Digi International(DGII) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's analysis Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarter ended March 31, 2019, including restated prior period information due to the adoption of ASU No 2014-09 Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income for the specified periods Q2 & YTD FY2019 vs FY2018 Statement of Operations (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 (as adjusted) | Six Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2018 (as adjusted) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $65,764 | $54,548 | $128,077 | $99,503 | | Gross Profit | $30,329 | $26,834 | $60,112 | $48,793 | | Operating Income (Loss) | $785 | $818 | $6,343 | $(1,181) | | Net Income (Loss) | $1,342 | $(126) | $6,024 | $(4,613) | | Diluted EPS | $0.05 | $0.00 | $0.21 | $(0.17) | Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents the company's net income and other comprehensive income components for the periods Q2 & YTD FY2019 vs FY2018 Comprehensive Income (in thousands) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 (as adjusted) | Six Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2018 (as adjusted) | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) | $1,342 | $(126) | $6,024 | $(4,613) | | Other Comprehensive (Loss) Income, net of tax | $(76) | $1,796 | $(1,642) | $2,049 | | Comprehensive Income (Loss) | $1,266 | $1,670 | $4,382 | $(2,564) | Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | September 30, 2018 (as adjusted) | | :--- | :--- | :--- | | Cash and cash equivalents | $69,593 | $58,014 | | Total current assets | $175,167 | $162,046 | | Total assets | $383,535 | $372,146 | | Total current liabilities | $41,091 | $35,573 | | Total liabilities | $42,697 | $41,653 | | Total stockholders' equity | $340,838 | $330,493 | Condensed Consolidated Statements of Cash Flows This statement details the cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary for Six Months Ended March 31 (in thousands) | Activity | 2019 | 2018 (as adjusted) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $6,202 | $(4,981) | | Net cash provided by (used in) investing activities | $4,953 | $(25,860) | | Net cash provided by financing activities | $908 | $3,364 | | Net increase (decrease) in cash and cash equivalents | $11,579 | $(25,831) | Condensed Consolidated Statements of Stockholders' Equity This statement outlines changes in the company's equity accounts over the reporting period - Total stockholders' equity increased from $330.5 million at September 30, 2018, to $340.8 million at March 31, 2019. The increase was primarily driven by net income of $6.0 million, partially offset by an other comprehensive loss of $1.6 million[26] Notes to Condensed Consolidated Financial Statements This section provides additional details and explanations for the financial statement line items - Effective October 1, 2018, the company adopted ASU 2014-09 (Topic 606) regarding revenue recognition, using the retrospective method. This required restating prior period financial information[29][46] - The company finalized purchase accounting for the TempAlert acquisition in Q1 fiscal 2019. Contingent consideration for TempAlert was valued at zero as of March 31, 2019, while the fair value for the Accelerated acquisition contingent consideration was $5.4 million[61][62][63] - On October 2, 2018, the company sold its corporate headquarters for $10.0 million in cash, recording a gain of $4.4 million ($3.4 million net of tax) in the first quarter of fiscal 2019[93] - The company is facing a lawsuit from DimOnOff Inc., which alleges damages of just over CAD 1.0 million due to allegedly defective products. The company intends to defend itself and cannot currently assess the potential loss[111] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial condition and operational results for the quarter ended March 31, 2019, highlighting revenue growth, gross margin trends, and liquidity Overview This section provides an overview of Digi International's business and its operating segments - Digi International is a global provider of IoT connectivity products, services, and solutions, operating through two reportable segments: IoT Products & Services and IoT Solutions[136] - The IoT Products & Services segment provides communication products (cellular, RF, embedded, network) and development services. The IoT Solutions segment offers wireless temperature monitoring and task management services, primarily for healthcare, food service, and logistics, marketed as SmartSense by Digi™[137][139] Consolidated Results of Operations This section analyzes the company's overall financial performance, including revenue, gross profit, and Adjusted EBITDA Q2 FY2019 vs Q2 FY2018 Revenue Performance (in millions) | Revenue Type | Q2 2019 | Q2 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product | $52.1 | $47.6 | +$4.5 | +9.5% | | Services and Solutions | $13.7 | $7.0 | +$6.7 | +96.4% | | Total Revenue | $65.8 | $54.5 | +$11.2 | +20.6% | - Gross margin decreased to 46.1% in Q2 2019 from 49.2% in Q2 2018, primarily due to product/customer mix and costs from transitioning to third-party manufacturing, partially offset by higher-margin recurring revenue from IoT Solutions[146][162] - Adjusted EBITDA for Q2 2019 was $6.5 million (10.0% of revenue), up from $5.2 million (9.6% of revenue) in Q2 2018[147][148] - Revenue in North America grew 24.8% YoY for the quarter, driven by SmartSense by Digi™ sales and the Accelerated acquisition[158] Segment Results of Operations This section details the financial performance of the IoT Products & Services and IoT Solutions segments Q2 FY2019 vs Q2 FY2018 Segment Performance (in millions) | Segment | Q2 2019 Revenue | Q2 2018 Revenue | % Change | Q2 2019 Operating Income (Loss) | Q2 2018 Operating Income (Loss) | | :--- | :--- | :--- | :--- | :--- | :--- | | IoT Products & Services | $56.0 | $49.8 | +12.5% | $3.5 | $4.7 | | IoT Solutions | $9.7 | $4.7 | +105.9% | $(2.7) | $(3.9) | - IoT Solutions revenue growth was driven by new customer deployments and an increase in recurring revenue, which constituted approximately 35% of the segment's revenue for the six months ended March 31, 2019[181] - IoT Products & Services operating income decreased 26.4% YoY for the quarter, primarily due to increased employee-related expenses and adjustments to contingent consideration[176] Liquidity and Capital Resources This section assesses the company's cash position, cash flow generation, and capital management activities - As of March 31, 2019, the company held $72.1 million in cash, cash equivalents, and short-term marketable securities, an increase from $62.8 million at September 30, 2018[187] - Net cash provided by operating activities for the first six months of fiscal 2019 was $6.2 million, a significant improvement from a $5.0 million use of cash in the same period of fiscal 2018. This was driven by higher net income and favorable changes in working capital[190] - Investing activities provided $4.9 million in cash, largely due to the $10.0 million proceeds from the sale of the corporate headquarters, compared to a $25.9 million use of cash in the prior year period which included acquisition spending[192] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate fluctuations on its investment portfolio and foreign currency exposure from international operations - The company's main market risks are interest rate risk on its investment portfolio and foreign currency risk[197][198] - For the six months ended March 31, 2019, revenue from foreign customers was approximately $32.9 million. A 10% change in the average exchange rates for the Euro, British Pound, Japanese Yen, and Canadian Dollar would impact revenue by 0.1% and stockholders' equity by 1.5%[199][200] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and Acting Principal Financial Officer concluded that disclosure controls and procedures were effective as of the end of the period[204] - No changes occurred during the quarter that materially affected, or are reasonably likely to affect, the company's internal control over financial reporting[205] PART II. OTHER INFORMATION This section provides additional disclosures on legal proceedings, risk factors, equity sales, and other relevant information Legal Proceedings This section discloses a lawsuit filed by DimOnOff Inc. alleging over CAD 1.0 million in damages related to allegedly defective products - The company is being sued by DimOnOff Inc. for over CAD 1.0 million related to allegedly defective products. The company intends to defend itself against the claims[111][206] Risk Factors The company states that there have been no material changes to the risk factors that were previously disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2018 - There have been no material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the year ended September 30, 2018[207] Unregistered Sales of Equity Securities and Use of Proceeds The company's $20.0 million stock repurchase program expired without any repurchases, though a small number of shares were bought for employee tax obligations - The Board of Directors authorized a $20.0 million stock repurchase program on April 24, 2018, which expired on May 1, 2019. No shares were repurchased under this program[208] - During the second quarter of fiscal 2019, 7,052 shares were purchased at an average price of $11.37 per share, but not as part of the publicly announced repurchase program. These were likely related to satisfying tax withholding obligations for employees on vested equity awards[209][115] Defaults Upon Senior Securities The company reports that there were no defaults upon senior securities during the period - None reported[210] Mine Safety Disclosures The company reports that there are no mine safety disclosures applicable to its operations - None reported[211] Other Information The company reports that there is no other information to disclose for the period - None reported[213] Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, incentive plans, and required certifications - A list of exhibits filed with the report is provided, including corporate governance documents, incentive plans, and required SEC certifications[213]