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, 2022, we had $250.0 million outstanding under our Term Loan and $0.0 million outstanding under our Revolving Loan. Borrowings under the Term Loan Facility bear interest at a rate per annum equal to LIBOR with a floor of 0.50% for an interest period of one, three or six months as selected by Digi, reset at the end of the selected interest period (or a replacement benchmark rate if LIBOR is no longer available) plus 5.00% or a base rate plus 4.00%. The base rate is determined by reference to the highest of BMO’s prime rate, the Federal Funds Effective Rate plus 0.5%, or the one-month LIBOR for U.S. dollars plus 1.00%. The applicable margin for loans under the Revolving Credit Facility is in a range of 4.00-3.75% for LIBOR loans and 3.00 to 2.75% for base rate loans, depending on Digi’s consolidated leverage ratio. Based on the balance sheet position for both the Term Loan and Revolving Loan at September 30, 2022, the annualized effect of a 25 basis point change in interest rates would increase or decrease our interest expense by $0.6 million. For additional information, see Note 7 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. If interest rates remain elevated, we will continue to see interest expenses that are higher than historical amounts.
FOREIGN CURRENCY RISK
We are exposed to foreign currency transaction risk associated with certain sales being denominated in 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 Canadian Dollar, Indian Rupee and Australian Dollar:
Fiscal year ended
September 30, % increase
2022 2021 (decrease)
Euro 1.1057 1.1951 (7.5) %
British Pound 1.1377 1.2718 (10.5) %
Canadian Dollar 0.7768 0.7911 (1.8) %
Indian Rupee 0.0130 0.0131 (0.8) %
Australian Dollar 0.7105 0.7510 (5.4) %
A 10.0% change from the 2022 average exchange rate for the Euro, British Pound Canadian Dollar, Indian Rupee and Australian Dollar to the U.S. Dollar would have resulted in an immaterial increase or decrease in fiscal 2022 annual revenue and a 1.2% increase or decrease in stockholders' equity at September 30, 2022. 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
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 248 )
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Consolidated Statements of Operations
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Consolidated Statements of Comprehensive Income
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Consolidated Balance Sheets
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Consolidated Statements of Cash Flows
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Consolidated Statements of Stockholders' Equity
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Notes to the Consolidated Financial Statements
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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, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2022, and the related notes and consolidated financial statement schedule included under Item 15(a) (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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, 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, 2022, 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 23, 2022 expressed an unqualified opinion.
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.
Critical audit matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical matters.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2016.
Cincinnati, Ohio
November 23, 2022
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
2022 2021 2020
(in thousands, except per common share data)
Revenue:
Product $ 290,170 $ 265,805 $ 248,374
Service 98,055 42,827 30,897
Total revenue 388,225 308,632 279,271
Cost of sales:
Cost of product 140,615 124,065 118,322
Cost of service 26,027 13,412 12,490
Amortization 5,297 4,498 4,487
Total cost of sales 171,939 141,975 135,299
Gross profit 216,286 166,657 143,972
Operating expenses:
Sales and marketing 70,366 61,909 52,761
Research and development 55,098 46,623 43,765
General and administrative 58,527 40,830 36,140
Change in fair value of contingent consideration ( 6,200 ) 5,772 ( 128 )
Restructuring charge 275 995 117
Total operating expenses 178,066 156,129 132,655
Operating income 38,220 10,528 11,317
Other expense, net:
Interest income 11 10 304
Interest expense ( 19,701 ) ( 1,395 ) ( 3,592 )
Other income (expense), net 98 ( 144 ) ( 566 )
Total other expense, net ( 19,592 ) ( 1,529 ) ( 3,854 )
Income before income taxes 18,628 8,999 7,463
Income tax benefit ( 755 ) ( 1,367 ) ( 948 )
Net income $ 19,383 $ 10,366 $ 8,411
Net income per common share:
Basic $ 0.55 $ 0.32 $ 0.29
Diluted $ 0.54 $ 0.31 $ 0.28
Weighted average common shares:
Basic 35,031 32,111 28,849
Diluted 35,995 33,394 29,546
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
Year ended September 30,
2022 2021 2020
(in thousands)
Net income $ 19,383 $ 10,366 $ 8,411
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment ( 3,308 ) 1,071 1,698
Other comprehensive (loss) income, net of tax ( 3,308 ) 1,071 1,698
Comprehensive income $ 16,075 $ 11,437 $ 10,109
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,
2022 2021
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 34,900 $ 152,432
Accounts receivable, net 50,450 43,738
Inventories 73,223 43,921
Deferred tax assets 3,764 2,698
Other current assets 3,871 3,869
Total current assets 166,208 246,658
Property, equipment and improvements, net 27,594 12,132
Identifiable intangible assets, net 302,064 118,029
Goodwill 340,477 225,522
Operating lease right-of-use assets 15,299 15,684
Other non-current assets 2,253 1,506
Total assets $ 853,895 $ 619,531
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 15,523 $ —
Accounts payable 32,373 22,586
Accrued compensation 14,576 12,934
Unearned revenue 19,803 13,589
Current portion of operating lease liabilities 3,196 2,633
Other current liabilities 11,036 7,199
Total current liabilities 96,507 58,941
Income taxes payable 2,441 2,334
Deferred tax liabilities 9,666 13,493
Long-term debt 222,448 45,799
Operating lease liabilities 16,978 18,368
Other non-current liabilities 4,342 8,079
Total liabilities 352,382 147,014
Commitments and Contingencies (see Note 16 )
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; 41,950,732 and 40,653,035 shares issued
420 407
Additional paid-in capital 385,244 370,699
Retained earnings 200,075 180,692
Accumulated other comprehensive loss ( 26,054 ) ( 22,746 )
Treasury stock, at cost, 6,412,812 and 6,390,645 shares
( 58,172 ) ( 56,535 )
Total stockholders’ equity 501,513 472,517
Total liabilities and stockholders’ equity $ 853,895 $ 619,531
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
Year ended September 30,
2022 2021 2020
Operating activities: (in thousands)
Net income $ 19,383 $ 10,366 $ 8,411
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, equipment and improvements 6,644 4,343 4,545
Amortization 30,928 16,534 14,754
Stock-based compensation 8,578 8,135 7,237
Deferred income tax provision ( 3,387 ) ( 4,598 ) ( 3,357 )
Loss on sale of property, equipment and improvements 4 89 —
Change in fair value of contingent consideration ( 6,200 ) 5,772 ( 128 )
Provision for bad debt and product returns 427 2,290 2,135
Provision for inventory obsolescence 6,901 1,200 2,630
Other, net ( 192 ) 42 366
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable ( 541 ) 11,467 5,539
Inventories ( 41,369 ) 4,679 ( 11,133 )
Other assets ( 545 ) ( 1,657 ) ( 704 )
Income taxes ( 1,305 ) 165 ( 1,100 )
Accounts payable 7,281 ( 5,578 ) 3,205
Accrued expenses 11,133 4,474 2,078
Net cash provided by operating activities 37,740 57,723 34,478
Investing activities:
Acquisition of businesses, net of cash acquired ( 347,554 ) ( 19,108 ) ( 136,098 )
Purchase of property, equipment, improvements and certain other intangible assets ( 1,974 ) ( 2,257 ) ( 899 )
Net cash used in investing activities ( 349,528 ) ( 21,365 ) ( 136,997 )
Financing activities:
Proceeds from long-term debt 350,000 617 119,018
Payments of debt issuance costs ( 13,443 ) — —
Payments on long-term debt ( 148,118 ) ( 15,624 ) ( 55,893 )
Payments for contingent consideration — ( 4,200 ) ( 4,698 )
Proceeds from issuances of stock, net of offering expenses — 73,830 —
Proceeds from stock option plan transactions 9,505 8,525 5,902
Proceeds from employee stock purchase plan transactions 1,500 1,214 1,065
Taxes paid for net share settlement of share-based payment awards ( 6,662 ) ( 2,120 ) ( 1,791 )
Net cash provided by financing activities 192,782 62,242 63,603
Effect of exchange rate changes on cash and cash equivalents 1,474 ( 297 ) 253
Net (decrease) increase in cash and cash equivalents ( 117,532 ) 98,303 ( 38,663 )
Cash and cash equivalents, beginning of period 152,432 54,129 92,792
Cash and cash equivalents, end of period $ 34,900 $ 152,432 $ 54,129
Supplemental disclosures of cash flow information:
Interest paid $ 14,209 $ 917 $ 3,009
Income taxes paid, net $ 4,333 $ 3,684 $ 3,686
Supplemental schedule of non-cash investing and financing activities:
Accrual for property, equipment, improvements and certain other intangibles assets $ ( 191 ) $ ( 98 ) $ ( 26 )
Tenant improvement allowance $ — $ ( 1,000 ) $ —
Transfer of inventory to property, equipment and improvements $ ( 6,237 ) $ ( 1,838 ) $ ( 1,363 )
Liability related to acquisition of business $ — $ ( 6,200 ) $ ( 5,100 )
Term debt refinanced as credit facility $ — $ 50,000 $ —
The accompanying notes are an integral part of the consolidated financial statements.
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