Item 1. Financial Statements

FORTINET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in millions, except per share amounts)

			September 30, 2023						December 31, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	2,186.8					$	1,682.9
Short-term investments			962.2						502.6
Marketable equity securities			19.8						25.5
Accounts receivable—net			1,013.8						1,261.7
Inventory			467.5						264.6
Prepaid expenses and other current assets			102.6						73.1
Total current assets			4,752.7						3,810.4
LONG-TERM INVESTMENTS			1.5						45.5
PROPERTY AND EQUIPMENT—NET			1,038.0						898.5
DEFERRED CONTRACT COSTS			569.9						518.2
DEFERRED TAX ASSETS			788.5						569.4
GOODWILL			125.4						128.0
OTHER INTANGIBLE ASSETS—NET			39.6						56.0
OTHER ASSETS			163.7						202.0
TOTAL ASSETS			$	7,479.3					$	6,228.0
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable			$	253.9					$	243.4
Accrued liabilities			317.2						248.7
Accrued payroll and compensation			210.5						219.4
Income taxes payable			220.1						17.6
Deferred revenue			2,647.3						2,349.3
Total current liabilities			3,649.0						3,078.4
DEFERRED REVENUE			2,638.0						2,291.0
INCOME TAX LIABILITIES			61.8						67.8
LONG-TERM DEBT			991.8						990.4
OTHER LIABILITIES			64.6						82.0
Total liabilities			7,405.2						6,509.6
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY (DEFICIT):
Common stock, $0.001 par value—1,500.0 shares authorized; 776.3 and 781.5 shares issued and outstanding on September 30, 2023 and December 31, 2022, respectively			0.8						0.8
Additional paid-in capital			1,397.0						1,284.2
Accumulated other comprehensive loss			(24.3)						(20.2)
Accumulated deficit			(1,299.4)						(1,546.4)
Total stockholders’ equity (deficit)			74.1						(281.6)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)			$	7,479.3					$	6,228.0

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, in millions, except per share amounts)

			Three Months Ended												Nine Months Ended
September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
REVENUE:
Product			$	465.9					$	468.7					$	1,439.2					$	1,240.4
Service			868.7						680.8						2,450.5						1,894.0
Total revenue			1,334.6						1,149.5						3,889.7						3,134.4
COST OF REVENUE:
Product			198.3						185.2						566.4						501.4
Service			119.4						97.8						354.9						286.2
Total cost of revenue			317.7						283.0						921.3						787.6
GROSS PROFIT:
Product			267.6						283.5						872.8						739.0
Service			749.3						583.0						2,095.6						1,607.8
Total gross profit			1,016.9						866.5						2,968.4						2,346.8
OPERATING EXPENSES:
Research and development			156.9						134.3						461.3						383.5
Sales and marketing			504.4						427.1						1,498.6						1,230.2
General and administrative			53.5						40.7						156.2						124.7
Gain on intellectual property matter			(1.1)						(1.1)						(3.4)						(3.4)
Total operating expenses			713.7						601.0						2,112.7						1,735.0
OPERATING INCOME			303.2						265.5						855.7						611.8
INTEREST INCOME			37.0						4.6						89.2						8.3
INTEREST EXPENSE			(5.4)						(4.5)						(15.6)						(13.5)
OTHER EXPENSE—NET			(7.0)						(0.9)						(11.2)						(19.3)
INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENT			327.8						264.7						918.1						587.3
PROVISION FOR (BENEFIT FROM) INCOME TAXES			(0.3)						27.3						48.6						21.6
LOSS FROM EQUITY METHOD INVESTMENT			(5.2)						(6.3)						(32.6)						(22.9)
NET INCOME INCLUDING NON-CONTROLLING INTERESTS			322.9						231.1						836.9						542.8
LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS, NET OF TAX			—						(0.5)						—						(0.7)
NET INCOME ATTRIBUTABLE TO FORTINET, INC.			$	322.9					$	231.6					$	836.9					$	543.5
Net income per share attributable to Fortinet, Inc. (Note 9):
Basic			$	0.41					$	0.29					$	1.07					$	0.68
Diluted			$	0.41					$	0.29					$	1.05					$	0.67
Weighted-average shares used to compute net income per share attributable to Fortinet, Inc.:
Basic			781.2						786.2						783.1						795.0
Diluted			791.2						798.6						793.5						809.8

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in millions)

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Net income including non-controlling interests			$	322.9					$	231.1					$	836.9					$	542.8
Other comprehensive loss:
Change in foreign currency translation			(2.4)						(3.7)						(9.9)						(16.5)
Change in unrealized gains (losses) on investments			1.6						1.0						7.5						(10.7)
Less: tax provision (benefit) related to items of other comprehensive income or loss			0.4						0.3						1.7						(2.4)
Other comprehensive loss			(1.2)						(3.0)						(4.1)						(24.8)
Comprehensive income including non-controlling interests			321.7						228.1						832.8						518.0
Less: comprehensive loss attributable to non-controlling interests			—						(1.4)						—						(4.8)
Comprehensive income attributable to Fortinet, Inc.			$	321.7					$	229.5					$	832.8					$	522.8

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

(unaudited, in millions)

			Three Months Ended September 30, 2023
			Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Non-Controlling Interests						Total Stockholders’ Equity
Shares						Amount
BALANCE—June 30, 2023			785.6						$	0.8					$	1,375.9					$	(23.1)					$	(1,032.4)					$	—					$	321.2
Issuance of common stock in connection with equity incentive plans - net of tax withholding			1.1						—						(25.1)						—						—						—						(25.1)
Repurchase and retirement of common stock			(10.4)						—						(15.3)						—						(589.9)						—						(605.2)
Excise tax on net stock repurchases			—						—						(2.8)						—						—						—						(2.8)
Stock-based compensation expense			—						—						64.3						—						—						—						64.3
Net unrealized gain on investments - net of tax			—						—						—						1.2						—						—						1.2
Foreign currency translation adjustment			—						—						—						(2.4)						—						—						(2.4)
Net income			—						—						—						—						322.9						—						322.9
BALANCE—September 30, 2023			776.3						$	0.8					$	1,397.0					$	(24.3)					$	(1,299.4)					$	—					$	74.1
			Three Months Ended September 30, 2022
			Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Non-Controlling Interests						Total (Deficit)
Shares						Amount
BALANCE—June 30, 2022			788.4						$	0.8					$	1,237.3					$	(23.4)					$	(1,607.6)					$	13.3					$	(379.6)
Issuance of common stock in connection with equity incentive plans - net of tax withholding			1.9						—						(26.0)						—						—						—						(26.0)
Repurchase and retirement of common stock			(10.2)						—						(15.8)						—						(484.2)						—						(500.0)
Stock-based compensation expense			—						—						54.7						—						—						—						54.7
Net unrealized gain on investments - net of tax			—						—						—						0.7						—						—						0.7
Foreign currency translation adjustment			—						—						—						(2.8)						—						(0.9)						(3.7)
Net income (loss)			—						—						—						—						231.6						(0.5)						231.1
BALANCE—September 30, 2022			780.1						$	0.8					$	1,250.2					$	(25.5)					$	(1,860.2)					$	11.9					$	(622.8)

See notes to condensed consolidated financial statements.

			Nine Months Ended September 30, 2023
			Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Non-Controlling Interests						Total Stockholders’ Equity (Deficit)
Shares						Amount
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			5.2						—						(54.7)						—						—						—						(54.7)
Repurchase and retirement of common stock			(10.4)						—						(15.3)						—						(589.9)						—						(605.2)
Excise tax on net stock repurchases			—						—						(2.8)						—						—						—						(2.8)
Stock-based compensation expense			—						—						185.6						—						—						—						185.6
Net unrealized gain on investments - net of tax			—						—						—						5.8						—						—						5.8
Foreign currency translation adjustment			—						—						—						(9.9)						—						—						(9.9)
Net income			—						—						—						—						836.9						—						836.9
BALANCE—September 30, 2023			776.3						$	0.8					$	1,397.0					$	(24.3)					$	(1,299.4)					$	—					$	74.1
			Nine Months Ended September 30, 2022
			Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Non-Controlling Interests						Total Equity (Deficit)
Shares						Amount
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			6.1						—						(110.6)						—						—						—						(110.6)
Repurchase and retirement of common stock			(36.0)						—						(55.4)						—						(1,935.8)						—						(1,991.2)
Stock-based compensation expense			—						—						162.6						—						—						—						162.6
Net unrealized loss on investments - net of tax			—						—						—						(8.3)						—						—						(8.3)
Foreign currency translation adjustment			—						—						—						(12.4)						—						(4.1)						(16.5)
Net income (loss)			—						—						—						—						543.5						(0.7)						542.8
BALANCE—September 30, 2022			780.1						$	0.8					$	1,250.2					$	(25.5)					$	(1,860.2)					$	11.9					$	(622.8)

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)

			Nine Months Ended
			September 30, 2023						September 30, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including non-controlling interests			$	836.9					$	542.8
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation			185.6						162.6
Amortization of deferred contract costs			195.9						163.8
Depreciation and amortization			83.2						77.0
Amortization of investment premiums (discounts)			(16.1)						3.6
Loss from equity method investment			32.6						22.9
Other			13.7						21.2
Changes in operating assets and liabilities, net of impact of business combinations:
Accounts receivable—net			243.4						(162.7)
Inventory			(231.0)						(59.7)
Prepaid expenses and other current assets			(29.3)						(7.6)
Deferred contract costs			(247.5)						(221.0)
Deferred tax assets			(221.7)						(172.0)
Other assets			13.5						(13.9)
Accounts payable			10.4						78.6
Accrued liabilities			56.9						33.7
Accrued payroll and compensation			(8.0)						(3.2)
Income taxes payable			196.8						(5.9)
Other liabilities			(17.7)						(0.5)
Deferred revenue			646.2						742.8
Net cash provided by operating activities			1,743.8						1,202.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments			(1,327.6)						(389.1)
Sales of investments			4.0						3.0
Maturities of investments			931.5						1,182.9
Purchases of property and equipment			(177.2)						(250.3)
Purchase of investment in privately held company			(8.5)						—
Other			0.1						—
Net cash provided by (used in) investing activities			(577.7)						546.5
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common stock			(604.3)						(1,991.2)
Proceeds from issuance of common stock			36.0						21.7
Taxes paid related to net share settlement of equity awards			(90.8)						(132.1)
Other			(1.2)						(1.3)
Net cash used in financing activities			(660.3)						(2,102.9)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(1.9)						(1.2)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			503.9						(355.1)
CASH AND CASH EQUIVALENTS—Beginning of period			1,682.9						1,319.1
CASH AND CASH EQUIVALENTS—End of period			$	2,186.8					$	964.0
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes—net			$	84.9					$	197.6
Operating lease liabilities arising from obtaining right-of-use assets			$	14.3					$	36.2
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment			$	24.5					$	13.1
Liability for purchase of property and equipment			$	24.7					$	25.3
Liability incurred for repurchase of common stock			$	0.9					$	—

See notes to condensed consolidated financial statements.

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, 2022, contained in our Annual Report on Form 10-K filed with the SEC on February 24, 2023. 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 and nine months ended September 30, 2023 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, 2022 is derived from the audited consolidated financial statements for the year ended December 31, 2022.

Amounts related to income taxes payable have been reclassified in prior periods to conform with current period presentation.

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 and nine months ended September 30, 2023, as compared to the significant accounting policies described in the Form 10-K.

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.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. REVENUE RECOGNITION

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Product			$	465.9					$	468.7					$	1,439.2					$	1,240.4
Service:
Security subscription			494.6						369.8						1,373.6						1,023.1
Technical support and other			374.1						311.0						1,076.9						870.9
Total service revenue			868.7						680.8						2,450.5						1,894.0
Total revenue			$	1,334.6					$	1,149.5					$	3,889.7					$	3,134.4

Deferred Revenue

During the three and nine months ended September 30, 2023, we recognized $514.3 million and $1.80 billion in service revenue that was included in the deferred revenue balance as of December 31, 2022, respectively. During the three and nine months ended September 30, 2022, we recognized $401.9 million and $1.37 billion in service revenue that was included in the deferred revenue balance as of December 31, 2021, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $5.30 billion, which was substantially comprised of deferred security subscription, technical support services revenue and unbilled contract revenue from non-cancellable contracts that will be recognized in future periods. We expect to recognize approximately $2.66 billion as revenue over the next 12 months and the remainder thereafter.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount, net of 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 $5.3 million and $3.6 million as of September 30, 2023 and December 31, 2022, respectively. Provisions, write-offs and recoveries were not material during the nine months ended September 30, 2023 and 2022.

Deferred Contract Costs

Amortization of deferred contract costs during the three months ended September 30, 2023 and 2022 were $68.0 million and $56.7 million, respectively. Amortization of deferred contract costs during the nine months ended September 30, 2023 and 2022 were $195.9 million and $163.8 million, respectively.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. FINANCIAL INSTRUMENTS AND FAIR VALUE

Available-for-Sale Securities

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

			September 30, 2023
			Amortized Cost						Unrealized Gains						Unrealized Losses						Fair Value
U.S. government and agency securities			$	423.4					$	0.1					$	(0.5)					$	423.0
Commercial paper			400.0						—						(0.3)						399.7
Certificates of deposit and term deposits			73.5						—						—						73.5
Corporate debt securities			68.0						—						(0.5)						67.5
Total available-for-sale securities			$	964.9					$	0.1					$	(1.3)					$	963.7

			December 31, 2022
			Amortized Cost						Unrealized Gains						Unrealized Losses						Fair Value
U.S. government and agency securities			$	198.0					$	—					$	(4.4)					$	193.6
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			$	556.8					$	—					$	(8.7)					$	548.1

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):

			September 30, 2023
			Less Than 12 Months												12 Months or Greater												Total
			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
U.S. government and agency securities			$	159.1					$	(0.1)					$	32.6					$	(0.4)					$	191.7					$	(0.5)
Commercial paper			376.6						(0.3)						—						—						376.6						(0.3)
Corporate debt securities			15.3						—						46.4						(0.5)						61.7						(0.5)
Total available-for-sale securities			$	551.0					$	(0.4)					$	79.0					$	(0.9)					$	630.0					$	(1.3)

			December 31, 2022
			Less Than 12 Months												12 Months or Greater												Total
			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
U.S. government and agency securities			$	3.9					$	(0.1)					$	189.8					$	(4.3)					$	193.7					$	(4.4)
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			$	125.8					$	(1.1)					$	379.8					$	(7.6)					$	505.6					$	(8.7)

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

			September 30, 2023						December 31, 2022
Due within one year			$	962.2					$	502.6
Due within one to three years			1.5						45.5
Total			$	963.7					$	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. 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.

Marketable Equity Securities

Our marketable equity securities were $19.8 million and $25.5 million as of September 30, 2023 and December 31, 2022. 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 a $2.3 million and $5.7 million loss during the three and nine months ended September 30, 2023, respectively. We recognized a $2.6 million gain and a $11.7 million loss during the three and nine months ended September 30, 2022, respectively.

Fair Value of Financial Instruments

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

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.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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):

			September 30, 2023																								December 31, 2022
			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:
U.S. government and agency securities			$	474.1					$	402.4					$	71.7					$	—					$	268.6					$	259.3					$	9.3					$	—
Commercial paper			439.5						—						439.5						—						115.8						—						115.8						—
Certificates of deposit and term deposits			93.5						—						93.5						—						50.4						—						50.4						—
Corporate debt securities			67.5						—						67.5						—						288.9						—						288.9						—
Money market funds			325.0						325.0						—						—						593.9						593.9						—						—
Municipal bonds			—						—						—						—						5.0						—						5.0						—
Marketable equity securities			19.8						19.8						—						—						25.5						25.5						—						—
Total			$	1,419.4					$	747.2					$	672.2					$	—					$	1,348.1					$	878.7					$	469.4					$	—
Reported as:
Cash equivalents			$	435.9																							$	774.5
Marketable equity securities			19.8																								25.5
Short-term investments			962.2																								502.6
Long-term investments			1.5																								45.5
Total			$	1,419.4																							$	1,348.1

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2023 and year ended December 31, 2022.

4. INVENTORY

Inventory consisted of (in millions):

			September 30, 2023						December 31, 2022
Raw materials			$	77.5					$	46.3
Work in process			8.0						12.0
Finished goods			382.0						206.3
Inventory			$	467.5					$	264.6

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. PROPERTY AND EQUIPMENT—Net

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

			September 30, 2023						December 31, 2022
Land			$	351.7					$	310.0
Buildings and improvements			591.7						490.3
Computer equipment and software			252.3						222.7
Leasehold improvements			60.6						53.5
Evaluation units			27.5						19.2
Furniture and fixtures			30.5						31.3
Construction-in-progress			55.8						51.7
Total property and equipment			1,370.1						1,178.7
Less: accumulated depreciation			(332.1)						(280.2)
Property and equipment—net			$	1,038.0					$	898.5

During the three months ended June 30, 2023, we purchased certain real estate in Spain and the United States for a total purchase price of $51.9 million. The purchases were accounted for under the asset acquisition method. The cost of the assets acquired was allocated to land and buildings and improvements based on their relative fair values. The total purchase price was allocated as $6.5 million to land and $45.4 million to buildings and improvements.

During the three months ended September 30, 2023, we purchased certain real estate in Australia for a total purchase price of $41.3 million. The purchase was accounted for under the asset acquisition method. The cost of the assets acquired was allocated to land and construction-in-progress based on their relative fair values. The total purchase price was allocated as $21.5 million to land and $19.8 million to construction-in-progress.

Depreciation expense was $23.9 million and $21.2 million during the three months ended September 30, 2023 and 2022, respectively. Depreciation expense was $69.6 million and $59.4 million during the nine months ended September 30, 2023 and 2022, respectively.

6. INVESTMENTS IN PRIVATELY HELD COMPANIES

Linksys Holdings, Inc.

During 2021, we invested $160 million in cash for shares of the Series A Preferred Stock of privately held Linksys Holdings, Inc. (“Linksys”), representing a 50.8% ownership interest in the outstanding common stock (on an as-converted basis). 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, totaled $5.2 million and $6.3 million for the three months ended September 30, 2023 and 2022, respectively, and has been recorded in loss from equity method investment on the condensed consolidated statements of income. Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $32.6 million and $22.9 million for the nine months ended September 30, 2023 and 2022, respectively, and has been recorded in loss from equity method investment on the condensed consolidated statements of income. The carrying amount of our Linksys investment was $51.6 million and $84.3 million as of September 30, 2023 and December 31, 2022, respectively, and the investment was included in other assets on our condensed consolidated balance sheets.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In the fourth quarter of 2022, we recorded a non-cash charge of $22.2 million related to other-than-temporary impairment (“OTTI”) recognized on our equity method investment in Linksys and our proportionate share of Linksys' financial results included a $17.5 million charge in connection with a valuation allowance established on deferred tax assets at Linksys. Due to the presence of impairment indicators, such as a series of operating losses, we evaluated our equity method investment for an OTTI during the three months ended September 30, 2023. We considered various factors in determining whether an OTTI has occurred, including the limited operating history available, 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 determined that an additional OTTI has not occurred as of September 30, 2023. 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, including the results and disclosures of Linksys.

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 our 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.

We will record our proportionate share of the company’s financial results on a three-month lag basis and will present it in loss from equity method investments—net on the condensed consolidated statements of income.

7. BUSINESS COMBINATIONS

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. 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. We acquired the equity interests in Alaxala to broaden our offering of secure switches integrated with our Core Platform and Enhanced Platform Technology functionality, and over time, to innovate and rebrand certain of Alaxala’s switches to offer a broader suite of secure switches globally.

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, 2022			$	128.0
Foreign currency translation adjustments			(2.6)
Balance—September 30, 2023			$	125.4

There were no impairments to goodwill during the nine months ended September 30, 2023 or during prior periods.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Intangible Assets—Net

The following tables present other intangible assets—net (in millions, except years):

			September 30, 2023
			Weighted-Average Useful Life (in Years)						Gross						Accumulated Amortization						Net
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies			4.3						$	82.3					$	59.7					$	22.6
Customer relationships			7.0						30.0						16.7						13.3
Trade name			10.0						4.7						1.0						3.7
Backlog			1.0						3.7						3.7						—
Total other intangible assets—net									$	120.7					$	81.1					$	39.6

			December 31, 2022
			Weighted-Average Useful Life (in Years)						Gross						Accumulated Amortization						Net
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies			4.1						$	85.1					$	50.3					$	34.8
Customer relationships			7.1						31.0						14.4						16.6
Trade name			10.0						5.3						0.7						4.6
Backlog			1.0						4.2						4.2						—
Total other intangible assets—net									$	125.6					$	69.6					$	56.0

Amortization expense was $4.4 million and $5.2 million during the three months ended September 30, 2023 and 2022, respectively. Amortization expense was $13.6 million and $17.6 million during the nine months ended September 30, 2023 and 2022, respectively.

The following table summarizes estimated future amortization expense of finite-lived intangible assets—net (in millions):

			Amount
Years:
2023 (the remainder of 2023)			$	4.0
2024			12.7
2025			8.2
2026			4.1
2027			3.8
Thereafter			6.8
Total			$	39.6

9. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income attributable to Fortinet, Inc., by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income attributable to Fortinet, Inc. by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“RSUs”), stock options and performance stock units (“PSUs”). Dilutive shares of common stock are determined by applying the treasury stock method.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share attributable to Fortinet, Inc. is (in millions, except per share amounts):

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Numerator:
Net income including non-controlling interests			$	322.9					$	231.1					$	836.9					$	542.8
Net loss attributable to non-controlling interests			—						(0.5)						—						(0.7)
Net income attributable to Fortinet, Inc.			$	322.9					$	231.6					$	836.9					$	543.5
Denominator:
Basic shares:
Weighted-average common stock outstanding-basic			781.2						786.2						783.1						795.0
Diluted shares:
Weighted-average common stock outstanding-basic			781.2						786.2						783.1						795.0
Effect of potentially dilutive securities:
RSUs			3.5						4.9						3.8						6.6
Stock options			6.2						7.5						6.4						8.2
PSUs			0.3						—						0.2						—
Weighted-average shares used to compute diluted net income per share attributable to Fortinet, Inc.			791.2						798.6						793.5						809.8
Net income per share attributable to Fortinet, Inc.:
Basic			$	0.41					$	0.29					$	1.07					$	0.68
Diluted			$	0.41					$	0.29					$	1.05					$	0.67

The following weighted-average shares of common stock were excluded from the computation of diluted net income per share attributable to Fortinet, Inc. for the periods presented, as their effect would have been antidilutive (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
RSUs			—						2.5						0.6						1.1
Stock options			3.0						1.6						2.8						1.4
Total			3.0						4.1						3.4						2.5

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. DEBT

2026 and 2031 Senior Notes

On March 5, 2021, we issued $1.0 billion aggregate principal amount of senior notes (collectively, the “Senior Notes”), consisting of $500.0 million aggregate principal amount of 1.0% notes due March 15, 2026 (the “2026 Senior Notes”) and $500.0 million aggregate principal amount of 2.2% notes due March 15, 2031 (the “2031 Senior Notes”), in an underwritten registered public offering. The Senior Notes are senior unsecured obligations and rank equally with each other in right of payment and with our other outstanding obligations. We may redeem the Senior Notes at any time in whole or in part for cash, at specified redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the 2026 Senior Notes on or after February 15, 2026, or the 2031 Senior Notes on or after December 15, 2030. Interest on the Senior Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2021. As of September 30, 2023 and December 31, 2022, the Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective contractual terms of these notes using the effective interest method.

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

			Maturity						Coupon Rate						Effective Interest Rate						September 30, 2023						December 31, 2022
Debt
2026 Senior Notes			March 2026						1.0%						1.3%						$	500.0					$	500.0
2031 Senior Notes			March 2031						2.2%						2.3%						500.0						500.0
Total debt																					1,000.0						1,000.0
Less: Unamortized discount and debt issuance costs																					8.2						9.6
Total long-term debt																					$	991.8					$	990.4

As of September 30, 2023 and December 31, 2022, we accrued interest payable of $0.7 million and $4.7 million, respectively, and there are no financial covenants with which we must comply. During the three months ended September 30, 2023 and 2022, we recorded $4.5 million and $4.4 million of total interest expense in relation to these Senior Notes in each quarter, respectively. During the nine months ended September 30, 2023 and 2022, we recorded $13.5 million and $13.4 million of total interest expense in relation to the Senior Notes in each period, respectively. No interest costs were capitalized for the nine months ended September 30, 2023 and 2022, as the costs that qualified for capitalization were not material.

The total estimated fair value of the outstanding Senior Notes was approximately $834.8 million, including accrued and unpaid interest, as of September 30, 2023. The fair value was determined based on observable market prices of identical instruments in less active markets. The estimated fair values are based on Level 2 inputs.

11. COMMITMENTS AND CONTINGENCIES

The following table summarizes our inventory purchase commitments as of September 30, 2023 (in millions):

			Total						2023						Thereafter
Inventory purchase commitments			$	820.6					$	608.5					$	212.1

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 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 September 30, 2023, we had $820.6 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 recorded a liability

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 September 30, 2023, the liability for these inventory purchase commitments was $64.6 million and was included in accrued liabilities. As of December 31, 2022, the liability for these purchase commitments was not material. The expense related to such accrued liability for inventory purchase commitments was $36.9 million and $59.3 million during the three and nine months ended September 30, 2023, respectively, and was recorded in product cost of revenue on the condensed consolidated statements of income.

Other Contractual Commitments and Open Purchase Orders—In addition to commitments with contract manufacturers, we have open purchase orders and contractual obligations in the ordinary course of business for which we have not received goods or services. A significant portion of our reported purchase commitments consist of non-cancelable commitments. In certain instances, contractual commitments allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to firm orders being placed. As of September 30, 2023, we had $76.8 million in other contractual commitments having a remaining term in excess of one year that are non-cancelable.

As of September 30, 2023, we had $89.5 million in contractual commitments related to payments for operating leases.

Litigation—We are involved in disputes, litigation, and other legal actions. For lawsuits where we are the defendant, we are in the process of defending these litigation matters, and while there can be no assurances and the outcome of certain of these matters is currently not determinable and not predictable, we currently are unaware of any existing claims or proceedings that we believe are likely to have a material adverse effect on our financial position. There are many uncertainties associated with any litigation and these actions or other third-party claims against us may cause us to incur costly litigation fees, costs and substantial settlement charges, and possibly subject us to damages and other penalties. In addition, the resolution of any intellectual property (“IP”) litigation may require us to make royalty payments, which could adversely affect our gross margins in future periods. If any of those events were to occur, our business, financial condition, results of operations, and cash flows could be adversely affected. Litigation is unpredictable and the actual liability in any such matters may be materially different from our current estimates, which could result in the need to adjust any accrued liability and record additional expenses. We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. These accruals are generally based on a range of possible outcomes that require significant management judgement. If no amount within a range is a better estimate than any other, we accrue the minimum amount. Litigation loss contingency accruals associated with outstanding cases were not material as of September 30, 2023, and December 31, 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. 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 September 30, 2023 or December 31, 2022 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. In some contracts, our exposure under these indemnification provisions is limited by the terms of the contracts to certain defined limits, such as the total amount paid by our customer under the agreement. However, certain agreements include covenants, penalties and indemnification provisions including and beyond indemnification for third-party claims of IP infringement that could potentially expose us to losses in excess of the amount received under the agreement, and in some instances to potential liability that is not contractually limited. 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 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.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. EQUITY PLANS AND SHARE REPURCHASE PROGRAM

Stock-Based Compensation Plans

We maintain the Amended and Restated Fortinet, Inc. 2009 Equity Incentive Plan (the “Amended Plan”) pursuant to which we have granted RSUs, stock options and PSUs. As of September 30, 2023, there were a total of 53.3 million shares of common stock available for grant under the Amended Plan.

Restricted Stock Units

The following table summarizes the activity and related information for RSUs for the periods presented below (in millions, except per share amounts):

			Restricted Stock Units Outstanding
			Number of Shares						Weighted-Average Grant Date Fair Value per Share
Balance—December 31, 2022			10.5						$	40.94
Granted			4.5						60.85
Forfeited			(0.6)						48.33
Vested			(4.3)						34.88
Balance—September 30, 2023			10.1						$	51.91

Stock compensation expense is recognized on a straight-line basis over the vesting period of each RSU. As of September 30, 2023, total compensation expense related to unvested RSUs granted to employees and non-employees under the Amended Plan, but not yet recognized, was $460.9 million, with a weighted-average remaining vesting period of 2.7 years.

RSUs settle into shares of common stock upon vesting. Upon the vesting of the RSUs, we net-settle the RSUs and withhold a portion of the shares to satisfy employee withholding tax requirements. The payment of the withheld taxes to the tax authorities is reflected as a financing activity within the condensed consolidated statements of cash flows.

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

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Shares withheld for taxes			0.4						0.5						1.5						2.2
Amount withheld for taxes			$	31.0					$	32.0					$	90.7					$	132.1

Employee Stock Options

The following table summarizes the weighted-average assumptions relating to our employee stock options:

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Expected term in years			4.4						4.4						4.4						4.4
Volatility			42.8		%				42.5		%				42.0		%				41.2		%
Risk-free interest rate			4.5		%				3.1		%				4.2		%				2.0		%
Dividend rate			—		%				—		%				—		%				—		%

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

			Options Outstanding
			Number of Shares						Weighted- Average Exercise Price						Weighted- Average Remaining Contractual Life (Years)						Aggregate Intrinsic Value
Balance—December 31, 2022			13.2						$	24.37					3.5						$	344.8
Granted			1.3						60.59
Forfeited			(0.1)						47.86
Exercised			(2.4)						14.89
Balance—September 30, 2023			12.0						$	29.95
Options vested and expected to vest—September 30, 2023			12.0						$	29.95					3.4						$	350.2
Options exercisable—September 30, 2023			8.4						$	21.24					2.6						$	317.9

The aggregate intrinsic value represents the difference between the exercise price of stock options and the quoted market price of our common stock for all in-the-money stock options. Stock compensation expense is recognized on a straight-line basis over the vesting period of each stock option. As of September 30, 2023, total compensation expense related to unvested stock options granted to employees but not yet recognized was $61.4 million, with a weighted-average remaining vesting period of 2.6 years.

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

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Weighted-average fair value per share granted			$	23.67					$	20.22					$	24.37					$	22.09
Intrinsic value of options exercised			$	13.9					$	29.7					$	110.9					$	73.3
Fair value of options vested			$	6.1					$	4.8					$	23.5					$	19.8

Market/Performance-Based PSUs

We granted market/performance-based PSUs under the Amended Plan 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.

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

			Three Months Ended
			March 31, 2023
Expected term in years			2.7
Volatility			47.5		%
Risk-free interest rate			4.6		%
Dividend rate			—		%

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. None of these PSU awards were vested or forfeited during the nine months ended September 30, 2023.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of September 30, 2023, total compensation expense related to unvested PSUs that were granted to certain of our executives, but not yet recognized, was $19.4 million. This expense is expected to be amortized on a graded vesting method over a weighted-average vesting period of 2.4 years.

Stock-Based Compensation Expense

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

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Cost of product revenue			$	0.4					$	0.5					$	1.3					$	1.3
Cost of service revenue			6.1						4.8						17.2						14.0
Research and development			20.0						16.7						57.0						47.9
Sales and marketing			28.5						25.9						84.1						79.0
General and administrative			9.9						7.4						28.0						22.3
Total stock-based compensation expense			$	64.9					$	55.3					$	187.6					$	164.5

The following table summarizes stock-based compensation expense, including stock-based compensation expense related to awards classified as liabilities, by award type (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
RSUs			$	54.2					$	48.9					$	158.4					$	146.2
Stock options			7.5						6.4						21.5						18.3
PSUs			3.2						—						7.7						—
Total stock-based compensation expense			$	64.9					$	55.3					$	187.6					$	164.5

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

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Income tax benefit associated with stock-based compensation			$	14.3					$	12.2					$	41.4					$	36.2

Share Repurchase Program

In February 2023, our board of directors approved an extension of the Repurchase Program originally approved by our board of directors in January 2016 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 amount under the Repurchase Program, respectively, bringing the aggregate amount authorized to be repurchased to $6.75 billion of our outstanding common stock through February 29, 2024. 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.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the three and nine months ended September 30, 2023, we repurchased 10.4 million shares of common stock under the Repurchase Program in open-market transactions at a weighted-average price of $58.43 per share, for an aggregate purchase price of $605.2 million, which excludes a $2.8 million accrual related to the 1% excise tax imposed by the Inflation Reduction Act of 2022. As of September 30, 2023, $1.42 billion remained available for future share repurchases under the Repurchase Program.

13. INCOME TAXES

Our effective tax rate was 0% for the three months ended September 30, 2023, compared to an effective tax rate of 10% for the same period last year. Our effective tax rate was 5% for the nine months ended September 30, 2023, compared to an effective tax rate of 4% for the same period last year. The tax rates for the three months ended September 30, 2023 and 2022 were composed of U.S. federal and state taxes, withholding taxes and foreign taxes that amounted to $50.2 million and $75.5 million, respectively. The tax rate for the three months ended September 30, 2023 was impacted by a tax benefit of $41.9 million from the FDII deduction, and excess tax benefits from stock-based compensation expense of $8.6 million. The tax rate for the three months ended September 30, 2022 was impacted by a tax benefit of $28.9 million from the FDII deduction, and excess tax benefits from stock-based compensation expense of $19.3 million.

The tax rates for the nine months ended September 30, 2023 and 2022 were composed of U.S. federal and state taxes, withholding taxes and foreign taxes that amounted to $220.9 million and $169.2 million, respectively. The tax rate for the nine months ended September 30, 2023 was impacted by a tax benefit of $105.9 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $48.3 million, and the release of reserves of $18.1 million on uncertain tax positions and the accrued interest thereon due to the expiration of statutes of limitations. The tax rate for the nine months ended September 30, 2022 was impacted by a tax benefit of $62.6 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $68.7 million, and the release of reserves of $16.3 million on uncertain tax positions and the accrued interest thereon due to the expiration of statutes of limitations.

As of September 30, 2023 and December 31, 2022, unrecognized tax benefits were $65.8 million and $67.4 million, respectively. If recognized, $55.9 million of the unrecognized tax benefits as of September 30, 2023 would favorably affect our effective tax rate. It is our policy to include accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2023 and December 31, 2022, accrued interest and penalties were $5.9 million and $9.3 million, respectively. It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $1.8 million in the next 12 months, due to the lapse of statutes of limitation in various jurisdictions. This decrease, if recognized, would favorably impact our effective tax rate, and would be recognized as an additional tax benefit.

We file income tax returns in the U.S. federal jurisdiction and in various U.S. state and foreign jurisdictions. Generally, we are no longer subject to examination by U.S federal income tax authorities for tax years prior to 2015. We are no longer subject to U.S. state and foreign income tax examinations by tax authorities for tax years prior to 2010. We currently have ongoing tax audits in the United Kingdom, Canada, Germany and several other foreign jurisdictions. The focus of these audits is the inter-company profit allocation.

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.

On January 4, 2022, the U.S. Treasury published another tranche of final regulations regarding the foreign tax credit. These final regulations impose new requirements that a foreign tax must meet in order to be creditable against U.S. income taxes, and generally apply to tax years beginning on or after December 28, 2021. On July 26, 2022, the U.S. Treasury released corrections to the final regulations. 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. As a result, our tax provision decreased by $39.8 million for the nine months ended September 30, 2023.

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. The applicable tax law changes have had no impact to our tax provision for the nine months ended September 30, 2023. We will continue to monitor the impact, if any, of these tax law changes on future periods.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. DEFINED CONTRIBUTION PLANS

Our tax-deferred savings plan under our 401(k) Plan permits participating U.S. employees to contribute a portion of their pre-tax or after-tax earnings. In Canada, we have a Group Registered Retirement Savings Plan Program (the “RRSP”), which permits participants to make pre-tax contributions. Our board of directors approved 50% matching contributions on employee contributions up to 4% of each employee’s eligible earnings. Our matching contributions to our 401(k) Plan and the RRSP for the three months ended September 30, 2023 and 2022 were $3.8 million and $3.2 million, respectively. Our matching contributions to our 401(k) Plan and the RRSP for the nine months ended September 30, 2023 and 2022 were $13.9 million and $9.8 million, respectively.

15. SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. Our chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We have one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, we have determined that we have one operating segment, and therefore, one reportable segment.

Revenue by geographic region is based on the billing address of our customers. The following tables set forth revenue and property and equipment—net by geographic region (in millions):

			Three Months Ended												Nine Months Ended
Revenue			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Americas:
United States			$	400.8					$	344.1					$	1,189.6					$	942.8
Other Americas			144.8						123.5						416.5						321.0
Total Americas			545.6						467.6						1,606.1						1,263.8
Europe, Middle East and Africa (“EMEA”)			512.2						443.9						1,497.3						1,181.7
Asia Pacific (“APAC”)			276.8						238.0						786.3						688.9
Total revenue			$	1,334.6					$	1,149.5					$	3,889.7					$	3,134.4

Property and Equipment—net			September 30, 2023						December 31, 2022
Americas:
United States			$	696.7					$	638.1
Canada			209.8						204.4
Latin America			1.2						1.1
Total Americas			907.7						843.6
EMEA			68.7						35.9
APAC			61.6						19.0
Total property and equipment—net			$	1,038.0					$	898.5

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

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
Distributor A			28		%				29		%				28		%				29		%
Distributor B			15		%				13		%				15		%				13		%
Distributor C			13		%				13		%				14		%				13		%

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

			September 30, 2023						December 31, 2022
Distributor A			26		%				32		%
Distributor B			13		%				12		%
Distributor C			13		%				13		%

16. SUBSEQUENT EVENT

Share Repurchase Program

Subsequent to September 30, 2023 through the filing of this Quarterly Report on Form 10-Q, we repurchased 11.2 million shares of our common stock at an average price of $54.87 per share for an aggregate purchase price of $613.5 million under the Repurchase Program, which excludes a $5.7 million accrual related to the 1% excise tax imposed by the Inflation Reduction Act of 2022.