Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We may be exposed to interest rate risk should we decide to invest in marketable securities. When we held marketable securities, we classified them as available-for-sale and were carried at fair value. Our investments historically consisted of money market funds, certificates of deposit, commercial paper, corporate bonds and government municipal bonds. Our investment policy specifies the types of eligible investments and minimum credit quality of our investments, as well as diversification and concentration limits which mitigate our risk. We do not use derivative financial instruments to hedge against interest rate risk because the majority of our investments mature in less than one year.
We are exposed to market risks related to fluctuations in interest rates on amounts borrowed under the Credit Facility. As of September 30, 2020, we had $48.1 million outstanding under our Term Loan and $15.0 million outstanding under our Revolving Loan. Prior to May 4, 2020, borrowings under the Credit Facility bore interest rates based on an underlying variable benchmark plus applicable margin based on our total leverage ("ABR"); this interest rate was reset quarterly. Effective May 4, 2020, borrowings under the Credit Facility bear a variable interest rate of LIBOR plus an applicable margin spread from 3.25% to 1.25%. The amount of the applicable margin spread is a function of our leverage ratio and is reset monthly. Based on the balance sheet position for both the Term Loan and Revolving Loan at September 30, 2020, the annualized effect of a 25 basis point change in interest rates would increase or decrease our interest expense by $0.3 million. For additional information, see Note 8 to our consolidated financial statements. For our Credit Facility, interest rate changes generally do not affect the fair value of the debt instruments, but do impact future earnings and cash flows, assuming other factors are held constant.
FOREIGN CURRENCY RISK
We are exposed to foreign currency transaction risk associated with certain sales being denominated in Euros, British Pounds, Japanese Yen or Canadian Dollars and in certain cases, transactions in U.S. Dollars in our foreign entities. We are also exposed to foreign currency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. We manage our net asset or net liability position for non-functional currency accounts, primarily the U.S. dollar accounts in our foreign locations to reduce our foreign currency risk. In addition, as foreign currency rates fluctuate, we may from time to time, adjust the prices of our products, services and subscriptions. We have not implemented a formal hedging strategy.
The table below compares the average monthly exchange rates of the Euro, British Pound, Japanese Yen and Canadian Dollar:
Fiscal year ended
September 30, % increase
2020 2019 (decrease)
Euro 1.1268 1.1300 (0.3) %
British Pound 1.2722 1.2769 (0.4) %
Japanese Yen 0.0093 0.0091 2.2 %
Canadian Dollar 0.7441 0.7518 (1.0) %
A 10.0% change from the 2020 average exchange rate for the Euro, British Pound, Yen and Canadian Dollar to the U.S. Dollar would have resulted in a 0.1% increase or decrease in fiscal 2020 annual revenue and a 0.9% increase or decrease in stockholders' equity at September 30, 2020. The above analysis does not take into consideration any pricing adjustments we may make in response to changes in the exchange rates.
CREDIT RISK
We have some exposure to credit risk related to our accounts receivable portfolio. Exposure to credit risk is controlled through regular monitoring of customer financial status, credit limits and collaboration with sales management on customer contacts to facilitate payment.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Digi International Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Digi International Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2020 and 2019,the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2020, and the related notes and consolidated financial statement schedule included under Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 25, 2020 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases in fiscal year 2020 due to the adoption of ASC Topic 842, Leases.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2017.
Minneapolis, Minnesota
November 25, 2020
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal year ended September 30,
2020 2019 2018
(in thousands, except per common share data)
Revenue:
Product $ 248,374 $ 224,530 $ 201,737
Service 30,897 29,673 25,156
Total revenue 279,271 254,203 226,893
Cost of sales:
Cost of product 118,322 118,855 104,639
Cost of service 12,490 13,350 10,329
Amortization 4,487 2,963 2,871
Total cost of sales 135,299 135,168 117,839
Gross profit 143,972 119,035 109,054
Operating expenses:
Sales and marketing 52,761 45,801 44,517
Research and development 43,765 37,564 33,178
General and administrative 36,012 25,685 28,276
Restructuring charge (reversal) 117 ( 87 ) 301
Total operating expenses 132,655 108,963 106,272
Operating income 11,317 10,072 2,782
Other (expense) income, net:
Interest income 304 733 445
Interest expense ( 3,592 ) ( 102 ) ( 25 )
Other (expense) income, net ( 566 ) 442 48
Total other (expense) income, net ( 3,854 ) 1,073 468
Income before income taxes 7,463 11,145 3,250
Income tax (benefit) expense ( 948 ) 1,187 1,619
Net income $ 8,411 $ 9,958 $ 1,631
Net income per common share:
Basic $ 0.29 $ 0.36 $ 0.06
Diluted $ 0.28 $ 0.35 $ 0.06
Weighted average common shares:
Basic 28,849 27,905 27,083
Diluted 29,546 28,554 27,652
The accompanying notes are an integral part of the consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal year ended September 30,
2020 2019 2018
(in thousands)
Net income $ 8,411 $ 9,958 $ 1,631
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 1,698 ( 2,003 ) ( 865 )
Change in net unrealized gain (loss) on investments — 19 ( 31 )
Less income tax (expense) benefit — ( 5 ) 6
Reclassification of realized loss on investments included in net income (1) — — 31
Less income tax benefit (2) — — ( 8 )
Other comprehensive income (loss), net of tax 1,698 ( 1,989 ) ( 867 )
Comprehensive income $ 10,109 $ 7,969 $ 764
(1) Recorded in Other (expense) income, net in our Consolidated Statements of Operations.
(2) Recorded in Income tax (benefit) expense in our Consolidated Statements of Operations.
The accompanying notes are an integral part of the consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As of September 30,
2020 2019
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 54,129 $ 92,792
Accounts receivable, net 59,227 56,417
Inventories 51,568 39,764
Other current assets 5,134 3,574
Total current assets 170,058 192,547
Property, equipment and improvements, net 11,507 13,857
Identifiable intangible assets, net 121,248 30,667
Goodwill 210,135 153,422
Deferred tax assets 389 7,330
Operating lease right-of-use assets 14,334 —
Other non-current assets 1,011 875
Total assets $ 528,682 $ 398,698
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 1,972 $ —
Accounts payable 28,067 21,183
Accrued compensation 9,372 8,733
Unearned revenue 7,691 5,025
Contingent consideration on acquired businesses 4,228 5,407
Current portion of operating lease liabilities 2,527 —
Other current liabilities 7,373 4,110
Total current liabilities 61,230 44,458
Income taxes payable 1,958 1,192
Deferred tax liabilities 17,171 261
Long-term debt 58,980 —
Operating lease liabilities 16,193 —
Other non-current liabilities 1,650 3,809
Total liabilities 157,182 49,720
Commitments and Contingencies (see Note 17)
Stockholders’ equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding — —
Common stock, $.01 par value; 60,000,000 shares authorized; 35,512,843 and 34,608,003 shares issued 355 346
Additional paid-in capital 279,741 266,567
Retained earnings 170,330 161,919
Accumulated other comprehensive loss ( 23,817 ) ( 25,515 )
Treasury stock, at cost, 6,353,094 and 6,367,428 shares ( 55,109 ) ( 54,339 )
Total stockholders’ equity 371,500 348,978
Total liabilities and stockholders’ equity $ 528,682 $ 398,698
The accompanying notes are an integral part of the consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended September 30,
2020 2019 2018
Operating activities: (in thousands)
Net income $ 8,411 $ 9,958 $ 1,631
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of property, equipment and improvements 4,545 4,578 3,349
Amortization of identifiable intangible assets 14,754 8,818 9,435
Stock-based compensation 7,237 5,655 4,854
Deferred income tax benefit ( 3,357 ) ( 799 ) ( 376 )
Gain on sale of property, equipment and improvements — ( 4,392 ) ( 622 )
Change in fair value of contingent consideration ( 128 ) 1,190 1,377
Provision for bad debt and product returns 2,135 635 1,120
Provision for inventory obsolescence 2,630 1,874 2,056
Other, net 366 ( 156 ) 368
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable 5,539 ( 6,589 ) ( 16,004 )
Inventories ( 11,133 ) ( 1,062 ) ( 11,344 )
Other assets ( 704 ) ( 866 ) ( 1,412 )
Income taxes ( 1,100 ) ( 103 ) 697
Accounts payable 3,205 8,232 2,728
Accrued expenses 2,078 1,991 ( 635 )
Net cash provided by (used in) operating activities 34,478 28,964 ( 2,778 )
Investing activities:
Proceeds from maturities of marketable securities — 4,750 32,032
Proceeds from sale of business — — 2,000
Acquisition of businesses, net of cash acquired ( 136,098 ) — ( 56,258 )
Proceeds from sale of property and equipment — 10,096 731
Purchase of property, equipment, improvements and certain other intangible assets ( 899 ) ( 9,335 ) ( 1,842 )
Net cash (used in) provided by investing activities ( 136,997 ) 5,511 ( 23,337 )
Financing activities:
Proceeds from long-term debt 119,018 — —
Payments on long-term debt ( 55,893 ) — —
Payments for contingent consideration ( 4,698 ) ( 3,748 ) —
Proceeds from stock option plan transactions 5,902 4,874 5,460
Proceeds from employee stock purchase plan transactions 1,065 1,058 1,115
Taxes paid for net share settlement of share-based payment awards ( 1,791 ) ( 1,071 ) ( 748 )
Net cash provided by financing activities 63,603 1,113 5,827
Effect of exchange rate changes on cash and cash equivalents 253 ( 810 ) 80
Net (decrease) increase in cash and cash equivalents ( 38,663 ) 34,778 ( 20,208 )
Cash and cash equivalents, beginning of period 92,792 58,014 78,222
Cash and cash equivalents, end of period $ 54,129 $ 92,792 $ 58,014
Supplemental disclosures of cash flow information:
Interest paid $ 3,009 $ 1 $ 10
Income taxes paid, net $ 3,686 $ 2,048 $ 1,235
Supplemental schedule of non-cash investing and financing activities:
Accrual for property, equipment, improvements and certain other intangibles assets $ ( 26 ) $ — $ ( 78 )
Transfer of inventory to property, equipment and improvements $ ( 1,363 ) $ ( 1,064 ) $ ( 2,159 )
Liability related to acquisition of business $ ( 5,100 ) $ — $ ( 2,300 )
The accompanying notes are an integral part of the consolidated financial statements.
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