Digi International(DGII) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Presents unaudited condensed consolidated financial statements for Q1 2020, detailing operations, balance sheets, cash flows, and notes on key events Condensed Consolidated Statements of Operations Total revenue increased to $73.4 million in Q1 2020, leading to significant growth in operating income and net income Condensed Consolidated Statements of Operations (Three Months Ended March 31) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $73,447 | $65,764 | 11.7% | | Gross Profit | $38,641 | $30,329 | 27.4% | | Operating Income | $3,724 | $785 | 374.4% | | Net Income | $2,004 | $1,342 | 49.3% | | Diluted EPS | $0.07 | $0.05 | 40.0% | Condensed Consolidated Balance Sheets Total assets increased to $554.8 million as of March 31, 2020, driven by the Opengear acquisition and new debt, significantly raising total liabilities Balance Sheet Comparison | Metric (in thousands) | March 31, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Total Assets | $554,752 | $398,698 | | Goodwill | $207,350 | $153,422 | | Intangible assets, net | $129,250 | $30,667 | | Total Liabilities | $196,389 | $49,720 | | Long-term debt | $104,973 | $0 | | Total Stockholders' Equity | $358,363 | $348,978 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $12.7 million for the six months ended March 31, 2020, primarily due to the Opengear acquisition Cash Flow Summary (Six Months Ended March 31) | Activity (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(12,683) | $6,202 | | Net cash (used in) provided by investing activities | $(136,532) | $4,953 | | Net cash provided by financing activities | $112,931 | $908 | | Net (decrease) increase in cash | $(34,706) | $11,579 | Notes to Condensed Consolidated Financial Statements Detailed notes cover accounting policies, the Opengear acquisition for $148.1 million, new $150 million credit facility, and segment reporting - The company adopted the new lease accounting standard (ASU 2016-02) in the first quarter of fiscal 2020, recognizing a right-of-use asset of approximately $14.1 million and a lease liability of approximately $17.9 million[32] - On December 13, 2019, the company acquired Opengear, Inc. for an upfront cash payment of $148.1 million, funded by cash on hand and a new credit facility[36][37] - In connection with the Opengear acquisition, the company entered into a $150 million credit facility, with $109.4 million outstanding as of March 31, 2020[63][68] - The company's IoT Products & Services segment revenue grew to $66.9 million for the quarter, while IoT Solutions revenue decreased to $6.6 million[71] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q2 2020 performance, highlighting 11.7% consolidated revenue growth driven by Opengear and addressing COVID-19 impacts - Key operating objectives for fiscal 2020 include growing the SmartSense by Digi® business, driving growth in IoT Products & Services through new products, seeking strategic acquisitions like Opengear, and optimizing the cost structure[127] - The COVID-19 pandemic began to impact the business in March 2020, leading to varied demand and implemented cost reduction actions[135][107] Q2 2020 vs Q2 2019 Performance Highlights | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Consolidated Revenue | $7.7M increase | 11.7% | | | Gross Margin | 52.6% | 46.1% | +650 bps | | Net Income | $2.0M | $1.3M | +49.3% | | Adjusted EBITDA | $11.2M (15.2% of revenue) | $6.5M (10.0% of revenue) | +72.3% | Revenue by Segment IoT Products & Services revenue increased 19.4% to $66.9 million, while IoT Solutions revenue decreased 32.6% to $6.6 million in Q2 2020 Revenue by Segment (Three Months Ended March 31) | Segment | 2020 (in thousands) | 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | IoT Products & Services | $66,890 | $56,039 | 19.4% | | IoT Solutions | $6,557 | $9,725 | (32.6)% | | Total Revenue | $73,447 | $65,764 | 11.7% | - The increase in IoT Products & Services revenue was primarily driven by incremental revenue from the Opengear acquisition and increased sales to a significant cellular products customer[143][144] - The decrease in IoT Solutions revenue was mainly due to equipment upgrades from existing customers in fiscal 2019 that did not repeat in fiscal 2020[147] Cost of Goods Sold and Gross Profit by Segment IoT Products & Services gross margin improved by 740 basis points to 53.0% in Q2 2020, driven by Opengear, while IoT Solutions margin slightly decreased Gross Profit Margin by Segment (Three Months Ended March 31) | Segment | 2020 Margin | 2019 Margin | Basis Point Change | | :--- | :--- | :--- | :--- | | IoT Products & Services | 53.0% | 45.6% | +740 bps | | IoT Solutions | 48.5% | 49.0% | -50 bps | | Total Gross Profit Margin | 52.6% | 46.1% | +650 bps | - The improvement in IoT Products & Services gross margin was primarily due to incremental gross profit from the Opengear acquisition and increased sales from higher-margin support services[150] Liquidity and Capital Resources Cash decreased by $34.7 million due to the Opengear acquisition funded by $110.0 million in new debt, with total contractual obligations at $167.4 million - The company incurred $110 million in debt in Q1 2020 to finance the Opengear acquisition, with $40 million remaining available under the Revolving Loan as of March 31, 2020[171] Summary of Contractual Obligations at March 31, 2020 | Obligation (in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $24,426 | $3,497 | $5,887 | $4,699 | $10,343 | | Long-term debt (Term & Revolving) | $109,375 | $2,500 | $6,563 | $100,312 | $0 | | Interest on long-term debt | $23,257 | $5,227 | $9,455 | $8,575 | $0 | | Total | $167,437 | $21,603 | $21,905 | $113,586 | $10,343 | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from changes in interest rates due to variable-rate debt and foreign currency exchange rates from international sales and operations - The company is exposed to interest rate risk on its $109.4 million of outstanding variable-rate debt, with a 25 basis point change impacting annualized interest expense by approximately $0.1 million[182] - The company is exposed to foreign currency risk, with approximately $30.9 million of revenue from foreign customers for the six months ended March 31, 2020[184][185] Controls and Procedures Management concluded disclosure controls were effective, with the recently acquired Opengear business excluded from internal control assessment for this period - The company's management concluded that disclosure controls and procedures were effective as of March 31, 2020[188] - The recently acquired Opengear business was excluded from management's assessment of internal control over financial reporting, representing 35% of consolidated total assets[189] PART II. OTHER INFORMATION Legal Proceedings The company is involved in a lawsuit by DimOnOff Inc. seeking over CAD 1.0 million in damages for alleged defective products, which the company intends to defend - DimOnOff Inc. has sued the company, alleging certain products were defective and caused street light malfunctions, claiming damages of over CAD 1.0 million[91][191] Risk Factors This section highlights material changes to risk factors, including the adverse impacts of health pandemics like COVID-19 and the risk of goodwill impairment - A key risk factor is the potential for a widespread health pandemic, such as COVID-19, to disrupt operations, supply chains, and customer demand[192][193] - The company faces a risk of goodwill impairment if its stock price experiences a sustained decline or if future profits do not meet forecasts[194] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 6,486 common shares at an average price of $16.44 per share during Q2 2020, not part of a publicly announced program Share Repurchases in Q2 2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2020 | 6,340 | $16.49 | | Feb 2020 | 146 | $14.19 | | Mar 2020 | 0 | N/A | | Total | 6,486 | $16.44 | Exhibits This section lists exhibits filed with the Form 10-Q, including the Opengear merger agreement, bylaws, incentive plans, credit agreement, and officer certifications