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 they 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, 2024, we had $124.3 million outstanding under our Credit Facility. Borrowings under the Credit Facility bear interest at a rate per annum equal to Term SOFR with a floor of 0.00% 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 Term SOFR is no longer available) plus the applicable margin or a base rate plus the applicable margin. The base rate is determined by reference to the highest of BMO’s prime rate, the rate determined by BMO to be the average rate of Federal funds in the secondary market plus 0.50%, or one-month SOFR plus 1.00%. The applicable margin for loans under the Credit Facility is in a range of 1.75% to 2.75% for Term SOFR loans and 0.75% to 1.75% for base rate loans, depending on Digi’s total net leverage ratio. Based on the balance sheet position for both the Revolving Loan at September 30, 2024, 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 6 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 and Australian Dollar:
Fiscal year ended
September 30, % increase
2024 2023 (decrease)
Euro 1.1111 1.0679 4.0 %
British Pound 1.3221 1.2183 8.5 %
Canadian Dollar 0.7381 0.7380 — %
Australian Dollar 0.6773 0.6423 5.4 %
A 10.0% change from the 2024 average exchange rate for the Euro, British Pound, Canadian Dollar and Australian Dollar to the U.S. Dollar would have resulted in an immaterial increase or decrease in fiscal 2024 annual revenue and a 1.0% increase or decrease in stockholders' equity at September 30, 2024. 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 34 )
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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
To the stockholders and the Board of Directors of Digi International Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Digi International Inc. and subsidiaries (the "Company") as of September 30, 2024, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for the year ended September 30, 2024, and the related notes and the schedule listed in the Table of Contents at 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, 2024, and the results of its operations and its cash flows for the year ended September 30, 2024, in conformity with accounting principles generally accepted in the United States of America.
We have also 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, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 22, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
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 Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill — Cellular Routers, Smart Sense, and Ventus Reporting Units — Refer to Notes 1 and 3 to the financial statements
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used a combination of the income approach and market approach to estimate fair value, which requires management to make significant estimates and assumptions, specifically related to discount rates and forecasts of future revenue growth rate, gross margins and earnings before income taxes, depreciation, and amortization (“EBITDA”) margins used in the income approach. The determination of the fair value using the market approach requires management to make significant estimates and assumptions related to revenue multiples within the Cellular Routers reporting unit and EBITDA multiples within the Ventus reporting unit. Changes in these assumptions could have a significant impact on the fair value. The goodwill balance was $341.9 million as of June 30, 2024, of which $32.7 million, $48.9 million, and $118.6 million was allocated to the Cellular Routers, Smart Sense, and Ventus reporting units, respectively.
We identified goodwill for the Cellular Routers, Smart Sense, and Ventus reporting units as a critical audit matter because of the significant judgments made by management to estimate the fair value of these reporting units. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing
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audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rates and forecasts of future revenue growth rate, gross margins, EBITDA margins and revenue multiples within the Cellular Routers reporting unit and EBITDA multiples within Ventus reporting unit.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the discount rates and forecasts of revenue growth rate, future gross margins, EBITDA margins, revenue multiples within the Cellular Routers reporting unit and EBITDA multiples within the Ventus reporting unit used by management to estimate the fair value of the Cellular Routers, Smart Sense and Ventus reporting units included the following, among others:
• We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Cellular Routers, Smart Sense, and Ventus reporting units, such as controls related to management’s selection of the discount rates and forecasts of revenue growth rate, gross margins, EBITDA margins, revenue multiples within the Cellular Routers reporting unit, and EBITDA multiples within the Ventus reporting unit.
• We evaluated management’s ability to accurately forecast revenue growth rate, gross margins and EBITDA margins by comparing actual results to management’s historical forecasts.
• We evaluated the reasonableness of management’s revenue growth rate, gross margin and EBITDA margin forecasts by comparing the forecasts to:
◦ Historical revenue growth rate, gross margins and EBITDA margins.
◦ Forecasted information included in Company press releases as well as in industry reports for the Company and certain of its peer companies.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rates by:
◦ Testing the source information underlying the determination of the discount rates and the mathematical accuracy of the calculations.
◦ Developing a range of independent estimates and comparing those to the discount rates selected by management.
• With the assistance of our fair value specialists, we evaluated the revenue multiples within the Cellular Routers reporting unit and EBITDA multiples within the Ventus reporting unit, including testing the underlying source information and mathematical accuracy of the calculations, and comparing the multiples selected by management to its guideline companies.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 22, 2024
We have served as the Company’s auditor since 2022.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Digi International Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of Digi International Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2022 (not presented herein), the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended, 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 the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
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 audit. 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We served as the Company’s auditor from 2016 to 2022.
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,
2024 2023 2022
(in thousands, except per common share data)
Revenue:
Product $ 304,540 $ 331,162 $ 290,170
Service 119,506 113,687 98,055
Total revenue 424,046 444,849 388,225
Cost of sales:
Cost of product 144,790 161,451 140,615
Cost of service 25,537 27,233 26,027
Amortization 3,813 3,962 5,297
Total cost of sales 174,140 192,646 171,939
Gross profit 249,906 252,203 216,286
Operating expenses:
Sales and marketing 83,278 81,681 70,366
Research and development 60,289 58,648 55,098
General and administrative 58,250 61,779 58,802
Change in fair value of contingent consideration — — ( 6,200 )
Total operating expenses 201,817 202,108 178,066
Operating income 48,089 50,095 38,220
Other expense, net:
Interest expense, net ( 15,415 ) ( 25,236 ) ( 19,690 )
Debt issuance cost write off ( 9,722 ) — —
Other (expense) income, net ( 94 ) 59 98
Total other expense, net ( 25,231 ) ( 25,177 ) ( 19,592 )
Income before income taxes 22,858 24,918 18,628
Income tax expense (benefit) 353 148 ( 755 )
Net income $ 22,505 $ 24,770 $ 19,383
Net income per common share:
Basic $ 0.62 $ 0.69 $ 0.55
Diluted net income per common share:
Diluted $ 0.61 $ 0.67 $ 0.54
Weighted average common shares:
Basic 36,316 35,820 35,031
Diluted 36,984 36,869 35,995
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,
2024 2023 2022
(in thousands)
Net income $ 22,505 $ 24,770 $ 19,383
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 3,267 ( 957 ) ( 3,308 )
Other comprehensive income (loss), net of tax 3,267 ( 957 ) ( 3,308 )
Comprehensive income $ 25,772 $ 23,813 $ 16,075
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,
2024 2023
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 27,510 $ 31,693
Accounts receivable, net 69,640 55,997
Inventories 53,357 74,396
Prepaid expenses and other current assets 3,940 4,112
Total current assets 154,447 166,198
Property, equipment and improvements, net 34,915 29,108
Identifiable intangible assets, net 252,909 277,084
Goodwill 342,774 341,593
Deferred tax assets 16,141 4,884
Operating lease right-of-use assets 10,207 12,876
Other non-current assets 3,682 3,788
Total assets $ 815,075 $ 835,531
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ — $ 15,523
Accounts payable 23,759 17,148
Income taxes payable 2,549 1,116
Accrued compensation 13,995 16,427
Unearned revenue 30,556 25,274
Current portion of operating lease liabilities 2,973 3,352
Other current liabilities 15,505 7,138
Total current liabilities 89,337 85,978
Income taxes payable 2,749 2,308
Deferred tax liabilities 1,308 1,812
Long-term debt 123,185 188,051
Operating lease liabilities 11,228 13,989
Other non-current liabilities 6,233 2,905
Total liabilities 234,040 295,043
Commitments and Contingencies (see Note 13 )
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; 42,996,725 and 42,501,150 shares issued
430 425
Additional paid-in capital 420,413 403,735
Retained earnings 247,350 224,845
Accumulated other comprehensive loss ( 23,744 ) ( 27,011 )
Treasury stock, at cost, 6,449,364 and 6,436,204 shares
( 63,414 ) ( 61,506 )
Total stockholders’ equity 581,035 540,488
Total liabilities and stockholders’ equity $ 815,075 $ 835,531
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,
2024 2023 2022
Operating activities: (in thousands)
Net income $ 22,505 $ 24,770 $ 19,383
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, equipment and improvements 8,511 6,753 6,644
Amortization 25,106 27,203 30,928
Write-off of debt issuance costs 9,722 — —
Stock-based compensation expense 13,159 13,286 8,578
Deferred income tax provision ( 11,761 ) ( 12,739 ) ( 3,387 )
Change in fair value of contingent consideration — — ( 6,200 )
Litigation accrual 5,700 — —
Other, net ( 1,540 ) ( 806 ) ( 188 )
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable ( 13,641 ) ( 5,558 ) ( 114 )
Inventories 8,786 ( 5,062 ) ( 34,468 )
Other assets ( 107 ) ( 1,214 ) ( 545 )
Income taxes 2,281 4,088 ( 1,305 )
Accounts payable 6,448 ( 15,503 ) 7,281
Accrued expenses 7,923 1,533 11,133
Net cash provided by operating activities 83,092 36,751 37,740
Investing activities:
Acquisition of businesses, net of cash acquired — — ( 347,554 )
Purchase of property, equipment, improvements and certain other intangible assets ( 2,226 ) ( 4,345 ) ( 1,974 )
Proceeds from sales of intangibles 2,229 — —
Net cash provided by (used in) investing activities 3 ( 4,345 ) ( 349,528 )
Financing activities:
Proceeds from long-term debt 214,062 — 350,000
Payments of debt issuance costs — — ( 13,443 )
Payments on long-term debt ( 304,725 ) ( 36,375 ) ( 148,118 )
Proceeds from stock option plan transactions 2,978 3,926 9,505
Proceeds from employee stock purchase plan transactions 2,206 2,263 1,500
Taxes paid for net share settlement of share-based payment awards ( 3,569 ) ( 4,314 ) ( 6,662 )
Net cash (used in) provided by financing activities ( 89,048 ) ( 34,500 ) 192,782
Effect of exchange rate changes on cash and cash equivalents 1,770 ( 1,113 ) 1,474
Net decrease in cash and cash equivalents ( 4,183 ) ( 3,207 ) ( 117,532 )
Cash and cash equivalents, beginning of period 31,693 34,900 152,432
Cash and cash equivalents, end of period $ 27,510 $ 31,693 $ 34,900
Supplemental disclosures of cash flow information:
Interest paid $ 14,763 $ 26,351 $ 14,209
Income taxes paid, net $ 7,306 $ 8,693 $ 4,333
Supplemental schedule of non-cash investing and financing activities:
Accrual for property, equipment, improvements and certain other intangibles assets $ ( 164 ) $ ( 277 ) $ ( 191 )
Transfer of inventory to property, equipment and improvements $ ( 12,252 ) $ ( 3,889 ) $ ( 6,237 )
The accompanying notes are an integral part of the consolidated financial statements.
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