Fortinet Inc. (NASDAQ:FTNT)

The analysis of current and deferred income tax expenses over the five-year period reveals notable fluctuations and trends worthy of attention.

Current Income Tax Expense

The current tax expense demonstrates a generally increasing trend from 2018 to 2022. It begins at $26,300 thousand in 2018, experiences a slight decrease to $22,500 thousand in 2019, and then rises significantly in subsequent years. By 2020, it reaches $60,300 thousand, nearly tripling from 2019. The upward trajectory continues with $106,500 thousand reported in 2021 and peaks at $256,400 thousand in 2022, indicating a substantial increase in the company's current tax obligations.

Deferred Income Tax Expense

Deferred tax expense values demonstrate greater volatility and varying sign across the timeline. In 2018, the deferred tax benefit is significant at -$107,600 thousand, implying a reduction in overall tax expense. This changes to a deferred tax expense of $30,200 thousand in 2019, suggesting an increase in deferred tax liabilities or a decrease in deferred tax assets. The deferred tax switches back to a small benefit of -$7,100 thousand in 2020 before exhibiting larger benefits again in 2021 (-$92,400 thousand) and 2022 (-$225,600 thousand). The overall pattern indicates considerable swings in deferred tax, with substantial benefits particularly in the latter years, which may reflect timing differences in recognizing income and expenses for tax and accounting purposes or adjustments in tax positions.

Provision for Income Taxes

The total provision, net of current and deferred components, starts with a notable tax benefit of -$81,300 thousand in 2018. This shifts to tax expenses over the following years: $52,700 thousand in 2019, closely followed by a similar amount of $53,200 thousand in 2020. A marked decline occurs in 2021 with only $14,100 thousand, and a modest increase is seen in 2022 at $30,800 thousand. This pattern reflects the combined effects of the rising current tax expenses and the fluctuating deferred tax benefits, resulting in an overall lower tax provision in 2021 despite increasing current tax expenses, due to substantial deferred tax benefits during that period.

In summary, the company’s current tax expenses have steadily grown over this timeframe, indicating increased taxable income or changes in tax rates or regulations impacting current tax liabilities. Deferred tax expenses have shown volatility with pronounced benefits in recent years, significantly impacting the total tax provision and potentially reflecting changes in the company’s tax planning strategies, asset valuations, or timing differences. The overall provision for income taxes demonstrates a dynamic interplay between current obligations and deferred tax adjustments, leading to variable tax expense outcomes annually.

The data presents the statutory federal and effective income tax rates over a five-year period. Throughout the years, the statutory federal income tax rate remains constant at 21%, indicating no changes in the nominal tax legislation affecting the company during this period.

Conversely, the effective income tax rate demonstrates notable fluctuations. In 2018, the effective tax rate was significantly negative at -32.4%, suggesting that the company recorded income tax benefits or recognized deferred tax assets that outweighed its tax expense. Starting from 2019, the effective rate shifted to positive figures, decreasing substantially from 13.9% in 2019 to 3.22% in 2022.

This declining trend in the effective tax rate from 2019 onward, approaching closer to zero, suggests an increasing tax efficiency or utilization of tax planning strategies, or possible changes in the composition of the company's taxable income and deductions. The variation between the stable statutory rate and the volatile effective rate indicates differences in taxable income recognition, potential tax credits, or adjustments in valuation allowances over time.

Statutory Federal Income Tax Rate

Remained steady at 21% from 2018 through 2022.

Effective Income Tax Rate

Highly volatile, shifting from a negative -32.4% in 2018 to positive single-digit percentages in subsequent years, reaching 3.22% in 2022.

Insights

The disparity between statutory and effective rates reflects significant fluctuations in tax expense relative to pre-tax earnings, potentially influenced by tax credits, deferred taxes, or other accounting factors affecting the tax calculation.

General Business Credit Carryforward

The general business credit carryforward showed fluctuations over the period, increasing significantly from 29,500 in 2018 to peak at 73,200 in 2019, then declining to 48,900 in 2020. It subsequently recovered, reaching 95,000 by 2022, indicating variability but an overall upward trend in available tax credits.

Deferred Revenue

Deferred revenue displayed a consistent upward trajectory, rising from 223,900 in 2018 to 380,100 in 2022. This steady increase suggests a growing volume of unearned revenue, potentially reflecting expanding customer contracts or prepaid services.

Reserves and Accruals

Reserves and accruals increased markedly during the period, nearly tripling from 26,600 in 2018 to 90,100 in 2022. This notable rise may reflect growing provisions for liabilities or anticipated expenses.

Net Operating Loss Carryforward

Net operating loss carryforward experienced a sharp increase to 57,900 in 2019 from 13,500 in 2018, but then declined gradually to 21,200 by 2022. This pattern indicates a peak in loss periods around 2019 with subsequent reductions.

Stock-Based Compensation Expense

Stock-based compensation expense remained relatively stable, with a slight increase from 16,200 in 2018 to 19,800 in 2022, suggesting moderate growth in employee equity-based incentives.

Depreciation and Amortization

Depreciation and amortization showed volatility, with a low of 700 in 2019 and a peak of 17,000 in 2021 before dropping to 5,600 in 2022. This may reflect changes in asset acquisitions or amortization schedules.

Capitalized Research Expenditures

Capitalized research expenditures started being reported in 2020 at 16,600 and increased significantly thereafter to 176,700 in 2022. This indicates substantial investment in research and development assets over recent years.

Operating Lease Liabilities

Operating lease liabilities were first recorded at 10,600 in 2019 and increased steadily to 20,800 by 2022, demonstrating growing commitments under operating leases.

Deferred Tax Assets

Deferred tax assets increased steadily from 313,000 in 2018 to 809,300 in 2022, reflecting enhanced future tax benefit realizations possibly driven by growth and increased deductible temporary differences.

Valuation Allowance

The valuation allowance, a contra account to deferred tax assets, became more negative over time, increasing from -14,900 in 2018 to -100,800 in 2022. This trend suggests a growing portion of deferred tax assets being considered less likely to be realized.

Deferred Tax Assets, Net of Valuation Allowance

After accounting for valuation allowances, net deferred tax assets showed an overall increase from 298,100 in 2018 to 708,500 in 2022, highlighting growth in recoverable deferred tax benefits despite increased valuation allowances.

Deferred Contract Costs

Deferred contract costs became increasingly negative, moving from -52,100 in 2018 to -117,500 in 2022. This growth in deferred costs suggests higher recognition of contract-related assets or expenditures to be amortized.

Operating Lease Right-of-Use (ROU) Assets

Operating lease ROU assets, first recognized negatively at -9,500 in 2019, increased in magnitude to -20,900 in 2022. This reflects the adoption and expansion of operating lease accounting standards, with corresponding assets recognized on the balance sheet.

Acquired Intangibles

Acquired intangibles, reported beginning in 2020 at -5,700, reached -15,700 in 2021 and then decreased to -8,800 by 2022. This fluctuation may indicate impairment or amortization impacts on intangible assets.

Deferred Tax Liabilities

Deferred tax liabilities increased consistently in absolute terms from -52,100 in 2018 to -147,200 in 2022, suggesting growing taxable temporary differences or increased future tax obligations.

Net Deferred Tax Assets (Liabilities)

The net deferred tax assets, calculated as deferred tax assets less deferred tax liabilities, showed an upward trend from 246,000 in 2018 to 561,300 in 2022. This appreciable increase indicates an improving net tax position over the analyzed period.

Deferred Tax Assets

The deferred tax assets show a rising trend over the observed five-year period. Starting at 255,000 thousand US dollars in 2018, the value slightly decreased in 2019 to 232,600 thousand US dollars, suggesting a temporary reduction. However, from 2020 onward, the amount increased consistently, reaching 245,200 thousand US dollars in 2020, 342,300 thousand US dollars in 2021, and a significant jump to 569,400 thousand US dollars in 2022. This indicates an expanding recognition of deferred tax assets, possibly due to an increase in deductible temporary differences or tax loss carryforwards.

Deferred Tax Liabilities

The deferred tax liabilities exhibit relatively stable behavior throughout the years. Beginning at 9,000 thousand US dollars in 2018, the figure declined to 5,000 thousand US dollars in 2019, indicating a reduction in taxable temporary differences or changes in tax regulations. Subsequently, it rose slightly to 8,000 thousand US dollars in 2020 and remained unchanged in 2021. By 2022, the liabilities showed a minor increase to 8,100 thousand US dollars, maintaining a level significantly lower than the deferred tax assets.

Overall Observations

The data reflects a growing disparity between deferred tax assets and liabilities, with assets increasing substantially whereas liabilities remain low and stable. This widening gap could imply improving future tax benefits due to increased deductible amounts or favorable tax positions. The modest fluctuation in liabilities suggests consistent recognition of taxable temporary differences without significant volatility.

Total Assets

Reported total assets have shown a consistent upward trend from 3.08 billion US dollars in 2018 to 6.23 billion US dollars in 2022. Adjusted total assets follow a similar growth pattern, increasing from 2.82 billion to 5.66 billion US dollars over the same period. The adjustments consistently reduce the asset base, suggesting deferred tax impacts or other accounting adjustments that lower the reported figures but maintain a parallel growth trajectory.

Total Liabilities

There is a notable increase in both reported and adjusted total liabilities, rising sharply from approximately 2.07 billion US dollars in 2018 to around 6.51 billion US dollars in 2022. The adjusted liabilities are marginally lower than reported liabilities each year, with the difference remaining relatively stable, indicating that deferred or adjusted tax liabilities do not materially alter the overall liability structure but have a consistent downward adjustment effect.

Stockholders' Equity (Deficit)

Reported stockholders' equity presents a declining trend over the observed period with an initial increase from about 1.01 billion US dollars in 2018 to a peak of 1.32 billion in 2019, followed by a sharp decline to a deficit of approximately 282 million US dollars in 2022. Adjusted stockholders' equity similarly declines but shows an earlier and deeper deficit reaching approximately 843 million US dollars by 2022. This deterioration indicates increasing financial leverage or accumulated losses not fully offset by equity inflows over the years, with adjustments amplifying the negative equity position.

Net Income Attributable to Fortinet, Inc.

Reported net income displays robust growth, rising from 332 million US dollars in 2018 to 857 million in 2022. Adjusted net income shows a generally increasing trend as well but with more variability, starting at 225 million in 2018, peaking at 481 million in 2020, then rising moderately to 632 million by 2022. The adjusted figures tend to be lower than reported, particularly in later years, reflecting income tax adjustments that reduce after-tax profitability figures. The strong growth in net income juxtaposed with declining equity suggests significant reinvestment, possible dividends, or accounting treatments affecting retained earnings.

Summary

The data indicates substantial growth in asset and liability bases over five years, highlighting expansion or increased operational scale. Despite increasing net income, the company’s equity trend shows deterioration into negative territory, signaling elevated risk or aggressive financing strategies possibly involving substantial debt or intangible asset treatments. Adjustments for deferred taxes and other accounting aspects consistently reduce asset, equity, and income figures, suggesting prudent financial reporting that tempers reported profitability and net asset values. These patterns imply a complex capital structure and significant tax-related accounting considerations influencing the financial position and performance.

The analysis of the financial metrics over the five-year period reveals distinct trends in profitability, efficiency, and leverage when comparing reported and adjusted figures.

Net Profit Margin

The reported net profit margin experienced a slight dip from 18.44% in 2018 to 15.14% in 2019 but then exhibited a general upward trend, reaching 19.41% by 2022. Conversely, the adjusted net profit margin shows more variability: starting lower at 12.47% in 2018, peaking at 18.56% in 2020, and then declining steadily to 14.3% in 2022. This suggests adjustments for deferred income taxes have a dampening effect on reported profitability in the later years.

Total Asset Turnover

Both reported and adjusted total asset turnover ratios followed a somewhat similar path. Reported turnover showed a decrease from 0.59 in 2018 to 0.55 in 2019, rebounded to 0.64 in 2020, dipped again in 2021, and then increased to 0.71 by 2022. The adjusted turnover consistently remains higher than the reported figures and follows a similar fluctuation pattern, rising to 0.78 in 2022. This indicates improved efficiency in asset utilization over time, with adjustments generally enhancing the turnover metric.

Financial Leverage

Reported financial leverage displayed substantial volatility, dropping slightly from 3.05 in 2018 to 2.94 in 2019, then surging to 4.72 in 2020 and dramatically increasing to 7.57 in 2021; the data for 2022 is missing. The adjusted financial leverage follows a similar steep upward trend, rising from 3.69 in 2018 to an elevated 12.46 in 2021, again with no data for 2022. This pronounced increase in leverage adjusted for deferred tax effects suggests a significant rise in the company's use of debt or other liabilities relative to equity during the period examined.

Return on Equity (ROE)

For ROE, the reported values indicate a sharp increase after 2019, jumping from 24.7% to 57.07% in 2020 and peaking at 77.63% in 2021 before the data ceases. The adjusted ROE mirrors this upward trajectory but at slightly lower levels initially (29.39% in 2018 rising to 32.6% in 2019), then surging dramatically to 77.8% in 2020 and soaring to an exceptionally high 114.98% in 2021. This reflects increasing profitability relative to shareholder equity, significantly influenced by adjustments related to income tax timing differences.

Return on Assets (ROA)

The reported ROA shows fluctuation from 10.79% in 2018, diminishing to 8.4% in 2019, increasing to 12.08% in 2020, declining again to 10.25% in 2021, and rising to 13.77% in 2022. Adjusted ROA follows a similar pattern but with generally lower values in later years, ranging from 7.96% in 2018 to 11.16% in 2022, peaking in 2020. The adjustments indicate that deferred taxes have a moderating effect on asset profitability across most periods.

Overall, the data indicate a company exhibiting improving operational efficiency and profitability trends over the years, with asset turnover and profitability measures generally increasing by 2022. However, the consistent rise in financial leverage, especially on an adjusted basis, points toward increased financial risk, which may amplify returns but also heighten vulnerability. Adjustments for deferred income taxes significantly affect profitability and leverage metrics, emphasizing the importance of considering both reported and adjusted figures for a comprehensive financial assessment.

Reported Net Income

The reported net income attributable to the company displays a consistent upward trend over the five-year period. Starting at $332.2 million in 2018, it marginally decreased to $326.5 million in 2019, followed by a significant increase to $488.5 million in 2020. This upward trajectory continued through 2021 and 2022, reaching $606.8 million and $857.3 million respectively, indicating strong profitability growth.

Adjusted Net Income

The adjusted net income shows a generally positive trend but with more variability than the reported net income. Beginning at $224.6 million in 2018, it rose substantially to $356.7 million in 2019 and then to $481.4 million in 2020. However, a slower growth occurred in 2021 when adjusted income increased only slightly to $514.4 million, before a more pronounced rise to $631.7 million in 2022. This suggests fluctuations in adjustments may impact the comparability across years.

Reported Net Profit Margin

The reported net profit margin fluctuates within a narrow range, reflecting relative stability in profitability ratios. Starting at 18.44% in 2018, it dipped to 15.14% in 2019, then rebounded to 18.83% in 2020. Subsequent years show slight declines and increases, with margins of 18.16% in 2021 and 19.41% in 2022, illustrating a general maintenance of strong profit margins.

Adjusted Net Profit Margin

The adjusted net profit margin demonstrates a more variable pattern compared to the reported margin. From 12.47% in 2018, it increased sharply to 16.54% in 2019 and peaked near 18.56% in 2020. However, the margin declined to 15.39% in 2021 and further to 14.3% in 2022, indicating a reduction in profitability when adjustments are factored in during the latest periods. This could signal changes in expense structure or other adjustments impacting the company's operational efficiency on an adjusted basis.

Summary of Trends

Overall, the company exhibited strong growth in both reported and adjusted net income across the analyzed timeframe, with reported figures showing more consistent increases. Reported profit margins remained stable and relatively high, underscoring sustained profitability. Adjusted margins, while initially improving, declined in the latter years, suggesting evolving factors affecting adjusted earnings that warrant further investigation. The disparity between reported and adjusted results highlights the importance of understanding the nature of adjustments made to assess true operational performance.

Reported and Adjusted Total Assets

There is a consistent increase in both reported and adjusted total assets over the five-year period. Reported total assets grew from 3.078 billion USD in 2018 to 6.228 billion USD in 2022, showing more than a doubling in value. Adjusted total assets similarly increased from 2.823 billion USD to 5.659 billion USD during the same period. Notably, the gap between reported and adjusted assets remains relatively stable, with adjusted figures slightly lower but following the same upward trend.

Reported and Adjusted Total Asset Turnover

The reported total asset turnover ratio exhibits fluctuations within the range of 0.55 to 0.71. It started at 0.59 in 2018, decreased to a low of 0.55 in 2019, then increased moderately to 0.64 in 2020, dipped again to 0.56 in 2021, before rising to the highest point of 0.71 in 2022. The adjusted total asset turnover ratio shows a similar pattern but consistently higher values, illustrating more efficient use of adjusted assets in generating revenue. It began at 0.64 in 2018, followed by a decline to 0.59 in 2019, then increased steadily to 0.68 in 2020, decreased slightly to 0.60 in 2021, and reached a peak of 0.78 in 2022.

Overall Trends and Insights

The data reflect a substantial growth in asset base, suggesting investment and expansion activity over the period. The increasing trend in asset turnover ratios, particularly towards 2022, indicates an improvement in asset utilization efficiency. Adjusted figures provide a more optimistic view of performance, with higher asset turnover ratios compared to reported figures, potentially reflecting the positive impact of deferred tax adjustments on the operational efficiency metrics. Despite some year-to-year volatility, the general trajectory points towards enhanced efficiency and asset growth.

The financial data reveals several noteworthy trends in asset size, equity position, and financial leverage over the five-year period from 2018 to 2022.

Total Assets

Both reported and adjusted total assets consistently increased each year, signaling growth in the scale of operations or asset base. Reported total assets grew from approximately 3.08 billion USD in 2018 to 6.23 billion USD in 2022, nearly doubling in size. Adjusted total assets followed a similar trajectory, rising from about 2.82 billion USD to 5.66 billion USD over the same period. The adjusted figures are persistently lower than the reported, suggesting that deferred income tax adjustments reduce the asset base by a consistent margin, which slightly decreased in relative magnitude by 2022.

Stockholders’ Equity

The reported stockholders’ equity exhibited an increasing trend from 2018 through 2019, rising from roughly 1.01 billion USD to 1.32 billion USD. However, from 2019 onwards, equity declined sharply, decreasing to about 856 million USD in 2020 and continuing downward to a negative value of -282.6 million USD by 2022. Adjusted equity mirrored this pattern but with more pronounced declines, turning negative earlier and reaching -842.9 million USD in 2022. This indicates deteriorating net worth under adjusted accounting measures, potentially linked to deferred tax effects or other adjustments impacting retained earnings or reserves.

Financial Leverage

Financial leverage ratios indicate increasing reliance on liabilities relative to equity over the available periods. Reported financial leverage decreased slightly from 3.05 in 2018 to 2.94 in 2019 but then rose sharply to 4.72 in 2020 and 7.57 in 2021. The 2022 reported leverage ratio is not available, likely due to negative equity. Adjusted financial leverage follows a similar but more accentuated trend, climbing from 3.69 in 2018 to 12.46 in 2021. The substantially higher adjusted leverage ratios, especially the sharp increase from 2020 to 2021, reflect the compounding effect of decreasing adjusted equity levels and asset growth. The negative equity in 2022 would imply an undefined or infinite leverage ratio, which is why it is likely omitted.

In summary, the data reveals expanding asset size accompanied by deteriorating equity positions, particularly under the adjusted framework. Consequently, the company’s financial leverage has intensified significantly, indicating increased financial risk and dependency on liabilities. The transition to negative equity values and extremely high leverage ratios may warrant close attention to the sustainability of the capital structure and the impact of deferred income tax adjustments on reported financial health.

Net Income Trends

The reported net income attributable to the company increased steadily from 2018 to 2022, rising from $332.2 million to $857.3 million. This reflects a significant overall growth in profitability during the period. The adjusted net income, which excludes the effects of reported and deferred income tax adjustments, also showed an upward trajectory, growing from $224.6 million in 2018 to $631.7 million in 2022. Although the adjusted figures are consistently lower than the reported figures, both sets demonstrate strong earnings growth, particularly notable between 2019 and 2022.

Stockholders’ Equity Trends

The reported total stockholders' equity experienced fluctuation over the five-year span. Initially, it grew from approximately $1.01 billion in 2018 to a peak of $1.32 billion in 2019. Subsequently, it declined sharply to $856 million in 2020 and further to $781.7 million in 2021, ultimately turning negative at -$281.6 million in 2022. The adjusted total stockholders’ equity mirrored this declining trend but at reduced levels across all periods, falling from $764.2 million in 2018 to a negative $842.9 million in 2022. This indicates worsening equity positions after adjustments, highlighting a potentially increasing liability or other balance sheet pressures affecting net equity.

Return on Equity (ROE) Analysis

Reported ROE showed an increasing trend from 32.88% in 2018 to a peak of 77.63% in 2021, demonstrating an improvement in the company’s ability to generate earnings from its equity base. The data for 2022 is unavailable. Adjusted ROE follows a similar pattern but with generally higher values, beginning at 29.39% in 2018 and surging to 114.98% in 2021. The steep increase in adjusted ROE suggests that when accounting for income tax adjustments, the company’s effective utilization of equity capital improved markedly over time. The absence of 2022 ROE figures limits the completeness of trend analysis for the final year.

Insights and Implications

The simultaneous increase in net income and decline in equity, especially reaching negative adjusted equity in 2022, may indicate substantial financial restructuring, dividend payments, or share repurchases affecting equity levels. The increasing returns on equity despite declining or negative equity balances suggest leverage or other financial engineering might be contributing to profitability metrics. The divergence between reported and adjusted figures underscores the material impact of income tax-related adjustments on financial performance and equity positions, which should be carefully considered in assessing the company’s financial health and capital efficiency.

The analysis of financial data over the five-year period reveals several key trends and patterns regarding the company's reported and adjusted net income, total assets, and return on assets (ROA).

Net Income Trends

Reported net income attributable to the company shows a steady increase throughout the period, growing from 332,200 thousand US dollars in 2018 to 857,300 thousand US dollars in 2022. This represents more than a twofold increase over five years. Adjusted net income, which excludes impacts from reported and deferred income taxes, also follows an upward trajectory but with a less pronounced increase, rising from 224,600 thousand US dollars in 2018 to 631,700 thousand US dollars in 2022. The adjusted figures depict a more moderate but consistent growth pattern, indicating that tax adjustments may have a significant effect on the reported net income volatility.

Total Assets Trends

Reported total assets have expanded considerably, increasing from 3,078,000 thousand US dollars in 2018 to 6,228,000 thousand US dollars in 2022. This near doubling of assets indicates substantial investment or acquisitions. Adjusted total assets, which incorporate tax-related adjustments, also increased substantially but show slightly lower values compared to reported totals, moving from 2,823,000 thousand US dollars in 2018 to 5,658,600 thousand US dollars in 2022. The consistent growth in total assets supports a narrative of company expansion and capital accumulation.

Return on Assets (ROA) Dynamics

The reported ROA demonstrates some fluctuation but overall positive performance. Starting at 10.79% in 2018, it decreased to 8.4% in 2019, rebounded to 12.08% in 2020, dipped slightly to 10.25% in 2021, and then rose sharply to 13.77% in 2022. In comparison, adjusted ROA figures begin at a lower 7.96% in 2018 and improve steadily through 2020 to 12.67%, only to decline to 9.22% in 2021 before recovering to 11.16% in 2022. The adjustments for taxes seem to smooth some volatility in ROA but still reflect overall positive profitability trends relative to assets.

Overall Insights

The company has experienced robust growth in net income and asset base during the examined period, with notable acceleration in reported net income and total assets from 2021 to 2022. The divergence between reported and adjusted figures indicates the material impact of tax-related items on financial results, with adjusted data generally presenting a more moderate growth profile and softer profitability ratios. Despite some fluctuations, the ROA metrics reflect effective utilization of the asset base to generate profit, especially marked in the most recent year.