 31,

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Total stock-based compensation expense $ 219.8 $ 211.2 $ 193.8

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Year Ended December 31,

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Share Repurchase Program

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

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 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.

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

From 2016 through 2021, our board of directors approved increases to our Repurchase Program by various amounts and extended the term to February 28, 2023, bringing the aggregated amount authorized to $ 4.25 billion.

In July 2022, our board of directors approved a $ 1.0 billion increase, bringing the aggregate amount authorized to be repurchased to $ 5.25 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 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 and loss from equity method investment consisted of the following (in millions):

In 2022, we repurchased 36.0 million shares of common stock under the Repurchase Program in open market transactions for an aggregate purchase price of $ 1.99 billion.

As of December 31, 2022, $ 529.6 million remained available for future share repurchases under the Repurchase Program.

In February 2023, our board of directors approved an extension of the Repurchase Program to February 29, 2024.

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

Year Ended December 31,

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Total income before income taxes and loss from equity method investment $ 955.5 $ 628.4 $ 541.7

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

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

Year Ended December 31,

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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.

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

GAAP to local tax return book to tax differences 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 income taxes differs from the amount computed by applying the statutory federal income tax rate (in millions):

Year Ended December 31,

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Valuation allowance 25.9 20.0 11.9

Impact of the 2017 Tax Act:

Impact of the 2017 Tax Cuts and Jobs Act:

One-time transition tax — 5.8 2.6

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Total provision for income taxes $ 30.8 $ 14.1 $ 53.2

On January 4, 2022, the U.S.

Treasury published another tranche of final regulations regarding the foreign tax credit.

These final regulations impose new requirements that a foreign tax must meet in order to be creditable against U.S.

income taxes, and generally apply to tax years beginning on or after December 28, 2021.

On July 26, 2022, the U.S.

Treasury released corrections to the final regulations.

These final regulations adversely impact our ability to claim foreign tax credits in the United States for certain taxes imposed by certain foreign jurisdictions.

These final regulations increased our tax expense by approximately $ 27.5 million on our consolidated financial statements as of December 31, 2022.

On August 16, 2022, the United States enacted the IRA that, among other changes, provides for changes to the U.S.

corporate income tax system, including a 15% minimum tax based on financial statement income for companies with three-year average annual adjusted financial statement income exceeding $1 billion, and a 1% excise tax on net repurchases of stock after December 31, 2022, if any.

We considered the applicable tax law changes, and there is no impact to our tax provision for the year ended December 31, 2022.

We will continue to evaluate the impact of these tax law changes on future periods.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On September 29, 2020, the U.S.

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

The final and proposed regulations provide administrative guidance for the foreign tax credit regime, which was updated in the 2017 Tax Cuts and Jobs Act (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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Net deferred tax assets $ 561.3 $ 334.3

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.

This realization is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

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 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.

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 credits carryforward, certain impairment losses in business investments, certain foreign tax credits from foreign disregarded entities and certain tax attributes from business acquisitions.

As of December 31, 2022, we had a valuation allowance of $ 100.8 million against those items.

As of December 31, 2022, our federal and California net operating loss carryforwards for income tax purposes were $ 70.4 million and $ 20.8 million, respectively.

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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.

We have analyzed our global working capital and cash requirements and the potential tax liabilities attributable to repatriation, and have determined that we will be repatriating certain unremitted foreign earnings which was previously deemed indefinitely reinvested.

For those investments from which we were able to make a reasonable estimate of the tax effects of such repatriation, we have recorded a provisional estimate for withholding and state taxes.

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

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.

Our policy is to include accrued interest and penalties related to uncertain tax benefits in income tax expense.

As of December 31, 2021, 2020 and 2019, accrued interest and penalties were $ 13.3 million, $ 14.5 million and $ 14.1 million, respectively.

The aggregate changes in the balance of unrecognized tax benefits are as follows (in millions):

The aggregate changes in the balance of unrecognized tax benefits are (in millions):

Year Ended December 31,

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Unrecognized tax benefits, end of year $ 67.4 $ 73.3 $ 77.3

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

As of December 31, 2022, we had $ 67.4 million of unrecognized tax benefits, of which, if recognized, $ 58.5 million would favorably affect our effective tax rate.

Our gross unrecognized tax benefits decreased by approximately $ 5.9 million during the year ended December 31, 2022.

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.

Our policy is to include accrued interest and penalties related to uncertain tax benefits in income tax expense.

As of December 31, 2022, 2021 and 2020, accrued interest and penalties were $ 9.3 million, $ 13.3 million and $ 14.5 million, respectively.

It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $ 15.1 million in the next 12 months, primarily due to the lapse of the statute of limitations.

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state and foreign jurisdictions.

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

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

federal income tax authorities for tax years prior to 2016.

We are no longer subject to U.S.

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employees to contribute a portion of their pre-tax or after-tax earnings.

In Canada, we have a Group Registered Retirement Savings Plan Program (the “RRSP”), which permits participants to make tax-deductible contributions.

In Canada, we have a Group Registered Retirement Savings Plan Program (the “RRSP”), which permits participants to make pre-tax contributions.

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

Our matching contributions to our 401(k) Plan and the RRSP for 2022, 2021 and 2020 were $ 12.6 million, $ 10.0 million and $ 8.3 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEGMENT INFORMATION

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Accordingly, we have determined that we have one operating segment, and therefore, one reportable segment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Revenue by geographic region is based on the billing address of our customers.

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Total property and equipment—net $ 898.5 $ 687.6

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

Year Ended December 31,

2022 2021 2020

Distributor A 29 % 31 % 30 %

Distributor B 14 % * *

Distributor C 14 % 12 % 10 %

* Represents less than 10%

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

Distributor A 32 % 33 %

Distributor B 13 % 13 %

Distributor C 12 % 13 %

SUBSEQUENT EVENT

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.

Share Repurchase Program

In February 2023, our board of directors approved an extension of the Repurchase Program to February 29, 2024.

As of February 23, 2023, approximately $529.6 million remained available for future share repurchases.

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