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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from              to             
Commission file number: 001-34511
______________________________________
FORTINET, INC.
(Exact name of registrant as specified in its charter)
______________________________________

Delaware77-0560389
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

899 Kifer Road
Sunnyvale, California 94086
(Address of principal executive offices, including zip code)

(408) 235-7700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 Par ValueFTNTThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 


Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  
As of May 3, 2022, there were 160,527,127 shares of the registrant’s common stock outstanding.




FORTINET, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2022
Table of Contents
 
  Page
PART IFINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 6.






Summary of Risk Factors

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Some of the principle risks and uncertainties include the following:

Our operating results are likely to vary significantly and be unpredictable.

The COVID-19 pandemic, including its ongoing variants, will likely continue to adversely affect our business in a significant way, for example, through product and component shortages, longer product lead times, or negative impact on demand.

Adverse economic conditions, such as a possible recession and possible impacts of inflation or stagflation, or reduced information technology spending may adversely impact our business.

Our billings, revenue, and free cash flow growth may slow or may not continue, and our operating margins may decline.

We are dependent on the continued services and performance of our senior management, as well as our ability to hire, retain and motivate qualified personnel, particularly for our sales organization.

We rely on third-party channel partners for substantially all of our revenue and a small number of distributors represents a large percentage of our revenue and accounts receivable.

Reliance on a concentration of shipments at the end of the quarter could cause our billings and revenue to fall below expected levels.

We rely significantly on revenue from FortiGuard security subscription and FortiCare technical support services, and revenue from these services may decline or fluctuate.

We have incurred indebtedness and may incur other debt in the future, which may adversely affect our financial condition and future financial results.

We generate a majority of revenue and cash flow from sales outside of the United States.

The war in Ukraine, related macroeconomic effects and our decision to suspend operations in Russia have affected and may continue to affect our business.

We may not be successful in executing our strategy to increase our sales to large- and medium-sized end-customers.

A portion of our revenue is generated by sales to government organizations, which are subject to a number of challenges and risks.

We face intense competition in our market and we may not maintain or improve our competitive position.

Insufficient inventory or components, including finished goods, chips and other components, and including component or inventory shortages related to the COVID-19 pandemic, manufacturer’s capacity, shipping challenges, or other factors affecting the global supply chain, may result in lost sales opportunities or delayed billings and revenue and increased costs, and may harm our gross margins and our product price increases designed to help mitigate lower gross margins may not be acceptable to customers.

We depend on third-party manufacturers to provide components for our products and build our products and are susceptible to manufacturing delays and cost increases.

We may be adversely affected by the effects of inflation or stagflation in certain geographies.

We are susceptible to supply chain constraints, supply shortages and disruptions, long lead times for components and finished goods and supply changes because some of the key components in our products come from limited sources of supply.
1



We are susceptible to defects or vulnerabilities in our products or services, as well as reputational harm from the failure or misuse of our products or services, and any actual or perceived defects or vulnerabilities in our products or services or the failure of our products or services to detect or prevent a security breach could harm our reputation.

Our inability to successfully acquire and integrate other businesses, products or technologies, or to successfully invest in and form successful strategic alliances with other businesses, and to properly account for such acquisitions and the financial information of such acquired companies, could seriously harm our competitive position.

Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

Our proprietary rights may be difficult to enforce and we may be subject to claims by others that we infringe their proprietary technology.

The trading price of our common stock may be volatile, which volatility may be exacerbated by share repurchases under our Share Repurchase Program (the “Repurchase Program”).

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Global economic uncertainty and weakening product demand caused by political instability, changes in trade agreements and conflicts, such as the conflict between Russia and Ukraine, could adversely affect our business and financial performance.
2

PART I—FINANCIAL INFORMATION

ITEM 1.     Financial Statements
FORTINET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in millions, except per share amounts)
 March 31,
2022
December 31,
2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$923.5 $1,319.1 
Short-term investments1,185.7 1,194.0 
Marketable equity securities32.4 38.6 
Accounts receivable—net 790.4 807.7 
Inventory184.6 175.8 
Prepaid expenses and other current assets91.7 65.4 
Total current assets3,208.3 3,600.6 
LONG-TERM INVESTMENTS360.8 440.8 
PROPERTY AND EQUIPMENT—NET786.5 687.6 
DEFERRED CONTRACT COSTS437.5 423.3 
DEFERRED TAX ASSETS431.7 342.3 
GOODWILL123.8 125.1 
OTHER INTANGIBLE ASSETS—NET55.1 63.6 
OTHER ASSETS247.4 235.8 
TOTAL ASSETS$5,651.1 $5,919.1 
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable$174.7 $148.4 
Accrued liabilities261.4 197.3 
Accrued payroll and compensation181.1 195.0 
Deferred revenue1,893.3 1,777.4 
Total current liabilities2,510.5 2,318.1 
DEFERRED REVENUE1,764.6 1,675.5 
INCOME TAX LIABILITIES82.7 79.5 
LONG-TERM DEBT988.9 988.4 
OTHER LIABILITIES71.2 59.2 
Total liabilities5,417.9 5,120.7 
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY:
Common stock, $0.001 par value—300.0 shares authorized; 160.3 and 162.0 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
0.2 0.2 
Additional paid-in capital1,236.3 1,254.2 
Accumulated other comprehensive loss(15.4)(4.8)
Accumulated deficit(1,003.4)(467.9)
Total Fortinet, Inc. stockholders’ equity217.7 781.7 
Non-controlling interests15.5 16.7 
Total equity 233.2 798.4 
TOTAL LIABILITIES AND EQUITY$5,651.1 $5,919.1 
See notes to condensed consolidated financial statements.
3


FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in millions, except per share amounts)
 Three Months Ended
March 31,
2022
March 31,
2021
REVENUE:
Product$371.0 $240.7 
Service 583.8 469.6 
Total revenue954.8 710.3 
COST OF REVENUE:
Product161.0 91.3 
Service 92.8 65.3 
Total cost of revenue253.8 156.6 
GROSS PROFIT:
Product210.0 149.4 
Service 491.0 404.3 
Total gross profit701.0 553.7 
OPERATING EXPENSES:
Research and development124.9 97.2 
Sales and marketing387.6 304.0 
General and administrative38.6 32.0 
Gain on intellectual property matter(1.1)(1.1)
Total operating expenses550.0 432.1 
OPERATING INCOME151.0 121.6 
INTEREST INCOME1.3 1.1 
INTEREST EXPENSE(4.5)(1.3)
OTHER EXPENSE—NET(9.1)(2.0)
INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENT138.7 119.4 
PROVISION FOR (BENEFIT FROM) INCOME TAXES(8.1)12.2 
LOSS FROM EQUITY METHOD INVESTMENT
(8.5) 
NET INCOME INCLUDING NON-CONTROLLING INTERESTS138.3 107.2 
LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS, NET OF TAX
(0.1) 
NET INCOME ATTRIBUTABLE TO FORTINET, INC.$138.4 $107.2 
Net income per share attributable to Fortinet, Inc. (Note 9):
Basic$0.86 $0.66 
Diluted$0.84 $0.64 
Weighted-average shares used to compute net income per share attributable to Fortinet, Inc.:
Basic160.7 163.0 
Diluted164.2 166.4 
See notes to condensed consolidated financial statements.
4

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in millions)
 Three Months Ended
 March 31,
2022
March 31,
2021
Net income including non-controlling interests$138.3 $107.2 
Other comprehensive loss:
Change in foreign currency translation(4.5) 
Change in unrealized losses on investments(9.3)(0.6)
Less: tax benefit related to items of other comprehensive income or loss(2.1)(0.2)
Other comprehensive loss(11.7)(0.4)
Comprehensive income including non-controlling interests126.6 106.8 
Less: comprehensive loss attributable to non-controlling interests(1.2) 
Comprehensive income attributable to Fortinet, Inc.$127.8 $106.8 
See notes to condensed consolidated financial statements.
5

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in millions)
Three Months Ended March 31, 2022
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated DeficitNon-Controlling InterestsTotal
Equity
SharesAmount
BALANCE—December 31, 2021162.0 $0.2 $1,254.2 $(4.8)$(467.9)$16.7 $798.4 
Issuance of common stock in connection with equity incentive plans - net of tax withholding0.6 — (53.8)— — — (53.8)
Repurchase and retirement of common stock(2.3)— (17.3)— (673.9)— (691.2)
Stock-based compensation expense— — 53.2 — — — 53.2 
Net unrealized loss on investments - net of tax— — — (7.2)— — (7.2)
Foreign currency translation adjustment— — — (3.4)— (1.1)(4.5)
Net income— — — — 138.4 (0.1)138.3 
BALANCE—March 31, 2022160.3 $0.2 $1,236.3 $(15.4)$(1,003.4)$15.5 $233.2 
Three Months Ended March 31, 2021
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated DeficitNon-Controlling InterestsTotal
Equity
SharesAmount
BALANCE—December 31, 2020162.5 $0.2 $1,207.2 $0.7 $(352.1)$ $856.0 
Issuance of common stock in connection with equity incentive plans - net of tax withholding0.8 — (31.5)— — — (31.5)
Stock-based compensation expense— — 49.5 — — — 49.5 
Net unrealized loss on investments - net of tax— — — (0.4)— — (0.4)
Net income— — — — 107.2 — 107.2 
BALANCE—March 31, 2021163.3 $0.2 $1,225.2 $0.3 $(244.9)$ $980.8 
See notes to condensed consolidated financial statements.
6

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
 Three Months Ended
 March 31,
2022
March 31,
2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including non-controlling interests$138.3 $107.2 
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation53.2 49.5 
Amortization of deferred contract costs52.5 39.7 
Depreciation and amortization25.5 17.3 
Amortization of investment premiums1.7 1.2 
Loss from equity method investment8.5  
Other 8.4 0.4 
Changes in operating assets and liabilities, net of impact of business combinations:
Accounts receivable—net15.4 82.5 
Inventory(13.5)(14.7)
Prepaid expenses and other current assets(26.0)(13.4)
Deferred contract costs(66.6)(55.2)
Deferred tax assets(87.6)(15.2)
Other assets(20.6)(4.8)
Accounts payable35.5 (12.4)
Accrued liabilities68.2 (2.8)
Accrued payroll and compensation(13.6)(3.9)
Other liabilities11.3 0.2 
Deferred revenue205.5 140.3 
Net cash provided by operating activities396.1 315.9 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments(385.2)(647.1)
Sales of investments3.0 18.6 
Maturities of investments459.4 292.4 
Purchases of property and equipment(122.6)(52.1)
Purchase of investment in privately held company (75.0)
Payments made in connection with business combinations, net of cash acquired (10.3)
Net cash used in investing activities(45.4)(473.5)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings, net of discount and underwriting fees 989.4 
Payments for debt issuance costs (1.9)
Repurchase and retirement of common stock(691.2) 
Proceeds from issuance of common stock11.0 9.9 
Taxes paid related to net share settlement of equity awards(64.8)(41.4)
Other(1.0) 
Net cash provided by (used in) financing activities(746.0)956.0 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(0.3) 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(395.6)798.4 
CASH AND CASH EQUIVALENTS—Beginning of period1,319.1 1,061.8 
CASH AND CASH EQUIVALENTS—End of period$923.5 $1,860.2 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes—net $18.8 $23.6 
Operating lease liabilities arising from obtaining right-of-use assets$24.6 $9.8 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment$2.9 $5.1 
Liability for purchase of property and equipment$15.5 $34.3 
Liability incurred in connection with business acquisition$ $0.5 
See notes to condensed consolidated financial statements.
7

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its subsidiaries (collectively, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2021, contained in our Annual Report on Form 10-K filed with the SEC on February 25, 2022. In the opinion of management, all adjustments, which include normal recurring adjustments, considered necessary for a fair presentation, have been included. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2021 is derived from the audited consolidated financial statements for the year ended December 31, 2021.

The condensed consolidated financial statements include the accounts of Fortinet, Inc. and its subsidiaries. We consolidate all legal entities in which we have an absolute controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

There have been no material changes to our significant accounting policies as of and for the three months ended March 31, 2022.

Recently Adopted and Recently Issued Accounting Standards

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

2.     REVENUE RECOGNITION

We sell cybersecurity solutions to a variety of organizations, such as enterprises, communication service providers, government organizations and small to medium-sized enterprises. Our revenue consists of product and service revenue. Product revenue is generated by our Core Platform (previously referred to as FortiGate network security and other products), our Platform Extensions (previously referred to as Fortinet Security Fabric products and other products). Service revenue relates to sales of our security subscription services, which mainly consists of our FortiGuard security subscriptions, as well as our FortiCare technical support services and other services.

8

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):
Three Months Ended
March 31,
2022
March 31,
2021
Product$371.0 $240.7 
Service:
Security subscription312.9 255.3 
Technical support and other270.9 214.3 
Total service revenue583.8 469.6 
Total revenue$954.8 $710.3 

Deferred Revenue

During the three months ended March 31, 2022 and 2021, we recognized $507.3 million and $417.9 million in service revenue that was included in the deferred revenue balance as of December 31, 2021 and 2020, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of March 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $3.66 billion, which was substantially comprised of deferred security subscription and technical support services revenue. We expect to recognize approximately $1.89 billion as revenue over the next 12 months and the remainder thereafter.

Accounts receivable

Trade accounts receivable are recorded at the invoiced amount. Our accounts receivable balance is reduced by an allowance for expected credit losses. We measure expected credit losses of accounts receivable on a collective (pooled) basis, aggregating accounts receivable that are either current or no more than 60 days past due, and aggregating accounts receivable that are more than 60 days past due. We apply a credit-loss percentage to each of the pools that is based on our historical credit losses. We review whether each of our significant accounts receivable that is more than 60 days past due continues to exhibit similar risk characteristics with the other accounts receivable in the pool. If we determine that it does not, we evaluate it for expected credit losses on an individual basis. Expected credit losses are recorded as general and administrative expenses on our consolidated statements of income.

The allowance for credit losses was $2.5 million and $2.4 million as of March 31, 2022 and December 31, 2021, respectively. Provisions, write-offs and recoveries were not material during the three months ended March 31, 2022 and 2021.

Deferred Contract Costs
    
Amortization of deferred contract costs during the three months ended March 31, 2022 and 2021 were $52.5 million and $39.7 million, respectively.

9

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3.     FINANCIAL INSTRUMENTS AND FAIR VALUE

The following tables summarize our available-for-sale securities (in millions):
 
 March 31, 2022
 Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Commercial paper$488.2 $ $(1.4)$486.8 
Corporate debt securities489.5  (5.0)484.5 
U.S. government and agency securities410.5  (4.9)405.6 
Certificates of deposit and term deposits164.8  (0.4)164.4 
Municipal bonds5.3  (0.1)5.2 
Total available-for-sale securities$1,558.3 $ $(11.8)$1,546.5 
 December 31, 2021
 Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Commercial paper$566.0 $ $(0.2)$565.8 
Corporate debt securities540.7  (1.2)539.5 
U.S. government and agency securities356.1  (1.0)355.1 
Certificates of deposit and term deposits169.1  (0.1)169.0 
Municipal bonds5.4   5.4 
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):
March 31, 2022
 Less Than 12 Months12 Months or GreaterTotal
 Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Commercial paper$435.1 $(1.4)$ $ $435.1 $(1.4)
Corporate debt securities466.8 (5.0)10.6  477.4 (5.0)
U.S. government and agency securities405.7 (4.9)  405.7 (4.9)
Certificates of deposit and term deposits149.8 (0.4)  149.8 (0.4)
Municipal bonds5.2 (0.1)  5.2 (0.1)
Total available-for-sale securities$1,462.6 $(11.8)$10.6 $ $1,473.2 $(11.8)
December 31, 2021
 Less Than 12 Months12 Months or GreaterTotal
 Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Commercial paper$288.0 $(0.2)$ $ $288.0 $(0.2)
Corporate debt securities494.4 (1.2)  494.4 (1.2)
U.S. government and agency securities334.2 (1.0)  334.2 (1.0)
Certificates of deposit and term deposits93.1 (0.1)  93.1 (0.1)
Municipal bonds5.3    5.3  
Total available-for-sale securities$1,215.0 $(2.5)$ $ $1,215.0 $(2.5)

10

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The contractual maturities of our investments were as follows (in millions):
 March 31,
2022
December 31,
2021
Due within one year$1,185.7 $1,194.0 
Due within one to three years360.8 440.8 
Total$1,546.5 $1,634.8 

Available-for-sale securities are reported at fair value, with unrealized gains and losses and the related tax impact included as a separate component of equity and in comprehensive income.

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

Our marketable equity securities were $32.4 million and $38.6 million as of March 31, 2022 and December 31, 2021. The changes in fair value of our marketable equity securities are recorded in other expense, net on the condensed consolidated statements of income. We recognized $6.2 million loss during the three months ended March 31, 2022.

Fair Value Accounting—We apply the following fair value hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

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

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

Level 3—Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

We measure the fair value of money market funds, certain U.S. government and agency securities and marketable equity securities using quoted prices in active markets for identical assets. The fair value of all other financial instruments was based on quoted prices for similar assets in active markets, or model-driven valuations using significant inputs derived from or corroborated by observable market data.

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

We classify items within Level 2 if the investments are valued using model-driven valuations using observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Investments are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.

11

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value of Financial Instruments

Assets Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial assets measured at fair value on a recurring basis (in millions):
 March 31, 2022December 31, 2021
 Aggregate
Fair
Value
Quoted
Prices in
Active
Markets For
Identical
Assets
Significant
Other
Observable
Remaining
Inputs
Significant
Other
Unobservable
Remaining
Inputs
Aggregate
Fair
Value
Quoted
Prices in
Active
Markets For
Identical
Assets
Significant
Other
Observable
Remaining
Inputs
Significant
Other
Unobservable
Remaining
Inputs
  (Level 1)(Level 2)(Level 3) (Level 1)(Level 2)(Level 3)
Assets:
Commercial paper$522.7 $ $522.7 $ $580.3 $ $580.3 $ 
Corporate debt securities487.9  487.9  542.5  542.5  
U.S. government and agency securities405.6 396.1 9.5  355.1 345.2 9.9  
Certificates of deposit and term deposits254.4  254.4  259.0  259.0  
Money market funds116.8 116.8   57.5 57.5   
Municipal bonds5.2  5.2  5.4  5.4  
Marketable equity securities32.4 32.4   38.6 38.6   
Total$1,825.0 $545.3 $1,279.7 $ $1,838.4 $441.3 $1,397.1 $ 
Reported as:
Cash equivalents$246.1 $165.0 
Marketable equity securities32.4 38.6 
Short-term investments1,185.7 1,194.0 
Long-term investments360.8 440.8 
Total$1,825.0 $1,838.4 

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

4.     INVENTORY

Inventory consisted of the following (in millions):
 March 31,
2022
December 31,
2021
Raw materials$39.1 $40.2 
Work in process8.3 9.8 
Finished goods137.2 125.8 
Inventory$184.6 $175.8 

12

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.     PROPERTY AND EQUIPMENT—Net

Property and equipment—net consisted of the following (in millions):
 
 March 31,
2022
December 31,
2021
Land$250.4 $204.5 
Buildings and improvements459.2 416.2 
Computer equipment and software188.0 176.1 
Leasehold improvements41.8 40.1 
Evaluation units14.8 15.6 
Furniture and fixtures28.5 26.9 
Construction-in-progress31.3 19.9 
Total property and equipment1,014.0 899.3 
Less: accumulated depreciation(227.5)(211.7)
Property and equipment—net$786.5 $687.6 

Depreciation expense was $19.1 million and $14.0 million during the three months ended March 31, 2022 and 2021, respectively.

6.     INVESTMENTS IN PRIVATELY HELD COMPANIES

Linksys Holdings, Inc.

On March 19, 2021, we invested $75.0 million in cash for shares of the Series A Preferred Stock of Linksys Holdings, Inc. (“Linksys”) for a 32.6% ownership interest. On September 24, 2021, we invested an additional $85.0 million in cash for shares of Series A Preferred Stock of Linksys, and as of September 30, 2021, we held 50.8% of the outstanding common stock (on an as-converted basis) of Linksys. Linksys provides router connectivity solutions to the consumer and small business markets.

We have concluded that our investment in Linksys is an in-substance common stock investment and that we do not hold an absolute controlling financial interest in Linksys, but that we have the ability to exercise significant influence over the operating and financial policies of Linksys. Determining that we have significant influence but not control over the operating and financial policies of Linksys required significant judgement of many factors, including but not limited to the ownership interest in Linksys, board representation, participation in policy-making processes and participation rights in certain significant financial and operating decisions of Linksys in the ordinary course of business. Therefore, we determined to account for this investment using the equity method of accounting. We record our share of Linksys’ financial results on a three-month lag basis. We determined that there was a basis difference between the cost of our investment in Linksys and the amount of underlying equity in net assets of Linksys. Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, in total was $8.5 million for the three months ended March 31, 2022, and has been recorded in loss from equity method investment on the condensed consolidated statements of income.

As of March 31, 2022 and December 31, 2021, the investment was included in other assets on our condensed consolidated balance sheets. Transaction costs related to this investment were not material.

7.     BUSINESS COMBINATIONS

2021 Acquisitions

Alaxala Networks Corporation

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. We acquired the equity interests in Alaxala to broaden our offering of secure switches integrated with our Core Platform and
13

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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:

(in millions)
Estimated Fair Value
ASSETS
Cash$1.1 
Accounts receivable—net15.6 
Inventory33.4 
Prepaid expenses and other current assets2.9 
Property and equipment5.3 
Goodwill 25.5 
Other intangible assets48.0 
Other long-term assets5.2 
TOTAL ASSETS$137.0 
LIABILITIES
Accounts payable$11.0 
Current portion of long-term debt20.2 
Accrued and other current liabilities17.1 
Other long-term liabilities6.7 
TOTAL LIABILITIES$55.0 
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 fair value of Alaxala.

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

Fair ValueEstimated Useful Life (in years)
Developed technology$26.6 4
Customer relationships10.0 10
Trade name6.4 10
Backlog5.0 1
Total identified intangible assets:$48.0 

Developed technology relates to Alaxalas network equipment. We valued the developed technology using the relief-from-royalty method under the income approach. This method reflects the present value of the projected cost savings that are expected to be realized by the owner of the royalty granted in exchange for the use of the asset. The economic useful life was
14

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

In connection with our acquisition of Alaxala, we assumed certain current debt liabilities of $20.2 million as of August 31, 2021. We concluded that the fair value of this debt approximated its book value as of the acquisition date. We repaid this debt in full in September and October 2021. During the post-acquisition period from September 1, 2021 through the repayment dates, interest expense related to Alaxala debt was not material.

The 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
March 31,
2021
March 31,
2020
Pro forma revenue
$746.6 $612.6 
Pro forma net income attributable to Fortinet, Inc.
$107.6 $101.4 

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, of which, $6.2 million was allocated to goodwill.


8.     GOODWILL AND OTHER INTANGIBLE ASSETS—Net

Goodwill

The following table presents the changes in the carrying amount of goodwill (in millions):
Amount
Balance—December 31, 2021$125.1 
Foreign currency translation adjustments(1.3)
Balance—March 31, 2022$123.8 
15

FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


There were no impairments to goodwill during the three months ended March 31, 2022 or during prior periods.

Other Intangible Assets—Net

The following tables present other intangible assets—net (in millions, except years):
March 31, 2022
 Weighted-Average Useful Life (in Years)GrossAccumulated AmortizationNet
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies4.0$80.8 $42.1 $38.7 
Customer relationships5.921.6 12.5 9.1 
Trade name10.05.7 0.3 5.4 
Backlog1.04.5