What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-26 compared with 2023-02-24 · 279 added, 230 removed, 998 unchanged (34% of the section changed)

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Consolidated Balance Sheets as of December 31, 202 3 and 202 2

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

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

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

Consolidated Statements of Income for the year s ended December 31, 202 3 , 202 2 and 202 1

Consolidated Statements of Comprehensive Income for the year s ended December 31, 202 3 , 202 2 and 202 1

Consolidated Statements of Equity (Deficit) for the year s ended December 31, 202 3 , 202 2 and 202 1

Consolidated Statements of Cash Flows for the year s ended December 31, 202 3 , 202 2 and 202 1

Notes to Consolidated Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Critical Audit Matters

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

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

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.

Critical Audit Matter

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

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

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

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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 its products.

Claims from third parties may result in a requirement to pay substantial damages.

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 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 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 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

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

• 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 the pending litigation matters with internal legal counsel.

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

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

• We read Board of Directors meeting minutes to search for contradictory information.

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

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FORTINET, INC.

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TOTAL ASSETS $ 7,258.9 $ 6,228.0

LIABILITIES AND EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES:

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DEFERRED REVENUE 2,886.3 2,291.0

INCOME TAX LIABILITIES 67.8 79.5

LONG-TERM DEBT 992.3 990.4

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COMMITMENTS AND CONTINGENCIES (Note 12)

EQUITY (DEFICIT):

STOCKHOLDERS’ DEFICIT:

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

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Accumulated deficit ( 1,861.7 ) ( 1,546.4 )

Total Fortinet, Inc.

stockholders’ equity (deficit) ( 281.6 ) 781.7

Non-controlling interests — 16.7

Total equity (deficit) ( 281.6 ) 798.4

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

Total stockholders’ deficit

( 463.4 ) ( 281.6 )

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

$ 7,258.9 $ 6,228.0

See notes to consolidated financial statements.

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FORTINET, INC.

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OTHER EXPENSE—NET ( 6.1 ) ( 13.5 ) ( 11.6 )

INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENT 955.5 628.4 541.7

INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENTS

1,333.7 955.5 628.4

PROVISION FOR INCOME TAXES 143.8 30.8 14.1

LOSS FROM EQUITY METHOD INVESTMENT

LOSS FROM EQUITY METHOD INVESTMENTS

( 42.1 ) ( 68.1 ) ( 7.6 )

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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 $ 1,147.8 $ 856.6 $ 606.7

Other comprehensive loss:

Other comprehensive income (loss):

Change in foreign currency translation ( 5.5 ) ( 9.7 ) ( 3.8 )

Change in unrealized gains (losses) on investments 8.8 ( 6.2 ) ( 3.5 )

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 )

tax provision (benefit) related to items of other comprehensive income (loss)

2.0 ( 1.4 ) ( 0.8 )

Other comprehensive income (loss)

1.3 ( 14.5 ) ( 6.5 )

Comprehensive income including non-controlling interests 1,149.1 842.1 600.2

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See notes to consolidated financial statements.

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FORTINET, INC.

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Capital Accumulated

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

Comprehensive Income (Loss) Accumulated Deficit

Non-Controlling Interests Total Equity (Deficit)

Shares Amount

BALANCE—December 31, 2020

812.7 $ 0.8 $ 1,206.6 $ 0.7 $ ( 352.1 ) $ — $ 856.0

Issuance of common stock in connection with equity incentive plans - net of tax withholding 10.2 — ( 141.7 ) — — — ( 141.7 )

Repurchase and retirement of common stock

( 12.9 ) — ( 19.2 ) — ( 722.6 ) — ( 741.8 )

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

BALANCE—December 31, 2021

810.0 0.8 1,253.6 ( 4.8 ) ( 467.9 ) 16.7 798.4

Issuance of common stock in connection with equity incentive plans - net of tax withholding 7.5 — ( 134.7 ) — — — ( 134.7 )

Repurchase and retirement of common stock

( 36.0 ) — ( 55.4 ) — ( 1,935.8 ) — ( 1,991.2 )

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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BALANCE—December 31, 2022

781.5 0.8 1,284.2 ( 20.2 ) ( 1,546.4 ) — ( 281.6 )

Issuance of common stock in connection with equity incentive plans - net of tax withholding 6.7 — ( 68.5 ) — — — ( 68.5 )

Repurchase and retirement of common stock

( 27.2 ) — ( 37.4 ) — ( 1,463.1 ) — ( 1,500.5 )

Excise tax on net stock repurchases

— — ( 10.9 ) — — — ( 10.9 )

Stock-based compensation expense — — 249.0 — — — 249.0

Acquisition of the non-controlling interests

Net unrealized gain on investments - net of tax

— — — 6.8 — — 6.8

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

Foreign currency translation adjustment — — — ( 5.5 ) — — ( 5.5 )

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BALANCE—December 31, 2023

761.0 $ 0.8 $ 1,416.4 $ ( 18.9 ) $ ( 1,861.7 ) $ — $ ( 463.4 )

See notes to consolidated financial statements.

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FORTINET, INC.

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Amortization of investment premiums (discounts) ( 27.7 ) 4.4 6.9

Loss from equity method investment 68.1 7.6 —

Loss from equity method investments

42.1 68.1 7.6

Other 18.5 23.6 7.9

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Purchases of property and equipment ( 204.1 ) ( 281.2 ) ( 295.9 )

Investment in privately held company — ( 160.0 ) —

Purchases of Investments in privately held companies

( 8.5 ) — ( 160.0 )

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

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Repurchase and retirement of common stock

( 1,500.5 ) ( 1,991.2 ) ( 741.8 )

Proceeds from issuance of common stock 43.8 26.1 26.0

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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

( 285.0 ) 363.8 257.3

CASH AND CASH EQUIVALENTS—Beginning of year 1,682.9 1,319.1 1,061.8

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Operating lease liabilities arising from obtaining right-of-use assets $ 19.2 $ 65.8 $ 39.6

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

NON-CASH INVESTING AND FINANCING ACTIVITIES:

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Liability for purchase of property and equipment $ 23.6 $ 21.2 $ 21.9

Liability incurred in connection with business combination $ 0.8 $ 0.9 $ 0.4

Excise tax payable on net stock repurchases $ 10.9 $ — $ —

Liability incurred in connection with business combinations

$ — $ 0.8 $ 0.9

See notes to consolidated financial statements.

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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 cybersecurity mesh architecture (the “Fortinet Security Fabric”) with automated protection, detection and responses.

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

The amounts previously reported as Income tax liabilities are included in Other liabilities.

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

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”).

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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 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.

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 investees, 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 and liability for non-cancellable inventory purchase commitments with contract manufacturers and component suppliers, 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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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.

We rely on a small number of manufacturing partners, with over 95 % of manufacturing in Taiwan and U.S., to manufacture our products, and some of the chips and other components of our products used by the contract manufacturers are available from limited or sole sources of supply.

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

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

other integrated circuits are provided by other chip manufacturers.

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

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

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.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

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 impacts.

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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.

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

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

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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.

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

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

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

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

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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 (deficit).

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 concluded that an allowance for credit losses was unnecessary as of December 31, 2023, 2022 and 2021 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.

As a result, we had no credit losses recorded for the years ended December 31, 2023, 2022 and 2021.

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)

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 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.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Our equity method investments provide us with the ability to exercise significant influence over the investees, 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 entity’s net loss, the amortization of any basis differences, as well as any OTTI as gain or loss from these 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 these equity method investments 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.

As of December 31, 2023, we had two equity method investments, including our investment in Linksys.

As of December 31, 2022, our investment in Linksys was our only equity method investment.

As of December 31, 2023 and 2022, our equity method investments were recorded in other assets.

Our remaining investments in privately held companies are recorded at cost and as of December 31, 2023 and 2022 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.

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 investments 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 investments or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investments.

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

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

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Cost is computed using the first-in, first-out method.

Inventory costs comprise primarily of the cost of materials and other component parts as well as capitalized overhead.

In assessing the ultimate recoverability of inventory, we make estimates regarding future customer demand, the timing of new product introductions, economic trends and market conditions.

If the actual product demand is significantly lower than forecasted, we could be required to record inventory write-downs which would be charged to cost of product revenue.

A write-down of inventory and a corresponding charge to cost of product revenue is recorded when inventory is determined to be in excess of anticipated demand or considered obsolete.

At the point of the write-down loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

In addition, we record a liability for non-cancelable inventory purchase commitments with contract manufacturers and suppliers for quantities in excess of our future estimated demand forecasts.

The expense related to such accrued liability for inventory purchase commitments is recorded in cost of product revenue on the consolidated statements of income.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property and Equipment —Property and equipment are stated at cost less accumulated depreciation.

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Leasehold improvements Shorter of useful life or lease term

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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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.

Our estimates and assumptions are subject to change based on information existing at acquisition date but unknown to us, which may become known during the remainder of the measurement period, not to exceed 12 months from the acquisition date, and if we make changes to the amounts recorded, such amounts are recorded in the period in which they are identified.

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

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

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

There were no impairments of long-lived assets in 2023, 2022 and 2021.

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 perform a qualitative assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.

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

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

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

If such evaluation indicates that it is more likely than not that the fair value of a reporting unit is less that its carrying amount, then the quantitative impairment test will be performed.

Under the quantitative impairment test, if the carrying amount of a reporting unit exceeds its fair value, any excess is recognized as an impairment loss in goodwill, limited to the total amount of goodwill allocated to that reporting unit.

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

As of December 31, 2023 and 2022, we h ad one reporti ng unit.

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We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes.

These differences result in deferred tax assets, which are included in our consolidated balance sheets.

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

differences result in deferred tax assets, which are included in our consolidated balance sheets.

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

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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We 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.

We have elected to account for the tax effect of the GILTI 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.

We have elected to use the Black-Scholes-Merton (“Black-Scholes”) pricing model to determine the fair value of our employee stock options and our equity incentive plans.

Stock-based compensation expense is amortized on a straight-line basis over the service period.

We have elected to use the Black-Scholes-Merton (“Black-Scholes”) pricing model to determine the fair value of our employee stock options and the Monte Carlo simulation pricing model to determine the fair value of our performance stock units (“PSUs”).

Stock-based compensation expense of our RSUs and options is amortized on a straight-line basis over the service period and stock-based compensation expense of our PSUs is amortized using a graded vesting method over the vesting period.

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

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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.

Variable lease payments primarily include common area maintenance charges, real estate taxes, certain parking expense, utilities based on actual usage, 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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For our finance leases, we recognize amortization expense from the amortization of the corresponding assets and interest expense on the related lease liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Internal use software development costs capitalized were not material for any periods presented.

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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Amortization of deferred contract costs during 2023, 2022 and 2021 was $ 266.3 million, $ 223.3 million and $ 175.9 million, respectively.

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

No impairment loss of deferred contract costs asset was recognized during 2023, 2022 and 2021.

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 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 derive a majority of product sales from Secure Networking hardware and associated security services 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.

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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.

We recognize revenue from professional and training services as the services are provided.

We also generate a 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.

We recognize revenue from professional and training services as the services

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

are provided.

We recognize revenue from SaaS as the subscription service is delivered over the term, which is typically one year, or on a monthly usage basis.

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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

FORTINET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

We also invoice certain services on a monthly basis.

Amounts billed and due from our customers are classified as receivables on the balance sheet and do not bear interest.

Our deferred revenue primarily consists of amounts that have been invoiced but have not been recognized as revenue as of period end.

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

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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 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.

Recent Accounting Standards Not Yet Effective

Segment Reporting

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which is intended to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses.

ASU 2023-07 was effective for us beginning on January 1, 2024 and will be applied on a retrospective basis to all periods presented.

We are currently evaluating the ASU to determine its impact on our disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction.

The amendments are effective for our annual periods beginning January 1, 2025, with early adoption permitted, and should be applied prospectively.

We are currently evaluating the ASU to determine its impact on our disclosures.

REVENUE RECOGNITION

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Deferred Revenue

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

During 2023 and 2022, we recognized $ 2.27 billion and $ 1.73 billion in revenue that was included in the deferred revenue balance as of December 31, 2022 and 2021, respectively.

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FINANCIAL INSTRUMENTS AND FAIR VALUE

Available-for-Sale Securities

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

Available-for-Sale Investments

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

December 31, 2023

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Gains Unrealized

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

government and agency securities $ 461.5 $ 0.2 $ ( 0.3 ) $ 461.4

Certificates of deposit and term deposits 34.2 — — 34.2

Commercial paper 401.7 0.2 ( 0.1 ) 401.8

Municipal Bonds 5.1 — ( 0.1 ) 5.0

Total available-for-sale securities $ 556.8 $ — $ ( 8.7 ) $ 548.1

Certificates of deposit and term deposits 88.2 0.1 — 88.3

Corporate debt securities 70.0 0.1 ( 0.1 ) 70.0

Total available-for-sale investments

$ 1,021.4 $ 0.6 $ ( 0.5 ) $ 1,021.5

December 31, 2022

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Gains Unrealized

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

government and agency securities $ 198.0 $ — $ ( 4.4 ) $ 193.6

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

Commercial paper 26.5 — ( 0.1 ) 26.4

Certificates of deposit and term deposits 34.2 — — 34.2

Corporate debt securities 293.0 — ( 4.1 ) 288.9

Municipal Bonds 5.1 — ( 0.1 ) 5.0

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

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):

Total available-for-sale investments

$ 556.8 $ — $ ( 8.7 ) $ 548.1

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

December 31, 2023

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Value Unrealized

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

government and agency securities $ 47.1 $ — $ 11.7 $ ( 0.3 ) $ 58.8 $ ( 0.3 )

Commercial paper 200.8 ( 0.1 ) — — 200.8 ( 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)

Corporate debt securities 21.8 — 26.9 ( 0.1 ) 48.7 ( 0.1 )

Total available-for-sale investments

$ 269.7 $ ( 0.1 ) $ 38.6 $ ( 0.4 ) $ 308.3 $ ( 0.5 )

December 31, 2022

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Value Unrealized

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

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 )

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

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

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

Total available-for-sale investments

$ 125.8 $ ( 1.1 ) $ 379.8 $ ( 7.6 ) $ 505.6 $ ( 8.7 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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Total $ 1,021.5 $ 548.1

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.

Available-for-sale investments 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.

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

Marketable Equity Securities

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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

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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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)

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

government and agency securities $ 501.4 $ 433.3 $ 68.1 $ — $ 268.6 $ 259.3 $ 9.3 $ —

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

Commercial paper 472.2 — 472.2 — 115.8 — 115.8 —

Certificates of deposit and term deposits 104.8 — 104.8 — 50.4 — 50.4 —

Corporate debt securities 73.0 — 73.0 — 288.9 — 288.9 —

Money market funds 277.1 277.1 — — 593.9 593.9 — —

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Inventory $ 484.8 $ 264.6

The excess and obsolete inventory reserve was $ 89.2 million and $ 52.5 million as of December 31, 2023 and 2022, respectively.

Inventory write-downs related to excess and obsolete inventory were $ 35.8 million for the year ended December 31, 2023, and not material for the years ended December 31, 2022 and 2021.

They were recorded in cost of product revenue on the consolidated statements of income.

FORTINET, INC.

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Property and equipment—net $ 1,044.4 $ 898.5

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

During 2023, we purchased certain real estate in the United States, Spain, and Australia totaling $ 109.3 million.

The purchases were accounted for under the asset acquisition method.

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.

The costs of the assets allocated to land, buildings and improvements and construction-in-progress were $ 41.7 million, $ 46.0 million and $ 21.6 million, respectively, based on their relative fair values.

Depreciation expense was $ 94.5 million, $ 81.0 million and $ 65.9 million in 2023, 2022 and 2021, 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 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.

During 2021, we invested $ 160.0 million in cash for shares of the Series A Preferred Stock of Linksys for a 50.8 % ownership interest in this privately held company.

As of December 31, 2023 and 2022, our ownership interest remained the same.

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

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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.

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-

Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $ 42.1 million in 2023.

Our loss related to Linksys in 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 other-than-temporary impairment (“OTTI”) charge of $ 22.2 million recorded during the three months ended December 31, 2022.

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.

The loss related to Linksys is recorded in loss from equity method investments on the consolidated statements of income.

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, changes in net working capital and cash available for business operations, and the results of a discounted cash flows analysis, we evaluated our equity method investment for an OTTI during 2023 and 2022.

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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.

milestones and any notable operational and strategic changes.

In connection with our evaluation as of December 31, 2022, we noted that certain factors were present that indicated that the equity method investment’s decline in value was OTTI, primarily driven by Linksys’ continuous losses, decrease in revenue and operating results, then 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.

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

In connection with our evaluation as of December 31, 2023, we determined that an additional OTTI has not occurred.

However, we may be required to recognize an impairment loss in future reporting periods if and when our evaluation of the aforementioned factors indicates that the investment in Linksys is determined to be other than temporarily impaired.

Such determination will be based on the prevailing facts and circumstances at that time.

The carrying amount of our Linksys investment was $ 42.2 million and $ 84.3 million as of December 31, 2023 and 2022, respectively, and the investment was included in other assets on our consolidated balance sheets.

Other investment

On August 1, 2023, we invested $ 8.5 million in cash for a 19.5 % ownership interest in the outstanding common stock of a privately held company that provides rugged ethernet switches, 4G/5G industrial routers and media converters for critical infrastructure customers.

We accounted for this investment as an equity method investment since we have the ability to exercise significant influence, but not control, over the operating and financial policies of the privately held company.

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

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

We recorded our proportionate share of the privately held company’s financial results on a three-month lag basis and presented it in loss from equity method investments on the consolidated statements of income.

Our share of income of the privately held company’s financial results, as well as our share of the amortization of the basis differences, were immaterial during 2023.

The carrying amount of the investment was $ 8.5 million as of December 31, 2023, and the investment was included in other assets on our consolidated balance sheets.

BUSINESS COMBINATIONS

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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

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

2021 Acquisition

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 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:

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

acquired the equity interests in Alaxala to broaden our offering of secure switches integrated with our secure networking solutions.

The following table provides the assets acquired and liabilities assumed as of the date of acquisition:

(in millions)

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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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Trade name relates to the “Alaxala” trade name.

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$ 608.2 $ 480.0

2020 Acquisitions

Panopta Holdings LLC

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

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

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

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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Balance—December 31, 2022

Additions due to business combinations 5.8

Foreign currency translation adjustments ( 1.5 )

Balance—December 31, 2023

There were no impairments to goodwill during 2022, 2021 and 2020, or any previous years.

There were no impairments to goodwill during 2023, 2022 and 2021 or any previous periods.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Intangible Assets—Net

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Total other intangible assets—net $ 125.6 $ 69.6 $ 56.0

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization expense of finite-lived intangible assets was $ 18.9 million, $ 23.3 million and $ 18.5 million in 2023, 2022, and 2021, respectively.

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

by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“RSUs”) and stock options.

by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units RSUs, stock options and PSUs.

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.

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Diluted $ 1.46 $ 1.06 $ 0.73

FORTINET, INC.

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

Our leases have remaining terms that range from less than one year to approximately six years , some of which include one or more options to renew, with renewal terms of up to 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The components of lease expense were (in millions):

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Total lease expense $ 58.1 $ 46.4 $ 33.3

(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.

(1) Variable lease expense for the years ended December 31, 2023, 2022 and 2021 predominantly included common area maintenance charges, real estate taxes, certain parking expense, utilities based on actual usage and insurance costs.

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

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Operating cash flows used for operating leases $ 40.0 $ 33.8 $ 25.8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Maturities of operating lease liabilities as of December 31, 2023 were (in millions):

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Less imputed interest ( 7.3 )

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 2023 and will have lease terms of approximately two to six years .

As of December 31, 2023, our operating leases that had been signed but had not yet commenced were not material.

FORTINET, INC.

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As of December 31, 2023 and 2022, 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.

In 2023, 2022 and 2021 we recorded $ 17.9 million, $ 17.9 million and $ 14.7 million of total interest expense in relation to these Senior Notes and repaid $ 16.0 million, $ 16.0 million and $ 8.4 million of interest in cash, respectively.

No interest costs were capitalized in 2023, 2022 and 2021, as the costs that qualified for capitalization were not material.

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The estimated fair values are based on Level 2 inputs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

COMMITMENTS AND CONTINGENCIES

The following table summarizes our inventory purchase commitments as of December 31, 2023 (in millions):

Total 2023 Thereafter

Inventory purchase commitments $ 637.3 $ 381.5 $ 255.8

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.

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 extended lead times, changes in supplier delivery commitments and other supply chain matters and other market conditions.

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 lead times, changes in supplier delivery commitments and other supply chain matters and market conditions.

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.

As of December 31, 2023, we had $ 637.3 million of open purchase orders with our independent contract manufacturers that consist 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.

We record a liability for non-cancelable inventory purchase commitments for quantities in excess of our future estimated demand forecasts, consistent with the valuation of our excess and obsolete inventory.

As of December 31, 2023, the liability for these inventory purchase commitments was $ 84.7 million and was included in accrued liabilities.

The expense related to such accrued liability

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

for inventory purchase commitments was $ 85.9 million for the year ended December 31, 2023, and not material for the years ended December 31, 2022 and 2021, and was recorded in cost of product revenue on the consolidated statements of income.

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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Litigation loss contingency accruals associated with outstanding cases were not material as of December 31, 2023 and 2022.

On March 21, 2019, we were sued by Alorica Inc.

(“Alorica”) in Santa Clara County Superior Court in California.

Alorica has alleged breach of warranty and misrepresentation claims, which we deny.

Fact discovery closed during the quarter ended June 30, 2023.

Trial is set for May 2024.

Although we believe that the ultimate outcome of this matter will not materially impact our financial position, results of operations or cash flows, legal proceedings are subject to inherent uncertainties, and an unfavorable ruling could occur, which may result in a material adverse impact on our business, financial position, results of operations and cash flows.

No loss accrual had been recorded as of December 31, 2023 related to this litigation.

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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Although from time to time there are indemnification claims asserted against us and currently there are pending indemnification claims, to date there have been no material awards under such indemnification provisions.

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

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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.

Similar to other security companies and companies in other industries, we have experienced and may experience in the future, 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.

EQUITY PLANS AND SHARE REPURCHASE PROGRAM

Stock-Based Compensation Plans

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

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

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.

provided, however, that only 67,500,000 shares may be

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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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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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Amount withheld for taxes $ 112.5 $ 160.4 $ 167.9

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Employee Stock Options

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Balance—December 31, 2020

13.6 $ 13.51 4.2 220.4

Granted 2.9 37.26

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Balance—December 31, 2021

13.7 18.57 4.0 729.9

Granted 1.7 60.26

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Balance—December 31, 2022

13.2 24.37 3.5 344.8

Granted 1.3 60.16

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Options vested and expected to vest—December 31, 2023

11.2 $ 31.14 3.3 $ 315.8

Options exercisable—December 31, 2023

8.2 $ 23.02 2.6 $ 293.2

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.

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1.5 5.1 62.76 0.7 62.49

Market/Performance-Based PSUs

In 2023, we granted market/performance-based PSUs under the 2009 EIP to certain of our executives.

Based on the achievement of the market/performance-based vesting conditions during the performance period, the final settlement of the PSUs will range between 0 % and 200 % of the target shares underlying the PSUs based on the percentile ranking of our total stockholder return over one -, two -, three - and four-year periods among companies included in the S&P 500 Index.

20 %, 20 %, 20 % and 40 % of the PSUs vest over one -, two -, three - and four-year service periods, respectively.

We granted approximately 0.3 million shares of PSU awards with a grant date fair value of $ 90.96 per share to certain of our executives during the first quarter of 2023.

The grant date fair value of these awards was determined using a Monte Carlo simulation pricing model.

The following table summarizes the weighted-average assumptions relating to our PSUs for the three months ended March 31, 2023:

Three Months Ended

Expected term in years 2.7

Volatility 47.5 %

Risk-free interest rate 4.6 %

Dividend rate — %

None of these PSU awards were vested and PSU awards forfeited were immaterial during the year ended December 31, 2023.

As of December 31, 2023, total compensation expense related to unvested PSUs that were granted to certain of our executives, but not yet recognized, was $ 16.1 million.

This expense is expected to be amortized on a graded vesting method over a weighted-average vesting period of 2.4 years.

Shares Reserved for Future Issuances

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Reserved for future equity award grants 53.6

Outstanding stock options and RSUs 23.7

Outstanding stock options, RSUs and PSUs

Total common stock reserved for future issuances 74.2

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation Expense

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Stock options 28.8 24.8 19.4

$ 11.0 $ — $ —

Total stock-based compensation expense $ 251.6 $ 219.8 $ 211.2

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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):

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From 2016 through 2022, 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 $ 5.25 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.

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

In April 2023 and July 2023, our board of directors approved $ 1.0 billion and $ 500.0 million increases in the authorized stock repurchase amount under the Repurchase Program, bringing the aggregate amount authorized to be repurchased to $ 6.75 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 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.

In 2023, we repurchased 27.2 million shares of common stock under the Repurchase Program in open market transactions for an aggregate purchase price of $ 1.50 billion, which excludes a $ 10.9 million accrual related to the 1% excise tax imposed by the Inflation Reduction Act of 2022.

As of December 31, 2023, $ 529.1 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):

Refer to Note 17, Subsequent Events, for information regarding the approved $ 500.0 million increase in the authorized stock repurchase amount under the Repurchase Program in January 2024 and the extension of the Repurchase Program to February 28, 2025 in February 2024.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Year Ended December 31,

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Foreign 138.7 81.7 60.7

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

Total income before income taxes and loss from equity method investments

$ 1,333.7 $ 955.5 $ 628.4

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

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One-time transition tax — — 5.8

Foreign-Derived Intangible Income ( 115.2 ) ( 33.6 ) ( 44.3 )

Tax effect of a law change

Foreign-Derived Intangible Income ("FDII")

( 89.5 ) ( 115.2 ) ( 33.6 )

Adjustment to prior year’s FDII

Other 22.7 ( 5.1 ) ( 6.7 )

Total provision for income taxes $ 143.8 $ 30.8 $ 14.1

Effective January 1, 2022, research and development expenses are required to be capitalized and amortized for U.S.

tax purposes, which delays the deductibility of these expenses, and increases our current provision.

During 2023, we changed our position regarding the allocation and apportionment of expenses for income tax purposes.

This change in approach affected the amount of our FDII benefit and our ability to utilize certain foreign tax credits.

As a result, our FDII benefits recorded in prior years decreased by $ 92.8 million, partially offset by an increased benefit for the utilization of foreign tax credits of $ 63.1 million.

These foreign tax credit carryforwards were previously expected to have expired unutilized resulting in the recording of a full valuation allowance thereon.

Accordingly, the benefit recognized as a result of their utilization is included in the benefit from the release of a valuation allowance of $ 67.7 million.

On January 4, 2022, the U.S.

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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.

On July 21, 2023, the IRS released a notice that suspended the application of significant portions of the final regulations regarding the foreign tax credit for tax years 2022 and 2023.

The notice released in July 2023 favorably impacted our ability to claim foreign tax credits in the United States for certain taxes imposed by certain foreign jurisdictions.

On December 11, 2023, the IRS released a notice that extended the suspension of significant portions of the final regulations beyond December 31, 2023, until further guidance is issued.

On August 16, 2022, the United States enacted the Inflation Reduction Act of 2022 that provides for certain 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.

The applicable tax law changes have had no impact to our tax provision for the year ended December 31, 2023.

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

In December 2021, the Organisation for Economic Co-operation and Development (the “OECD”) enacted model rules for a new global minimum tax framework (“BEPS Pillar Two”), and various governments around the world have enacted, or are in the process of enacting, legislation on this.

We are in the process of assessing the tax impact of Pillar Two legislation becoming applicable to us beginning January 1, 2024, and believe these rules will not have a material impact on our provision for income taxes.

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

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 and certain tax attributes from business acquisitions.

As of December 31, 2023, we had a valuation allowance of $ 33.2 million against those items.

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As of December 31, 2023, we had $ 65.8 million of unrecognized tax benefits, of which, if recognized, $ 55.5 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.

Our gross unrecognized tax benefits decreased approximately $ 1.6 million during the year ended December 31, 2023.

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

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As of December 31, 2023, 2022 and 2021, accrued interest and penalties were $ 6.4 million, $ 9.3 million and $ 13.3 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.

It is reasonably possible that our gross unrecognized tax benefits will decrease up to $ 3.9 million in the next 12 months, primarily due to the lapse of the statute of limitations.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DEFINED CONTRIBUTION PLANS

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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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* Represents less than 10%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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Distributor C 10 % 13 %

SUBSEQUENT EVENT

SUBSEQUENT EVENTS

Real Property Purchases

In January 2024, we purchased real property in Santa Clara, CA, and Union City, CA, totaling approximately 480,000 square feet and 54,300 square feet, respectively, for $ 192.0 million and $ 14.8 million in cash, respectively.

Share Repurchase Program

In January 2024, our board of directors approved a $ 500.0 million increase in the authorized stock repurchase amount under the Repurchase Program, bringing the aggregate amount authorized to be repurchased to $ 7.25 billion of our outstanding common stock.

In February 2024, our board of directors approved an extension of the Repurchase Program to February 28, 2025.

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

As of February 23, 2024, approximately $ 1.03 billion 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