What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2024-11-22 compared with 2023-11-22 · 76 added, 76 removed, 249 unchanged (38% of the section changed)

1 unchanged sentence

Stock Listing

Our common stock is listed under the symbol DGII on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC.

Our common stock is listed under the symbol DGII on the Nasdaq Global Select Market tier of the Nasdaq.

On November 8, 2024 there were 95 stockholders of record.

9 unchanged sentences

Performance Evaluation

The graph below compares the total cumulative stockholders’ return on our common stock for the period from the close of the Nasdaq Stock Market - U.S.

The graph below compares the total cumulative stockholders’ return on our common stock for the period from the close of the Nasdaq - U.S.

Companies on September 30, 2019 to September 30, 2024, the last day of fiscal 2024, with the total cumulative return for the Nasdaq U.S.

17 unchanged sentences

This discussion contains forward-looking statements that are based on management’s current expectations and assumptions.

These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue," or the negative thereof or other variations thereon or similar terminology.

Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision.

These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," or "will" or the negative thereof or other variations thereon or similar terminology.

Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, inventory levels, perceived marketplace opportunities, debt repayments, attributions of potential acquisitions and statements regarding our mission and vision.

Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions.

Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, risks arising from the present war in Ukraine and the Middle East, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present and ongoing concerns about a potential recession, the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, risks related to cybersecurity, risks arising from the present wars in Ukraine and the Middle East, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, those set forth in Item 1A, Risk Factors, of this Annual Report on Form 10-K, subsequent filings on Form 10-Q and other filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

11 unchanged sentences

This included an increase of 9% in our Products and Services business segment and 10% in our Solutions business segment.

We also believe our high service levels are evidenced by an overall increase in revenues of 15% from fiscal 2022 to fiscal 2023.

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance.

Below we highlight the metrics for fiscal 2024 that we feel are most important in these evaluations, with comparisons to fiscal 2023:

• Consolidated revenue was $445 million, an increase of 15%.

• Consolidated gross profit was $252 million, an increase of 17%.

• Gross profit margin was 56.7% versus 55.7%.

• Net income was $25 million, compared to $19 million, an increase of 28%.

• Diluted earnings per share was $0.67, compared to $0.54, an increase of 24%.

• Adjusted net income was $74 million , or $1.99 per diluted share, compared to $60 million , or $1.66 per diluted share, an increase of 20% .

• Adjusted EBITDA was $97 million , or 21.7% of revenue, compared to $79 million or 20.5% of revenue.

• Revenue was $424 million, a decrease of 5%.

• Gross profit margin was 58.9%, an increase of 220 basis points.

• Net income was $23 million, compared to $25 million.

• Net income per diluted share was $0.61, compared to $0.67.

• Adjusted net income per diluted share was $1.99 , flat year over year.

• Adjusted EBITDA was $98 million, an increase of 2%.

• ARR was over $116 million at the end of the fiscal year, an increase of 9%.

1 unchanged sentence

There are a number of circumstances globally that we are monitoring for potential impacts on our business.

While the Covid-19 pandemic has ceased disrupting daily life, new variants of the virus continue to emerge.

If any of these are considered dangerous, governments may react with a return to more restrictive policies.

Global economic conditions and political tensions also have the ability to cause business disruptions.

For instance, because of the war in Ukraine sanctions remain imposed on trade with Russia and Belarus which has the potential to disrupt the supply of raw materials needed to make components.

Political tensions between China and western governments have become more heightened which could lead to similar disruptions.

And the ongoing war in the Middle East could have a range of negative impacts for the global economy such as increases in the price of oil which could impact transportation costs.

Central banks globally have increased interest rates significantly in an effort to combat inflation which has heightened concerns of recession in many regions of the world.

These situations could all lead to potential adverse impacts on a wide range of businesses and could disrupt supply chains and impact the businesses of our vendors and customers in ways that could impact our sales.

With respect to supply chain, conditions did improve during fiscal 2023, but we still experience shortages of some important components.

These supply chain shortages have led to component purchases at levels that were higher than historical trends to assure we could meet customer demand which drove higher levels of inventory.

We increased our inventory write downs in the fourth fiscal quarter of 2023.

We expect the supply chain to continue to normalize in fiscal 2024 as we work through elevated inventory levels.

Global economic conditions and political tensions have the ability to cause business disruptions.

For instance, many Western governments have imposed a range of trade restrictions on Chinese products and components that if expanded could lead to disruptions in our business.

Due to the war in Ukraine, sanctions remain imposed on trade with Russia and Belarus which has the potential to disrupt the supply of raw materials needed to make components.

Political tensions between China and other nations have become more heightened which could lead to similar issues.

And the ongoing war in the Middle East has led to disruptions in shipping and could cause other issues such as an increase in the price of oil which could impact transport costs.

Monetary and fiscal policies have fluctuated in different parts of the world to deal with both inflationary and deflationary pressures.

These situations could all lead to potential adverse impacts on a wide range of businesses and could impact the businesses of our vendors and customers in ways that could impact our sales.

With respect to supply chain, conditions continued to improve during fiscal 2024, but we still experience shortages of some important components.

These supply chain shortages led to component purchases at levels that were higher than historical trends to assure we could meet customer demand.

This drove higher levels of inventory, which in recent quarters has normalized.

In addition, because of supply chain shortages in prior years customers of some of our products stockpiled inventory to assure a steady supply was readily available for their needs.

In turn, these same customers have now slowed purchases as they work through those stockpiles.

We expect the effects on demand to impact future sales of some products during fiscal 2025.

In addition, to the above macro conditions, we believe the following trends will continue to impact our business in fiscal 2025 and beyond:

13 unchanged sentences

Income before income taxes 5.4 5.6 (0.2)

Income tax benefit — (0.2) 0.2

Income tax expense 0.1 — 0.1

Net income 5.3 % 5.6 % (0.3)

6 unchanged sentences

IoT Products & Services

IoT Products & Services revenue increased 16.1% for fiscal 2023, as compared to fiscal 2022.

This primarily was the result of growth in the volume of sales in our OEM and Infrastructure Management product lines.

IoT Products & Services revenue decreased 6.1% for fiscal 2024, as compared to fiscal 2023.

The decrease consisted of a $24.7 million decline in product sales volume, with no material impact from pricing.

The decrease was driven by lower demand for some products, as some customers bled down inventory stockpiled from when supply chains were stressed, as well as certain prior year project-based sales not reoccurring.

The decline was partially offset by $3.5 million of service revenue growth.

IoT Solutions

IoT Solutions revenue increased 0.4% for fiscal 2024, as compared to fiscal 2023.

This was the result of growth in the volume of sales in both our SmartSense by Digi and Ventus offerings, as well as 2022 results excluding the results of Ventus prior to our November acquisition.

The increase consisted of a $5.6 million increase in recurring revenue offset by a $3.2 million decrease in one time services volume and a $2.0 million decrease in hardware sales.

These results reflect some customers reducing the scope of their operations and others electing to make new deployments by obtaining hardware under a subscription contract versus purchasing hardware and obtaining only services under subscription.

ARR was $116 million as of September 30, 2024, compared to $106 million as of September 30, 2023.

IoT Products & Services ARR was $24 million as of September 30, 2024, compared to $22 million as of September 30, 2023.

IoT Solutions ARR was $84 million as of September 30, 2023, compared to $80 million as of September 30, 2022.

These increases in ARR in both business segments were driven by the expansion of business with existing customers who purchase on a subscription basis as well as sales to new customers.

While it is possible to experience a loss of subscription based customer business due to contraction of a customer’s business or through competition, in general we believe if we provide a high level of service to our subscription based customers our level of ARR will continue to increase over time.

This increase was due to growth in the subscription base across remote management platforms and extended warranty offerings.

IoT Solutions ARR was $92 million as of September 30, 2024, compared to $84 million as of September 30, 2023, driven by growth in both SmartSense and Ventus.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

14 unchanged sentences

IoT Products & Services gross profit margin increased 20 basis points for fiscal 2024 as compared to the prior fiscal year.

This increase was primarily the result of a reduction in the price of component purchases due to eased inflationary pressures partially offset by write-downs of inventory.

This increase was driven by increased recurring revenue at high margin rates and by a reduction in inventory adjustments and reduced inflationary pressures, partially offset by decreased product volume.

IoT Solutions

The IoT Solutions gross profit margin increased 820 basis points for fiscal 2024 as compared to the prior fiscal year.

This increase was primarily the result of growth in higher margin ARR subscription revenues.

This increase was the result of growth in higher margin ARR subscription revenues, favorable mix within one time volume and a reduction in inventory adjustments.

OPERATING EXPENSES

6 unchanged sentences

General and administrative 58,250 13.7 61,779 13.9 (3,529) (5.7)

Change in fair value of contingent consideration — — (6,200) (1.6) 6,200 N/M

Total operating expenses $ 201,817 47.6 % $ 202,108 45.4 % $ (291) (0.1) %

The $24.0 million increase in operating expenses in fiscal 2023 from fiscal 2022 primarily was the result of no fair value changes of contingent consideration in 2023 compared to a $6.2 million gain in 2022, incremental investments in Opengear and SmartSense by Digi, an increase in stock-based compensation expense and an increase in costs associated with ongoing litigation.

The $0.3 million decrease in operating expenses in fiscal 2024 from fiscal 2023 was the result of a $3.9 decrease in non-labor expense and a $2.1 million gain on the sale of an intangible asset, partially offset by a $5.7 million increase to litigation reserves.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

4 unchanged sentences

Interest expense, net $ (15,415) (3.7) % $ (25,236) (5.7) % $ 9,821 (38.9) %

Other expense, net 59 — 98 — (39) (39.8)

Debt issuance cost write off (9,722) (2.3) — — (9,722) NM

Other expense, net (94) — 59 — (153) NM

Total other expense, net $ (25,231) (6.0) % $ (25,177) (5.7) % $ (54) 0.2 %

The $5.6 million increase in other expense in fiscal 2023 from fiscal 2022 primarily was the result of an increase in our interest expense due to an increase in our effective interest rate (see Note 7 to the condensed consolidated financial statements).

Our effective income tax benefit rates were 0.6%, (4.1)% and (15.2)% for fiscal 2023, 2022 and 2021, respectively.

The $0.1 million increase in other expense in fiscal 2024 from fiscal 2023 was driven by the $9.7 million debt issuance cost expense realized upon the extinguishment of our prior credit facility partially offset by a decrease in our average debt outstanding and our effective interest rate on debt(see Note 6 to the condensed consolidated financial statements).

Our effective income tax expense (benefit) rates were 1.5%, 0.6% and (4.1)% for fiscal 2024, 2023 and 2022, respectively.

Our effective tax rate will vary based on a variety of factors.

1 unchanged sentence

KEY BUSINESS METRICS

Annualized Recurring Revenue, or ARR, represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period.

ARR, represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period.

Subscriptions primarily include contracts for term-based equipment usage, the delivery of data insights, extended warranty coverage or customer service coverage.

2 unchanged sentences

ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either item.

Digi management uses ARR to manage and assess the growth of our subscription revenue business.

We use ARR to manage and assess the growth of our subscription revenue business.

Because ARR does not have a consistent definition, it is unlikely to be compared to the similarly titled measurements of other companies.

24 unchanged sentences

Interest expense, net 15,415 25,236

Income tax (benefit) 148 (755)

Debt issuance cost write off 9,722 —

Income tax expense 353 148

Depreciation and amortization 33,064 31,979

Stock-based compensation expense 13,159 13,286

Litigation accrual 5,700 —

Changes in fair value of contingent consideration (2,111) —

Restructuring charge 430 141

Acquisition and integration expense 940 4,605

Acquisition expense, net (127) 940

Adjusted EBITDA $ 98,110 23.1 % $ 96,500 21.7 %

7 unchanged sentences

Stock-based compensation expense 13,159 0.36 13,286 0.36

Other non-operating expense (59) — (98) —

Acquisition and integration expense 940 0.03 4,605 0.13

Other non-operating expense, net 94 — (59) —

Acquisition expense, net (127) — 940 0.03

Litigation accrual 5,700 0.15 — —

Changes in fair value of contingent consideration (2,111) (0.06) — —

1 unchanged sentence

Interest expense, net 15,415 0.42 25,236 0.68

Debt issuance cost write off 9,722 0.26 — —

Tax effect from above net income adjustments (1)

(17,005) (0.45) (18,488) (0.50)

Discrete tax benefits (2)

Discrete tax expenses (2)

1,212 0.03 2,490 0.07

7 unchanged sentences

Historically we have financed our operations and capital expenditures principally with funds generated from operations.

In fiscal 2021 we issued an equity offering and in fiscal 2022 we issued debt to fund our acquisition of Ventus.

In fiscal 2022 we issued debt to fund our acquisition of Ventus.

Our liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations and facilitate growth and expansion.

During the second quarter of fiscal 2021 we sold 4,025,000 shares of our common stock and received net proceeds of $73.8 million (see Note 13 to our consolidated financial statements).

Our outstanding debt as of September 30, 2023 was issued under a third amended and restated credit agreement Digi entered with BMO on December 22, 2021.

Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement entered into on November 1, 2021, but did not receive any additional proceeds from nor modify the amounts of any facilities or subfacilities contained within that credit agreement.

The credit agreement consists of a $350 million term loan B secured loan and a $35 million revolving credit facility.

The $35 million revolving credit facility, which presently has no outstanding balance, includes a $10 million letter of credit subfacility and $10 million swingline subfacility.

As of September 30, 2023, $35.0 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment.

For additional information regarding the terms of our Credit Facility (see Note 7 to our consolidated financial statements).

On December 7, 2023, we entered into a credit agreement.

The Credit Agreement provides Digi with a $250 million senior secured revolving credit facility, with an uncommitted accordion feature that provides for additional borrowing capacity of up to the greater of $95 million or one hundred percent of trailing twelve month adjusted earnings before interest, taxes, depreciation, and amortization.

The Credit Facility also contains a $10 million letter of credit sublimit and $10 million swingline sub-facility.

Digi used the proceeds to retire the remaining balance of the prior credit agreement and may use the proceeds in the future for general corporate purposes.

For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 6 to our condensed consolidated financial statements.

The Credit Agreement replaced our prior credit agreement that consisted of a $350 million term loan B secured loan and a $35 million revolving credit facility.

The $35 million revolving credit facility included a $10 million letter of credit subfacility and $10 million swingline subfacility.

We expect positive cash flows from operations.

9 unchanged sentences

Net decrease in cash and cash equivalents $ (4,183) $ (3,207)

Cash flows from operating activities decreased $1.0 million primarily as a result of:

• an increase in net operating assets and liabilities (net of acquisitions) during fiscal 2023 of $19.1 million, compared to $18.4 million in fiscal 2022,

• a decrease in amortization expense, and

• increases in deferred income tax benefits (provisions) and provisions for bad debt.

These decreases were partially offset by:

• no changes in the fair value of contingent consideration in fiscal 2023 compared to a decrease of $6.2 million in fiscal 2022, and

• increases in stock compensation expense and net income.

Cash flows used in investing activities decreased $345.2 million primarily as a result of:

• no acquisitions occurring in fiscal 2023 compared to $347.5 million used for acquisitions in fiscal 2022, primarily related to our November 2021 acquisition of Ventus (see Note 2 to the consolidated financial statements).

This increase was partially offset by:

• an increase in purchases of property, equipment, improvements and certain other intangible assets.

Cash flows from financing activities decreased $227.3 million primarily as a result of:

• no proceeds from loans in fiscal 2023 compared to $350.0 million in proceeds from the Term Loan issued in November 2021 in fiscal 2022, and

• a reduction in proceeds from stock plan transactions.

This decrease was partially offset by:

• payments on debt of $36.4 million in fiscal 2023 compared to $148.1 million in fiscal 2022,

• no payments of debt issuance costs in fiscal 2023 compared to $13.4 million in fiscal 2022,

• an increase in ESPP proceeds, and

• a decrease in taxes paid for net share settlements.

Cash flows from operating activities increased $46.3 million as a result of:

• a $11.7 million increase in net operating assets for fiscal 2024 compared to a $21.7 million decrease in fiscal 2023,

• a $9.7 million debt issuance cost write-off included in net income in fiscal 2024,

• a $5.7 million litigation accrual included in net income in fiscal 2024.

These increases were partially offset by:

• a $2.3 million decrease in net income in fiscal 2024

• and a $2.2 million increase in gains from the sale of assets in fiscal 2024.

Cash flows used in investing activities decreased $4.3 million as a result of:

• a $2.2 million increase in proceeds from the sale of property, equipment, improvements and certain other intangible assets

• and a $2.1 million decrease in purchases of property, equipment, improvements and certain other intangible assets.

Cash flows from financing activities decreased $54.5 million as a result of:

• debt payments of $304.7 million in fiscal 2024, including $213.6 million to retire our prior credit facility, and payments of $91.1 million against our new credit facility, compared to debt payments of $36.4 million in fiscal 2023.

• and a $1.0 million decrease in proceeds from stock option plan transactions.

These were partially offset by:

• net proceeds of $214.1 million from the issuance of a new credit facility

• and a $0.7 million decrease in taxes paid for net share settlement of share-based payment options and awards.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

5 unchanged sentences

Revolving loan 124,300 — — 124,300 —

Interest on long-term debt 90,492 21,978 37,442 29,977 1,095

Total $ 141,068 $ 3,791 $ 5,375 $ 128,037 $ 3,865

11 unchanged sentences

We have not implemented a formal hedging strategy.

During 2023, 2022 and 2021, we had approximately $121.1 million, $85.8 million and $80.7 million, respectively, of revenue related to foreign customers including export sales, of which $0.8 million were denominated in foreign currencies, predominantly the Canadian Dollar.

During 2024, 2023 and 2022, we had approximately $121.6 million, $121.1 million and $85.8 million, respectively, of revenue related to foreign customers including export sales, of which $0.4 million, $0.8 million and $0.8 million, respectively, were denominated in foreign currencies, predominantly the Canadian Dollar.

In future periods, we continue to expect that the majority of our sales will be in U.S.

20 unchanged sentences

Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded.

Estimated sales returns for our distributor stock rotation program are accounted for under the guidance of ASC 845 Nonmonetary Transactions .

Material differences between the historical trends used to determine estimated reserves and actual credit returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position.

22 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity