Business Combinations

9 Months Ended

Sep. 30, 2021

Business Combination and Asset Acquisition [Abstract]

BUSINESS COMBINATIONS

BUSINESS COMBINATION

AlaxalA Networks Corporation

On August 31, 2021, we closed an acquisition of 75% of equity interests in AlaxalA Networks Corporation (“AlaxalA”), a privately held network hardware equipment company in Japan, for $64.2 million in cash. We acquired the equity interest in AlaxalA to help address the increasing need for secure switches integrated with FortiGate Firewalls and Security Fabric functionality, and, over time, to innovate and rebrand certain of AlaxalA’s switches to offer a broader suite of secure switches globally.

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

(in millions)	Estimated Fair Value
ASSETS
Cash	$	1.1
Accounts receivable—net	15.6
Inventory	33.4
Prepaid expenses and other current assets	2.9
Property and equipment	5.3
Goodwill	29.0
Other intangible assets	48.0
Other long-term assets	2.7
TOTAL ASSETS	$	138.0
LIABILITIES
Accounts payable	$	11.0
Current portion of long-term debt	20.2
Accrued and other current liabilities	14.7
Other long-term liabilities	10.1
TOTAL LIABILITIES	$	56.0
NON-CONTROLLING INTERESTS	$	17.8
Net purchase consideration	$	64.2

The excess of the purchase consideration and the fair value of non-controlling interests over the fair value of net tangible and identified intangible assets acquired was recorded as goodwill, which is not deductible for tax purposes. Goodwill is primarily attributable to the assembled workforce of AlaxalA and the anticipated operational synergies.

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

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

	Fair Value		Estimated Useful Life (in years)
Developed technology	$	26.6	4
Customer relationships	10.0		10
Trade name	6.4		10
Backlog	5.0		1
Total identified intangible assets:	$	48.0

Developed technology relates to AlaxalA’s network equipment. We valued the developed technology using the relief-from-royalty method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.

Customer relationships represent the fair value of future projected revenue that will be derived from sales to existing customers of AlaxalA. Customer contracts and related relationships were valued using the multi-period excess earnings method. This method reflects the present value of the projected cash flows that are expected to be generated by the customer contracts and relationships less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on historical customer turnover rates.

Trade name relates to the “AlaxalA” trade name. The fair value was determined by applying the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade name. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecast period.

Customer backlog relates to the unfulfilled customer contract orders. Backlog was valued using the multi-period excess earnings method. This method reflects the present value of the projected cash flows that are expected to be generated by the execution of the unfulfilled customer contract orders less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on the anticipated contract orders’ execution timeframe.

Our estimates and assumptions are subject to change within the measurement period, which is up to 12 months after the acquisition date. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation of certain assets and liabilities may occur as additional information becomes available. The primary areas of the purchase price that are not yet finalized are related to income taxes and the valuation of acquired assets and assumed liabilities.

The operating results of the acquired company were included in our condensed consolidated financial statements from the date of acquisition which was August 31, 2021. For the period from September 1, 2021 through September 30, 2021, AlaxalA contributed revenue of $15.6 million. Income before income taxes for the period from September 1, 2021 through September 30, 2021 was not material. Acquisition-related costs for this acquisition were not material and were recorded as general and administrative expense.

The following unaudited pro forma financial information presents the combined results of operations of Fortinet, Inc. and AlaxalA, as if AlaxalA had been acquired as of the beginning of business on January 1, 2020. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business that would have been achieved if the acquisition had taken place at the beginning of business on January 1, 2020, or of the results of our future operations of the combined business. The following unaudited pro forma financial information for all periods presented includes purchase accounting adjustments for amortization of acquired intangible assets, depreciation of acquired property and equipment, the purchase accounting effect on inventory acquired and related tax effects (in millions):

	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Pro forma revenue	$	887.6	$	684.3	$	2,460.5	$	1,939.6
Pro forma net income attributable to Fortinet, Inc.	$	165.1	$	122.8	$	407.3	$	334.8

ShieldX Networks, Inc.

On March 10, 2021, we closed an acquisition of certain assets and liabilities of ShieldX Networks Inc. (“ShieldX”), a provider of a security platform focusing on protecting multi-cloud data centers from the risk of lateral movement that can lead to attacks such as ransomware, data loss and service disruption, for $10.8 million in cash. This acquisition was accounted for as a business combination using the acquisition method of accounting. Of the purchase price, $6.2 million was allocated to goodwill, $4.1 million was allocated to developed technology intangible asset and $0.5 million was allocated to other net assets acquired. Goodwill recorded in connection with this acquisition represents the value we expect to be created through expansion into markets within our existing business and potential cost savings and synergies. All acquired goodwill is expected to be deductible for tax purposes. Acquisition-related costs related to this acquisition were not material and were recorded as general and administrative expense.