Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 1-34033
DIGI INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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41-1532464 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
11001 Bren Road East
Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
(952) 912-3444
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files.) Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
On April 30, 2010, there were 24,926,980 shares of the registrants $.01 par value Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended March 31, |
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Six months ended March 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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(in thousands, except per common share data) |
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Net sales |
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$ |
45,076 |
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$ |
40,085 |
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$ |
88,044 |
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$ |
81,446 |
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Cost of sales (exclusive of amortization of purchased
and core technology shown separately below) |
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21,254 |
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19,908 |
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41,417 |
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38,977 |
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Amortization of purchased and core technology |
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1,074 |
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1,008 |
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2,166 |
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2,052 |
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Gross profit |
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22,748 |
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19,169 |
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44,461 |
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40,417 |
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Operating expenses: |
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Sales and marketing |
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9,603 |
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8,976 |
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18,843 |
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18,601 |
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Research and development |
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7,078 |
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6,196 |
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13,564 |
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13,170 |
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General and administrative |
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4,224 |
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3,398 |
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8,382 |
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7,281 |
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Restructuring |
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(352 |
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(352 |
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Total operating expenses |
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20,553 |
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18,570 |
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40,437 |
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39,052 |
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Operating income |
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2,195 |
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599 |
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4,024 |
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1,365 |
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Other income, net: |
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Interest income |
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90 |
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404 |
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183 |
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984 |
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Interest expense |
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(32 |
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(50 |
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(84 |
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(135 |
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Other income (expense) |
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301 |
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41 |
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263 |
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(195 |
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Total other income, net |
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359 |
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395 |
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362 |
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654 |
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Income before income taxes |
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2,554 |
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994 |
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4,386 |
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2,019 |
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Income tax provision |
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868 |
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279 |
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1,501 |
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288 |
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Net income |
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$ |
1,686 |
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$ |
715 |
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$ |
2,885 |
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$ |
1,731 |
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Net income per common share: |
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Basic |
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$ |
0.07 |
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$ |
0.03 |
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$ |
0.12 |
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$ |
0.07 |
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Diluted |
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$ |
0.07 |
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$ |
0.03 |
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$ |
0.12 |
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$ |
0.07 |
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Weighted average common shares: |
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Basic |
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24,816 |
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24,953 |
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24,758 |
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25,169 |
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Diluted |
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25,213 |
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25,195 |
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25,072 |
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25,439 |
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The accompanying notes are an integral part of the condensed consolidated financial
statements.
3
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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March 31, |
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September 30, |
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2010 |
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2009 |
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(in thousands, except share data) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
29,433 |
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$ |
48,434 |
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Marketable securities |
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47,290 |
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22,311 |
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Accounts receivable, net |
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22,996 |
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19,032 |
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Inventories |
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25,987 |
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26,619 |
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Other |
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6,065 |
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6,259 |
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Total current assets |
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131,771 |
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122,655 |
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Marketable securities, long-term |
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4,267 |
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5,063 |
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Property, equipment and improvements, net |
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16,506 |
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16,678 |
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Identifiable intangible assets, net |
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22,895 |
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26,877 |
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Goodwill |
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85,587 |
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86,558 |
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Other |
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970 |
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1,117 |
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Total assets |
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$ |
261,996 |
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$ |
258,948 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
8,583 |
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$ |
5,567 |
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Accrued compensation |
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5,098 |
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3,275 |
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Accrued warranty |
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965 |
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970 |
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Deferred payment on acquisition |
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2,966 |
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Restructuring |
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225 |
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721 |
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Other |
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3,062 |
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3,035 |
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Total current liabilities |
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17,933 |
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16,534 |
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Income taxes payable |
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4,922 |
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4,893 |
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Deferred tax liabilities |
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3,408 |
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4,331 |
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Deferred payment on acquisition |
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2,862 |
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2,812 |
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Other noncurrent liabilities |
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626 |
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792 |
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Total liabilities |
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29,751 |
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29,362 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued and outstanding |
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Common stock, $.01 par value; 60,000,000 shares authorized;
28,573,894 and 28,409,198 shares issued |
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286 |
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284 |
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Additional paid-in capital |
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183,470 |
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181,282 |
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Retained earnings |
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85,593 |
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82,708 |
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Accumulated other comprehensive loss |
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(9,392 |
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(6,527 |
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Treasury stock, at cost, 3,649,216 and 3,708,302 shares |
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(27,712 |
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(28,161 |
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Total stockholders equity |
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232,245 |
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229,586 |
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Total liabilities and stockholders equity |
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$ |
261,996 |
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$ |
258,948 |
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The accompanying notes are an integral part of the condensed consolidated financial
statements.
4
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six months ended March 31, |
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2010 |
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2009 |
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(in thousands) |
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Operating activities: |
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Net income |
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$ |
2,885 |
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$ |
1,731 |
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Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
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Depreciation of property, equipment and improvements |
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1,334 |
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1,203 |
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Amortization of identifiable intangible assets and other assets |
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3,869 |
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3,662 |
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Stock-based compensation |
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1,824 |
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1,842 |
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Excess tax benefits from stock-based compensation |
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(39 |
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(42 |
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Deferred income tax benefit |
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(848 |
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(1,540 |
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Restructuring |
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(352 |
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Other |
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(3 |
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40 |
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Changes in operating assets and liabilities |
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285 |
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(7,694 |
) |
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Net cash provided by (used in) operating activities |
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8,955 |
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(798 |
) |
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Investing activities: |
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Purchase of marketable securities |
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(28,510 |
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(7,647 |
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Proceeds from maturities of marketable securities |
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4,334 |
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32,063 |
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Deferred cash payout for acquisition of Spectrum Design Solutions, Inc. |
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(3,000 |
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Purchase of property, equipment, improvements and certain other intangible assets, net of proceeds from sale |
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(1,469 |
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(1,666 |
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Net cash (used in) provided by investing activities |
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(28,645 |
) |
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22,750 |
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Financing activities: |
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Payments on capital lease obligations |
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(7 |
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(139 |
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Excess tax benefits from stock-based compensation |
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39 |
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42 |
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Proceeds from stock option plan transactions and other |
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1,032 |
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120 |
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Proceeds from employee stock purchase plan transactions |
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445 |
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529 |
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Purchase of treasury stock |
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(6,150 |
) |
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Net cash provided by (used in) financing activities |
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1,509 |
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(5,598 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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(820 |
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(1,989 |
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Net (decrease) increase in cash and cash equivalents |
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(19,001 |
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14,365 |
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Cash and cash equivalents, beginning of period |
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48,434 |
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14,176 |
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Cash and cash equivalents, end of period |
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$ |
29,433 |
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$ |
28,541 |
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The accompanying notes are an integral part of the condensed consolidated financial
statements.
5
DIGI INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim unaudited condensed consolidated financial statements included in this Form 10-Q have
been prepared by Digi International Inc. (the Company, Digi, we, our, or us) pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures, normally included in consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of America, have been
condensed or omitted, pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and
related notes thereto, including the summary of significant accounting policies, presented in our
Annual Report on Form 10-K for the year ended September 30, 2009 as filed with the SEC (2009
Financial Statements).
The condensed consolidated financial statements presented herein reflect, in the opinion of
management, all adjustments which consist only of normal, recurring adjustments necessary for a
fair statement of the condensed consolidated financial position and the condensed consolidated
results of operations and cash flows for the periods presented. The condensed consolidated results
of operations for any interim period are not necessarily indicative of results for the full year.
The year-end condensed balance sheet data were derived from our 2009 Financial Statements, but do
not include all disclosures required by accounting principles generally accepted in the United
States of America.
Recently Issued Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board (FASB) issued an amendment to the
accounting standards related to the recognition and disclosure requirements for subsequent events.
This amendment removes the requirement to disclose the date through which subsequent events have
been evaluated in both issued and revised financial statements for companies that file financial
statements with the SEC. This amendment was effective immediately. We evaluate subsequent events
through the date our financial statements are filed with the SEC.
In January 2010, the FASB issued an amendment to the accounting standards related to fair value
measurements. This guidance requires disclosure of transfers into and out of Level 1 and Level 2
fair value measurements and the reasons for those transfers and also requires more detailed
disclosure about the activity within Level 3 fair value measurements. We adopted this guidance as
of January 1, 2010, except for the additional disclosures required for the Level 3 reconciliation
which is effective for us beginning with the quarter ending December 31, 2011. We have provided
the requisite disclosure for the transfers into and out of Level 1 and Level 2 fair value
measurements in our consolidated financial statements for the period ended March 31, 2010. We do
not expect the impact of the Level 3 additional disclosures to have a material impact to our
consolidated financial statements.
In October 2009, the FASB issued an amendment to the accounting standards that provides guidance
for identifying separate deliverables in a revenue-generating transaction where multiple
deliverables exist, and for allocating and recognizing revenue based on those separate
deliverables. This guidance is expected to result in more multiple-deliverable arrangements being
separable than under current guidance. This amendment is effective for revenue arrangements
entered into or materially modified in our fiscal year beginning October 1, 2010. Early adoption
is permitted. We are currently evaluating the impact this amendment will have on our consolidated
financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 2009, the FASB issued an amendment to the accounting standards related to certain
revenue arrangements that include software elements. This standard clarifies the existing
accounting guidance such that tangible products that contain both software and non-software
components that function together to deliver the products essential functionality shall be
excluded from the scope of the software revenue recognition accounting standards. Accordingly,
sales of these products may fall within the scope of other revenue recognition accounting standards
or may now be within the scope of this standard and may require an allocation of the arrangement
consideration for each element of the arrangement. This amendment is effective for revenue
arrangements entered into or materially modified in our fiscal year beginning October 1, 2010. We
are currently evaluating the impact this amendment will have on our consolidated financial
statements.
2. NET INCOME PER COMMON SHARE
Basic net income per common share is calculated based on the weighted average number of common
shares outstanding during the period. Diluted net income per common share is computed by dividing
net income by the weighted average number of common and potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares of our stock result from
dilutive common stock options and shares purchased through the employee stock purchase plan.
The following table is a reconciliation of the numerators and denominators in the net income per
common share calculations (in thousands, except per common share data):
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Three months ended March 31, |
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Six months ended March 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,686 |
|
|
$ |
715 |
|
|
$ |
2,885 |
|
|
$ |
1,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common
share weighted average shares outstanding |
|
|
24,816 |
|
|
|
24,953 |
|
|
|
24,758 |
|
|
|
25,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and employee
stock purchase plan |
|
|
397 |
|
|
|
242 |
|
|
|
314 |
|
|
|
270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per common
share adjusted weighted average shares |
|
|
25,213 |
|
|
|
25,195 |
|
|
|
25,072 |
|
|
|
25,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic |
|
$ |
0.07 |
|
|
$ |
0.03 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, diluted |
|
$ |
0.07 |
|
|
$ |
0.03 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares related to stock options to purchase 2,495,421 and 2,865,921
common shares for the three and six month periods ended March 31, 2010, respectively, and
4,587,240 and 4,365,675 common shares for the three and six month periods ended March 31,
2009, respectively, were not included in the
computation of diluted earnings per common share because the options exercise prices were
greater than the average market price of common shares and, therefore, their effect would be
anti-dilutive.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income, foreign currency translation
adjustments and unrealized gain (loss) on available-for-sale marketable securities, net of tax.
Comprehensive income (loss) was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
1,686 |
|
|
$ |
715 |
|
|
$ |
2,885 |
|
|
$ |
1,731 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustment |
|
|
(2,136 |
) |
|
|
(1,713 |
) |
|
|
(2,846 |
) |
|
|
(9,614 |
) |
Change in unrealized gain (loss) on investments |
|
|
(52 |
) |
|
|
10 |
|
|
|
7 |
|
|
|
(3 |
) |
Less income tax (provision) benefit |
|
|
20 |
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
1 |
|
Reclassification of gain included in net income |
|
|
(36 |
) |
|
|
|
|
|
|
(36 |
) |
|
|
|
|
Less income tax (provision) benefit |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(504 |
) |
|
$ |
(992 |
) |
|
$ |
21 |
|
|
$ |
(7,885 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
4. SELECTED BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2010 |
|
|
September 30, 2009 |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
23,512 |
|
|
$ |
19,656 |
|
Less allowance for doubtful accounts |
|
|
516 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
$ |
22,996 |
|
|
$ |
19,032 |
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
22,173 |
|
|
$ |
21,359 |
|
Work in process |
|
|
594 |
|
|
|
452 |
|
Finished goods |
|
|
3,220 |
|
|
|
4,808 |
|
|
|
|
|
|
|
|
|
|
$ |
25,987 |
|
|
$ |
26,619 |
|
|
|
|
|
|
|
|
Other accrued expenses: |
|
|
|
|
|
|
|
|
Accrued professional fees |
|
$ |
529 |
|
|
$ |
696 |
|
Deferred gain on building sale short-term |
|
|
254 |
|
|
|
276 |
|
Other accrued expenses |
|
|
2,279 |
|
|
|
2,063 |
|
|
|
|
|
|
|
|
|
|
$ |
3,062 |
|
|
$ |
3,035 |
|
|
|
|
|
|
|
|
Inventories are stated at the lower of cost or market value, with cost determined using the
first-in, first-out method.
5. ACQUISITION
MobiApps Holdings Private Limited
On June 8, 2009, we acquired substantially all the assets of MobiApps Holdings Private Limited
(MobiApps), a developer of machine-to-machine (M2M) communications technology focusing on
satellite, cellular, and hybrid satellite/cellular solutions. MobiApps has locations in India,
Singapore and in the U.S. Pursuant to the terms of the asset purchase agreements, Digi acquired
the U.S. assets located in Herndon, Virginia. In addition, we established Digi Wireless Singapore
Pte. Ltd. and Digi m2m Solutions India Private Limited, which acquired the assets of MobiApps
affiliate companies, located in Singapore and India, respectively. The acquisition was a cash
transaction for $3.0 million. An additional $0.5 million may be payable at the end of fiscal 2010,
contingent on the achievement of certain performance milestones. We have determined that the
MobiApps
acquisition is not material to our consolidated results of operations or financial condition.
Therefore, pro forma financial information is not presented.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. MARKETABLE SECURITIES
Our marketable securities consist of certificates of deposit, corporate bonds and government
municipal bonds. We obtain quoted market prices and trading activity for each security we hold,
where available, and review the financial solvency of each security issuer and obtain other
relevant information from our investment advisors to estimate the fair value for each security in
our investment portfolio. Thirty-two of the securities we held were trading slightly below our
amortized cost basis at March 31, 2010. We determined each decline in value to be temporary as we
expect to receive full par value of our investments upon maturity and have no indication from the
security issuers of default or any other factor leading us to believe the decline would be
other-than-temporary. We expect to realize the fair value of these securities, plus accrued
interest, either at the time of maturity or when the security is sold. We monitor our investment
values on an ongoing basis and record them at fair value as discussed in Note 7.
During the fourth quarter of fiscal 2008, we recorded an other-than-temporary impairment of
$1,014,900 on the bond issued by Lehman Brothers, (the Lehman Brothers Bond) with a par amount of
$1,194,000. The resulting value of $179,100 for the security became its new cost basis as of
September 30, 2008. We sold a portion of the bond in fiscal 2009, leaving the remaining value of
the Lehman Brothers Bond as of September 30, 2009 at $134,100. We sold the remainder of the bond
in January 2010 for $169,860 and recognized a gain of $35,760 on this sale during the second
quarter of fiscal 2010, reflecting the difference between the remaining value and the selling
price.
All of our current holdings are classified as available-for-sale marketable securities and are
recorded at fair value on our balance sheet with the unrealized gains and losses recorded in
accumulated other comprehensive income (loss). Our marketable securities were comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
At March 31, 2010 (in thousands) |
|
Cost (1) |
|
|
Gains |
|
|
Losses (2) |
|
|
Fair Value (1) |
|
Current marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
25,574 |
|
|
$ |
198 |
|
|
$ |
(214 |
) |
|
$ |
25,558 |
|
Certificates of deposit |
|
|
13,543 |
|
|
|
10 |
|
|
|
(13 |
) |
|
|
13,540 |
|
Government municipal bonds |
|
|
8,194 |
|
|
|
3 |
|
|
|
(5 |
) |
|
|
8,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable securities |
|
|
47,311 |
|
|
|
211 |
|
|
|
(232 |
) |
|
|
47,290 |
|
Non-current marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
2,157 |
|
|
|
|
|
|
|
(12 |
) |
|
|
2,145 |
|
Government municipal bonds |
|
|
2,131 |
|
|
|
|
|
|
|
(9 |
) |
|
|
2,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current marketable securities |
|
|
4,288 |
|
|
|
|
|
|
|
(21 |
) |
|
|
4,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
51,599 |
|
|
$ |
211 |
|
|
$ |
(253 |
) |
|
$ |
51,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in amortized cost and fair value is purchased and accrued interest of $538,085. |
|
(2) |
|
The aggregate related fair value of securities with unrealized losses as of March 31, 2010 was $26,555,744. |
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. MARKETABLE SECURITIES (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
At September 30, 2009 (in thousands) |
|
Cost (1) |
|
|
Gains |
|
|
Losses (3) |
|
|
Fair Value (1) |
|
Current marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds (2) |
|
$ |
4,236 |
|
|
$ |
18 |
|
|
$ |
|
|
|
$ |
4,254 |
|
Certificates of deposit |
|
|
10,022 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
10,025 |
|
Government municipal bonds |
|
|
8,023 |
|
|
|
11 |
|
|
|
(2 |
) |
|
|
8,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable securities |
|
|
22,281 |
|
|
|
33 |
|
|
|
(3 |
) |
|
|
22,311 |
|
Non-current marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
5,107 |
|
|
|
|
|
|
|
(44 |
) |
|
|
5,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
27,388 |
|
|
$ |
33 |
|
|
$ |
(47 |
) |
|
$ |
27,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in amortized cost and fair value is purchased and accrued interest of $263,883. |
|
(2) |
|
The Lehman Brothers Bond is included in amortized cost at a fair value of $134,100. |
|
(3) |
|
The aggregate related fair value of securities with unrealized losses as of September 30, 2009 was $9,009,428. |
7. FAIR VALUE MEASUREMENTS
Fair value is defined as the exit price, or the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants as of the
measurement date. This standard also establishes a hierarchy for inputs used in measuring fair
value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability based on market data obtained from
independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors
market participants would use in valuing the asset or liability based upon the best information
available in the circumstances. The categorization of financial assets and liabilities within the
valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
The hierarchy is broken down into three levels defined as follows:
|
|
|
Level 1 Inputs are quoted prices in active markets for identical assets or liabilities. |
|
|
|
|
Level 2 Inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, and inputs (other than quoted prices) that are observable for the asset
or liability, either directly or indirectly. |
|
|
|
|
Level 3 Inputs are unobservable for the asset or liability. See the section below
titled Level 3 Valuation Techniques for further discussion of how we determine fair
value for investments classified as Level 3. |
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Fair value is applied to financial assets, such as certificates of deposit, corporate bonds and
government municipal bonds, which are classified and accounted for as available-for-sale. These
items are stated at fair value at each reporting period; however, the definition of fair value is
applied using the above guidance.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FAIR VALUE MEASUREMENTS (CONTINUED)
The following table provides information by level for financial assets that are measured at
fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 Using: |
|
|
|
Total carrying |
|
|
Quoted price in |
|
|
Significant other |
|
|
Significant |
|
|
|
value at |
|
|
active markets |
|
|
observable inputs |
|
|
unobservable inputs |
|
|
|
March 31, 2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
12,780 |
|
|
$ |
12,780 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
27,703 |
|
|
|
|
|
|
|
27,703 |
|
|
|
|
|
Certificates of deposit |
|
|
13,540 |
|
|
|
|
|
|
|
13,540 |
|
|
|
|
|
Government municipal bonds |
|
|
10,314 |
|
|
|
|
|
|
|
10,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and marketable securities measured at fair value |
|
$ |
64,337 |
|
|
$ |
12,780 |
|
|
$ |
51,557 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents are measured at fair value using quoted market prices in active markets for
identical assets. All other marketable securities are measured at fair value using similar assets
and are classified within Level 2 of the valuation hierarchy.
Prior to January 1, 2010, we classified certain investments as Level 1 and upon further review,
have subsequently determined to classify them as Level 2. As a result, we transferred $34.9
million of assets previously classified within Level 1 to Level 2 on January 1, 2010. It was
determined that the fair value of such investments is based off of indices and matrices for similar
assets, as defined within Level 2 valuation techniques, and not identical assets, as defined within
Level 1 valuation techniques. Our policy for determining when to recognize transfers between levels
is based on the actual date of the event or change in circumstances that caused the transfer. This
transfer had no impact on the fair value of our investments as stated in any of the periods
presented.
Level 3 Valuation Techniques
Financial assets are categorized within Level 3 of the hierarchy when their fair values are
determined using pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is unobservable. Level 3 also may include certain
investment securities for which there is limited market activity or a decrease in the observability
of market pricing for the investments, such that the determination of fair value requires
significant judgment or estimation. We have no financial assets valued with Level 3 inputs as of
March 31, 2010. We sold the remaining portion of the Lehman Brothers Bond in January 2010 for
$169,860 and recognized a gain of $35,760 on this sale, reflecting the difference between the
remaining value and the selling price.
The following table provides a reconciliation of the beginning and ending balances of items
measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in
thousands):
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
134 |
|
Sale of security |
|
|
(170 |
) |
Realized gain recorded in other income (expense) |
|
|
36 |
|
|
|
|
|
Balance at March 31, 2010 |
|
$ |
|
|
|
|
|
|
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FAIR VALUE MEASUREMENTS (CONTINUED)
The use of different assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different estimates of fair value
of our securities, currently and in the future. The fair value of our securities could change
significantly based on changes in market conditions and continued uncertainties in the credit
markets. If these uncertainties continue or if these securities experience credit rating
downgrades, we may incur impairment charges for securities in our investment portfolio.
8. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Amortizable identifiable intangible assets were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
September 30, 2009 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
carrying |
|
|
Accum. |
|
|
|
|
|
|
carrying |
|
|
Accum. |
|
|
|
|
|
|
amount |
|
|
amort. |
|
|
Net |
|
|
amount |
|
|
amort. |
|
|
Net |
|
Purchased and core technology |
|
$ |
46,186 |
|
|
$ |
(36,829 |
) |
|
$ |
9,357 |
|
|
$ |
46,583 |
|
|
$ |
(34,893 |
) |
|
$ |
11,690 |
|
License agreements |
|
|
2,840 |
|
|
|
(2,501 |
) |
|
|
339 |
|
|
|
2,840 |
|
|
|
(2,464 |
) |
|
|
376 |
|
Patents and trademarks |
|
|
9,495 |
|
|
|
(6,054 |
) |
|
|
3,441 |
|
|
|
9,292 |
|
|
|
(5,536 |
) |
|
|
3,756 |
|
Customer maintenance contracts |
|
|
700 |
|
|
|
(569 |
) |
|
|
131 |
|
|
|
700 |
|
|
|
(534 |
) |
|
|
166 |
|
Customer relationships |
|
|
17,288 |
|
|
|
(8,099 |
) |
|
|
9,189 |
|
|
|
17,607 |
|
|
|
(7,334 |
) |
|
|
10,273 |
|
Non-compete agreements |
|
|
1,028 |
|
|
|
(590 |
) |
|
|
438 |
|
|
|
1,041 |
|
|
|
(425 |
) |
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
77,537 |
|
|
$ |
(54,642 |
) |
|
$ |
22,895 |
|
|
$ |
78,063 |
|
|
$ |
(51,186 |
) |
|
$ |
26,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $2.0 million and $1.8 million for the three months ended March
31, 2010 and 2009, respectively, and $3.9 million and $3.7 million for the six months ended
March 31, 2010 and 2009, respectively.
Estimated amortization expense related to identifiable intangible assets for the remainder of
fiscal 2010 and the five succeeding fiscal years is as follows (in thousands):
|
|
|
|
|
2010 (six months) |
|
$ |
3,718 |
|
2011 |
|
|
6,607 |
|
2012 |
|
|
4,567 |
|
2013 |
|
|
3,042 |
|
2014 |
|
|
2,288 |
|
2015 |
|
|
1,240 |
|
The changes in the carrying amount of goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Beginning balance, October 1 |
|
$ |
86,558 |
|
|
$ |
86,578 |
|
Foreign currency translation adjustment |
|
|
(971 |
) |
|
|
(3,456 |
) |
|
|
|
|
|
|
|
Ending balance, March 31 |
|
$ |
85,587 |
|
|
$ |
83,122 |
|
|
|
|
|
|
|
|
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
Income taxes have been provided at an effective rate of 34.2% and 14.3% for the six month periods
ended March 31, 2010 and 2009, respectively.
In the six month period ended March 31, 2009, we recorded a discrete tax benefit of $0.4 million
resulting from the enactment on October 3, 2008 of the retroactive extension of the research and
development tax credit for activity from January 1, 2008 to September 30, 2008. The benefit
resulting from such discrete tax event reduced our effective tax rate by 20.5 percentage points for
the six month period ended March 31, 2009.
A reconciliation of the beginning and ending amount of uncertain tax positions is as follows (in
thousands):
|
|
|
|
|
Uncertain tax positions as of December 31, 2009 |
|
$ |
4,121 |
|
Decreases related to: |
|
|
|
|
Settlements |
|
|
(32 |
) |
Expiration of the statute of limitations |
|
|
(13 |
) |
|
|
|
|
Uncertain tax positions as of March 31, 2010 |
|
$ |
4,076 |
|
|
|
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect our effective
tax rate is $3.3 million.
We recognize interest and penalties related to income tax matters in income tax expense. During
the six months ended March 31, 2010, we recognized an immaterial amount of interest and penalties.
As of March 31, 2010, we had $0.8 million in accrued interest and penalties on our consolidated
balance sheet.
It is reasonably possible that there are tax positions taken in prior years that may be realized
within in the next 12 months that will decrease the total amount of unrecognized tax benefits.
This is due to the expiration of the statute of limitations for both domestic and foreign tax
returns and an ongoing U.S. federal income tax audit. As the federal audit is not final, an
estimate of the reduction in unrecognized tax benefits cannot be made.
We operate in multiple tax jurisdictions both in the U.S. and outside of the U.S. Accordingly, we
must determine the appropriate allocation of income to each of these jurisdictions. This
determination requires us to make several estimates and assumptions. Certain open tax years are
expected to close in future periods that may result in adjustments to our income tax balances in
those periods that are material to our consolidated financial position and results of operations.
10. FINANCIAL GUARANTEES
In general, we warrant our products to be free from defects in material and workmanship under
normal use and service. The warranty periods range from 90 days to five years from the date
of receipt. We have the option to repair or replace products we deem defective with regard to
material or workmanship. Estimated warranty costs are accrued in the period that the related
revenue is recognized based upon an estimated average per unit repair or replacement cost
applied to the estimated number of units under warranty. These estimates are based upon
historical warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of
the warranty accrual.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. FINANCIAL GUARANTEES (CONTINUED)
The following table summarizes the activity associated with the product warranty accrual (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
Balance at |
|
|
Warranties |
|
|
Settlements |
|
|
Balance at |
|
Fiscal year |
|
January 1 |
|
|
issued |
|
|
made |
|
|
March 31 |
|
2010 |
|
$ |
952 |
|
|
$ |
229 |
|
|
$ |
(216 |
) |
|
$ |
965 |
|
2009 |
|
$ |
1,230 |
|
|
$ |
123 |
|
|
$ |
(210 |
) |
|
$ |
1,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
Balance at |
|
|
Warranties |
|
|
Settlements |
|
|
Balance at |
|
Fiscal year |
|
October 1 |
|
|
issued |
|
|
made |
|
|
March 31 |
|
2010 |
|
$ |
970 |
|
|
$ |
425 |
|
|
$ |
(430 |
) |
|
$ |
965 |
|
2009 |
|
$ |
1,214 |
|
|
$ |
344 |
|
|
$ |
(415 |
) |
|
$ |
1,143 |
|
We are not responsible and do not warrant that custom software versions created by original
equipment manufacturer (OEM) customers based upon our software source code will function in a
particular way, will conform to any specifications or are fit for any particular purpose and we do
not indemnify these customers from any third-party liability as it relates to or arises from any
customization or modifications made by the OEM customer.
11. CONTINGENCIES
Contingent obligations
There have been no additional developments in In re Initial Public Offering Securities
Litigation since our Annual Report on Form 10-K for the year ended September 30, 2009. Under
the settlement, our insurers are to pay the full amount of settlement share allocated to us, and we
would bear no financial liability beyond our deductible of $250,000. While there can be no
guarantee as to the ultimate outcome of this pending lawsuit, we expect that our liability
insurance will be adequate to cover any potential unfavorable outcome, less the applicable
deductible amount of $250,000 per claim. As of March 31, 2010, we have an accrued liability for
the anticipated settlement of $300,000 which we believe is adequate and reflects the amount of loss
that is probable and a receivable related to the insurance proceeds of $50,000, which represents
the anticipated settlement of $300,000 less our $250,000 deductible. In the event we should have
losses that exceed the limits of the liability insurance, such losses could have a material adverse
effect on our business and our consolidated results of operations or financial condition.
We received allegations regarding possible violations of our gifts, travel and entertainment policy
in the Asia Pacific region by a few employees. We are conducting an investigation of these policy and corresponding internal control
issues, including any possible related violations of applicable law, such as the Foreign Corrupt Practices
Act, under the direction of the Audit Committee, utilizing outside counsel. We voluntarily disclosed this matter to the United States Department of Justice and the
Securities and Exchange Commission. Our Chief Financial Officer resigned during the course of this investigation.
Our investigation is not complete; however, as of the date of this filing we are not aware of any
material impact to our reported consolidated financial statements. We cannot predict the outcome of
this matter at this time or whether it will have a materially adverse impact on our business
prospects and our consolidated financial condition, results of operations or cash flow. However, we
do anticipate additional general and administrative expense in the quarter ending June 30,2010 related to the
cost of the investigation, which is expected to be material.
In addition to the matters discussed above, in the normal course of business, we are subject to
various claims and litigation, including patent infringement and intellectual property claims. Our
management expects that these various claims and litigation will not have a material adverse effect
on our consolidated results of operations or financial condition.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING
On April 23, 2009, we announced a business restructuring to increase our focus on wireless products
and solutions that include hardware, software and services. The restructuring included the closing
of an engineering facility in Long Beach, California, and the relocation and consolidation of the
manufacturing facility in Davis, California to our Minneapolis, Minnesota headquarters. We paid a
lease cancellation fee for one of the leased facilities in Davis and had vacated the facility as of
the end of fiscal 2009. We continue to maintain non-manufacturing activities at the remaining
leased facility in Davis, California. As a result of these initiatives, during the third quarter
of fiscal 2009 we recorded a $2.0 million charge, which consisted of $1.8 million for employee
termination costs for 86 positions and $0.2 million for contract termination fees and other
relocation costs.
All of the 86 positions were vacated in fiscal 2009. The employee termination costs include
severance and the associated costs of continued medical benefits and outplacement services. The
other restructuring expenses include contract termination fees for non-renewal of lease terms
relating to one of the facilities in Davis, California and relocation expenses for employees.
A summary of the restructuring charges and other activity within the restructuring accrual is
listed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
Costs |
|
|
Other |
|
|
Total |
|
Balance at September 30, 2009 |
|
$ |
620 |
|
|
$ |
101 |
|
|
$ |
721 |
|
Restructuring charge |
|
|
75 |
|
|
|
|
|
|
|
75 |
|
Payments |
|
|
(208 |
) |
|
|
(11 |
) |
|
|
(219 |
) |
Write-downs |
|
|
(352 |
) |
|
|
|
|
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
$ |
135 |
|
|
$ |
90 |
|
|
$ |
225 |
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of fiscal 2010, we eliminated $0.4 million of the restructuring accrual
as a result of lower than expected costs associated with continued medical benefits and lower than
expected relocation costs.
The remaining liability is mostly related to continued medical benefits as part of the American
Recovery and Reinvestment Act of 2009 (ARRA), which provides for premium reductions for health
benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). The ARRA was
amended by the Department of Defense Appropriations Act of 2010 on December 19, 2009, which
provides an additional six months (from nine to fifteen months) for receiving the subsidy. We
recorded an additional accrual of $0.1 million for the additional six months of continued medical
benefits during the three months ended December 31, 2009. We expect the remaining liability to be
settled by the end of the second quarter of fiscal 2011.
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms we, our or us mean Digi International Inc. and all of the subsidiaries
included in the consolidated financial statements unless the context indicates otherwise. Our
managements discussion and analysis should be read in conjunction with our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009, as well as our reports on Forms 10-Q
and 8-K and other publicly available information.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q contains certain statements that are forward-looking statements as that term is
defined under the Private Securities Litigation Reform Act of 1995, and within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended.
The words believe, anticipate, intend, estimate, target, may, will, expect, plan,
project, should, or continue or the negative thereof or other expressions, which are
predictions of or indicate future events and trends and which do not relate to historical matters,
identify forward-looking statements. Such statements are based on information available to our
management as of the time of such statements and relate to, among other things, expectations of the
business environment in which we operate, projections of our future performance, perceived
opportunities in the market and statements regarding our mission and vision. Forward-looking
statements involve known and unknown risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking statements. We undertake
no obligation to publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
Our operating results and performance trends may be affected by a number of factors, including,
without limitation, those described under Item 1A, Risk Factors in our Annual Report on Form 10-K
for the year ended September 30, 2009. Those risk factors, and other risks, uncertainties and
assumptions identified from time to time in our filings with the Securities and Exchange
Commission, including without limitation, our quarterly reports on Form 10-Q and our registration
statements, could cause our actual future results to differ materially from those projected in the
forward-looking statements as a result of the factors set forth in our various filings with the
Securities and Exchange Commission and of changes in general economic conditions, changes in
interest rates and/or exchange rates and changes in the assumptions used in making such
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies was provided in the Managements Discussion and
Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K
for the year ended September 30, 2009.
16
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
OVERVIEW
We operate in the communications technology industry, which is characterized by rapid technological
advances and evolving industry standards. The market can be significantly affected by new product
introductions and marketing activities of industry participants. We compete for customers on the
basis of existing and planned product features, service capabilities, company reputation, brand
recognition, technical support, relationships with partners, quality and reliability, product
development capabilities, price and availability.
Net sales increased from $40.1 million in the second quarter of fiscal 2009 to $45.1 million in the
second quarter of fiscal 2010, an increase of $5.0 million, or 12.5%. Net sales in the second
quarter of fiscal 2010 also increased by $2.1 million, or 4.9%, compared to the first quarter of
fiscal 2010. Net income and net income per diluted share increased from $0.7 million, or $0.03 per
diluted share, in the second quarter of fiscal 2009 to $1.7 million, or $0.07 per diluted share, in
the second quarter of fiscal 2010, an increase of $1.0 million, or $0.04 per diluted share. Net
income and net income per diluted share in the second quarter of fiscal 2010 also exceeded net
income and net income per diluted share in the first quarter of fiscal 2010 by $0.5 million, or
$0.02 per diluted share. We believe that increases in net sales and net income over both the
second quarter of fiscal 2009 and the first quarter of fiscal 2010 are indicative of an upturn in
our business and stabilization of economic conditions. Revenue in North America increased by $5.8
million, or 27.9%, in the second fiscal quarter of 2010 compared to the year ago comparable
quarter, and increased sequentially from the first quarter of fiscal 2010 by $1.0 million, or 3.9%.
Revenue in all other geographic regions decreased by $0.8 million, or 4.1%, in the second fiscal
quarter of 2010 compared to the year ago comparable quarter, and increased sequentially from the
first quarter of fiscal 2010 by $1.1 million, or 6.4%.
Our wireless product net sales grew from $14.0 million, or 34.9% of net sales, in the second
quarter of fiscal 2009 compared to $15.8 million, or 35.0% of net sales, in the second quarter of
fiscal 2010, an increase of 12.9%. Wireless product net sales increased from $27.6 million, or
33.7% of net sales, in the first six months of fiscal 2009 compared to $30.9 million, or 35.1% of
net sales, in the first six months of fiscal 2010.
Our business was negatively impacted by the effects of the severe economic downturn in fiscal 2009.
We experienced a reduction in demand for our products in all geographic locations. In response to
the depressed economic conditions, we put in place a restructuring plan that included various cost
reduction actions, including closing our manufacturing facility in Davis, California and
consolidation of manufacturing operations in our Minneapolis plant. As a result, we believe the
deployment of this restructuring plan has contributed to the improvements in our gross margin. Our
gross margins have improved from 47.8% and 49.6% for the three and six months ended March 31, 2009,
respectively, to 50.5% for both the three and six months ended March 31, 2010.
We suspended our non-sales incentive compensation program for fiscal 2009, for both executive
management as well as a large part of the employee base. This program was reinstated at a reduced
level for fiscal 2010. We also reduced our sales commission program in the last half of fiscal
2009 and we have fully restored the program in fiscal 2010.
We anticipate that growth in the future will result from products and services that are developed
internally as well as from products and services that are acquired. We are continuing to invest in
wireless products and services while closely monitoring and controlling discretionary spending. We
also are actively managing our supply chain to ensure that our key sources of supply are intact.
17
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information derived from our interim condensed consolidated
statements of operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
% increase |
|
|
Six months ended March 31, |
|
|
% increase |
|
|
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
Net sales |
|
$ |
45,076 |
|
|
|
100.0 |
% |
|
$ |
40,085 |
|
|
|
100.0 |
% |
|
|
12.5 |
% |
|
$ |
88,044 |
|
|
|
100.0 |
% |
|
$ |
81,446 |
|
|
|
100.0 |
% |
|
|
8.1 |
% |
Cost of sales (exclusive of amortization of purchased and core technology
shown separately below) |
|
|
21,254 |
|
|
|
47.1 |
|
|
|
19,908 |
|
|
|
49.7 |
|
|
|
6.8 |
|
|
|
41,417 |
|
|
|
47.0 |
|
|
|
38,977 |
|
|
|
47.9 |
|
|
|
6.3 |
|
Amortization of purchased and
core technology |
|
|
1,074 |
|
|
|
2.4 |
|
|
|
1,008 |
|
|
|
2.5 |
|
|
|
6.5 |
|
|
|
2,166 |
|
|
|
2.5 |
|
|
|
2,052 |
|
|
|
2.5 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
22,748 |
|
|
|
50.5 |
|
|
|
19,169 |
|
|
|
47.8 |
|
|
|
18.7 |
|
|
|
44,461 |
|
|
|
50.5 |
|
|
|
40,417 |
|
|
|
49.6 |
|
|
|
10.0 |
|
Operating expenses |
|
|
20,553 |
|
|
|
45.6 |
|
|
|
18,570 |
|
|
|
46.3 |
|
|
|
10.7 |
|
|
|
40,437 |
|
|
|
45.9 |
|
|
|
39,052 |
|
|
|
47.9 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,195 |
|
|
|
4.9 |
|
|
|
599 |
|
|
|
1.5 |
|
|
|
N/M |
|
|
|
4,024 |
|
|
|
4.6 |
|
|
|
1,365 |
|
|
|
1.7 |
|
|
|
N/M |
|
Interest income and other, net |
|
|
359 |
|
|
|
0.8 |
|
|
|
395 |
|
|
|
1.0 |
|
|
|
(9.1 |
) |
|
|
362 |
|
|
|
0.4 |
|
|
|
654 |
|
|
|
0.8 |
|
|
|
(44.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,554 |
|
|
|
5.7 |
|
|
|
994 |
|
|
|
2.5 |
|
|
|
N/M |
|
|
|
4,386 |
|
|
|
5.0 |
|
|
|
2,019 |
|
|
|
2.5 |
|
|
|
N/M |
|
Income tax provision |
|
|
868 |
|
|
|
2.0 |
|
|
|
279 |
|
|
|
0.7 |
|
|
|
N/M |
|
|
|
1,501 |
|
|
|
1.7 |
|
|
|
288 |
|
|
|
0.4 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,686 |
|
|
|
3.7 |
% |
|
$ |
715 |
|
|
|
1.8 |
% |
|
|
N/M |
% |
|
$ |
2,885 |
|
|
|
3.3 |
% |
|
$ |
1,731 |
|
|
|
2.1 |
% |
|
|
66.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N//M = not meaningful
NET SALES
The following summarizes our net sales by product categories for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
% increase |
|
|
Six months ended March 31, |
|
|
% increase |
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
Non-embedded |
|
$ |
24,910 |
|
|
|
55.3 |
% |
|
$ |
22,715 |
|
|
|
56.7 |
% |
|
|
9.7 |
% |
|
$ |
49,807 |
|
|
|
56.6 |
% |
|
$ |
46,055 |
|
|
|
56.5 |
% |
|
|
8.1 |
% |
Embedded |
|
|
20,166 |
|
|
|
44.7 |
|
|
|
17,370 |
|
|
|
43.3 |
|
|
|
16.1 |
|
|
|
38,237 |
|
|
|
43.4 |
|
|
|
35,391 |
|
|
|
43.5 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
45,076 |
|
|
|
100.0 |
% |
|
$ |
40,085 |
|
|
|
100.0 |
% |
|
|
12.5 |
% |
|
$ |
88,044 |
|
|
|
100.0 |
% |
|
$ |
81,446 |
|
|
|
100.0 |
% |
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-embedded
Our non-embedded revenue increased by $2.2 million or 9.7% for the three months ended March 31,
2010 compared to the three months ended March 31, 2009 and increased by $3.8 million or 8.1% for
the six months ended March 31, 2010 compared to the six months ended March 31, 2009. The increases
resulted primarily from an increase in cellular products, serial servers, wireless communication
adaptors and USB products, which were offset by decreases in net sales of Sarian-branded products
and serial cards. Most of the increase in our non-embedded net sales took place in the North
American and Asian regions primarily resulting from a favorable product mix, offset by a decrease
in the European, Middle Eastern and African (EMEA) and Latin American regions. In fiscal 2009,
net sales of Sarian-branded products, located in the EMEA region were higher due to a large sale to
a legacy customer of Sarian Systems, Inc. in the second quarter of fiscal 2009.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NET SALES (CONTINUED)
Embedded
Our embedded revenue increased by $2.8 million or 16.1% for the three months ended March 31, 2010
compared to the three months ended March 31, 2009, and increased by $2.8 million or 8.0% for the
six months ended March 31, 2010 compared to the six months ended March 31, 2009. Most of the
increase in our embedded net sales took place in the North American, Asian and Latin American
regions primarily related to net sales of modules and incremental net sales of satellite-related
products due to our acquisition of MobiApps in the third quarter of fiscal 2009. This was
partially offset by a decrease in net sales in the EMEA region primarily relating to a chip that
was phased out during fiscal 2009.
The following summarizes our net sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
$ increase |
|
|
% increase |
|
|
Six months ended March 31, |
|
|
$ increase |
|
|
% increase |
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
|
(decrease) |
|
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
|
(decrease) |
|
North America (1) |
|
$ |
26,515 |
|
|
$ |
20,724 |
|
|
$ |
5,791 |
|
|
|
27.9 |
% |
|
$ |
52,040 |
|
|
$ |
43,869 |
|
|
$ |
8,171 |
|
|
|
18.6 |
% |
EMEA (2) |
|
|
12,347 |
|
|
|
14,934 |
|
|
|
(2,587 |
) |
|
|
(17.3 |
) |
|
|
23,368 |
|
|
|
28,262 |
|
|
|
(4,894 |
) |
|
|
(17.3 |
) |
Asia countries |
|
|
5,238 |
|
|
|
3,776 |
|
|
|
1,462 |
|
|
|
38.7 |
|
|
|
10,573 |
|
|
|
7,610 |
|
|
|
2,963 |
|
|
|
38.9 |
|
Latin America |
|
|
976 |
|
|
|
651 |
|
|
|
325 |
|
|
|
49.9 |
|
|
|
2,063 |
|
|
|
1,705 |
|
|
|
358 |
|
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
45,076 |
|
|
$ |
40,085 |
|
|
$ |
4,991 |
|
|
|
12.5 |
% |
|
$ |
88,044 |
|
|
$ |
81,446 |
|
|
$ |
6,598 |
|
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Satellite net sales of $0 and $100,605 for the three and six months ended March 31, 2010, respectively. |
|
(2) |
|
Includes Satellite net sales of $360,497 and $841,632 for the three and six months ended March 31, 2010, respectively. |
The fluctuation of foreign currency rates for the three month and six month periods ended
March 31, 2010 had a favorable impact on net sales of $0.3 million and $0.7 million,
respectively, compared to the same periods a year ago.
GROSS MARGIN
Gross margins were 50.5% for both the three and six months ended March 31, 2010, compared to
47.8% and 49.6% for the three and six months ended March 31, 2009, respectively. The increase
in the gross margin for both the three and six months ended March 31, 2010 as compared to the
same period a year ago was primarily due to lower manufacturing expenses, favorable product
mix and product cost reductions. A large sale to a legacy customer of Sarian Systems, Inc.
reduced gross margin by 1.6% in the second quarter of fiscal 2009. Gross margin in fiscal
2010 was also favorably impacted by the restructuring in the third quarter of fiscal 2009.
OPERATING EXPENSES
Total operating expenses increased by $2.0 million and
$1.4 million for the three and six months ended March 31, 2010, respectively, as compared to the same periods a year ago.
The increase is primarily the result of increases in incentive compensation and commissions of $1.7 million and
$1.2 million for the three and six months ended March 31, 2010, respectively, as compared to the
same periods a year ago and incremental operating expenses of $0.7 million and $1.3 million for the
three and six months ended March 31, 2010, respectively, related to our acquisition of MobiApps in June 2009. This was offset by decreases in
employee compensation and benefits primarily as a result of the restructuring of $0.7 million and
$1.4 million for the three and six months ended March 31, 2010, respectively, as compared to the
same period a year ago.
19
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
$ increase |
|
|
Six months ended March 31, |
|
|
$ increase |
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
9,603 |
|
|
|
21.3 |
% |
|
$ |
8,976 |
|
|
|
22.4 |
% |
|
$ |
627 |
|
|
$ |
18,843 |
|
|
|
21.4 |
% |
|
$ |
18,601 |
|
|
|
22.8 |
% |
|
$ |
242 |
|
Research and development |
|
|
7,078 |
|
|
|
15.7 |
|
|
|
6,196 |
|
|
|
15.4 |
|
|
|
882 |
|
|
|
13,564 |
|
|
|
15.4 |
|
|
|
13,170 |
|
|
|
16.2 |
|
|
|
394 |
|
General and administrative |
|
|
4,224 |
|
|
|
9.4 |
|
|
|
3,398 |
|
|
|
8.5 |
|
|
|
826 |
|
|
|
8,382 |
|
|
|
9.5 |
|
|
|
7,281 |
|
|
|
8.9 |
|
|
|
1,101 |
|
Restructuring |
|
|
(352 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
0.0 |
|
|
|
(352 |
) |
|
|
(352 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
0.0 |
|
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
20,553 |
|
|
|
45.6 |
% |
|
$ |
18,570 |
|
|
|
46.3 |
% |
|
$ |
1,983 |
|
|
$ |
40,437 |
|
|
|
45.9 |
% |
|
$ |
39,052 |
|
|
|
47.9 |
% |
|
$ |
1,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net increase of $0.6 million in sales and marketing expenses for the three months ended
March 31, 2010 as compared to March 31, 2009 was primarily due to an increase of $0.4 million
in compensation-related expenses and $0.3 million due to the incremental ongoing expenses
resulting from our acquisition of MobiApps. For the six months ended March 31, 2010 as
compared to March 31, 2009, the net increase of $0.2 million in sales and marketing expenses
was primarily due to an increase of $0.4 million due to the incremental ongoing expenses
resulting from the MobiApps acquisition, offset by a reduction of $0.2 million for other sales
and marketing expenses.
The net increase of $0.9 million in research and development expenses for the three months
ended March 31, 2010 compared to March 31, 2009 was due primarily to an increase of $0.5
million pertaining to outside testing and various development projects, $0.2 million for
compensation-related expenses and $0.2 million related to incremental ongoing research and
development expenses resulting from the MobiApps acquisition. Research and development
expenses for the six months ended March 31, 2010 increased $0.4 million compared to the same
period a year ago due primarily to an increase of $0.3 million in outside service expense
primarily for agency testing and various development projects, incremental ongoing expenses of
$0.5 million resulting from the MobiApps acquisition and $0.2 million in other research and
development expenses, offset by a decrease of $0.6 million of compensation-related expenses.
The net increase in general and administrative expenses of $0.8 million for the three months
ended March 31, 2010 compared to the three months ended March 31, 2009 was primarily due to an
increase of compensation-related expenses of $0.4 million, $0.2 million of incremental ongoing
expenses due to the acquisition of MobiApps and a $0.2 million increase in other general and
administrative expenses. For the six months ended March 31, 2010 compared to March 31, 2009,
the net increase in general and administrative expenses of $1.1 million was due primarily to
an increase of $0.4 million in compensation-related expenses, $0.3 million in other general
and administrative expenses and $0.4 million in incremental ongoing expenses due to the
acquisition of MobiApps.
During the second quarter of fiscal 2010, we eliminated $0.4 million of the restructuring accrual
as a result of lower than expected costs associated with continued medical benefits and lower than
expected relocation costs.
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME, NET
Other income, net was $0.4 million for both the three and six months ended March 31, 2010 compared
to $0.4 million and $0.7 million for the three and six months ended March 31, 2009, respectively.
For the three months ended March 31, 2010 compared to March 31, 2009, interest income, net
decreased $0.3 million, offset by an increase of $0.3 million related to foreign currency
transaction net gains. The decrease of $0.3 million for the six months ended March 31, 2010, as
compared to the same period a year ago, was due to a $0.8 million reduction in interest income,
offset by an increase of $0.5 million related to foreign currency transaction net gains. We earned
an average interest rate of 0.6% for both the three and six months ended March 31, 2010,
respectively, compared to 2.8% and 3.3% for the three and six months ended March 31, 2009. The
average invested balance for the three and six months ended March 31, 2010 was $67.9 million and
$67.4 million, respectively, and for the three and six months ended March 31, 2009 the average
invested balance was $53.5 million and $57.1 million, respectively.
INCOME TAXES
For the six months ended March 31, 2010, income taxes have been provided at an effective rate of
34.2% compared to 14.3% for the six months ended March 31, 2009. We recorded a discrete tax
benefit of $0.4 million during the first quarter of fiscal 2009 resulting from the enactment on
October 3, 2008 of the retroactive extension of the research and development tax credit for
activity from January 1, 2008 to September 30, 2008. We expect our annualized 2010 income tax
rate, before the impact of discrete items, to be approximately 33% to 35%.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations principally with funds generated from operations. At March 31,
2010, we had cash, cash equivalents and short-term marketable securities of $76.7 million compared
to $70.7 million at September 30, 2009. Our working capital (current assets less total current
liabilities) increased $7.7 million to $113.8 million at March 31, 2010 compared to $106.1 million
at September 30, 2009. We anticipate total fiscal 2010 capital expenditures will be approximately
$3.5 million.
Net cash provided by operating activities was $9.0 million for the six months ended March 31, 2010
as compared to net cash used by operating activities of $0.8 million for the six months ended March
31, 2009, resulting in a net increase of $9.8 million. This increase was primarily due to cash
provided by working capital in accounts primarily related to inventories. An increase in
inventories for the six months ended March 31, 2009 resulted from certain forecasted sales being
deferred to future quarters, pre-builds of new products and strategic inventory purchases. Cash
provided by working capital accounts also increased in the six months ended March 31, 2010 compared
to the same period a year ago due to net increases in both accounts payable and accrued
liabilities, offset by a decrease related to accounts receivable.
Net cash used in investing activities was $28.6 during the six months ended March 31, 2010 as
compared to net cash provided by investing activities of $22.8 million during the six months ended
March 31, 2009. The increase was due to the timing of settlements and maturities of marketable
securities. We also paid $3.0 million to the former shareholders of Spectrum Design Solutions,
Inc. (Spectrum) for a deferred cash payout related to our acquisition of Spectrum.
21
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Cash provided by financing activities was $1.5 million during the six months ended March 31, 2010
compared to a cash usage of $5.6 million during the same period a year ago, or a net increase of
$7.1 million. We used $6.1 million for the purchase of treasury stock during the six months ended
March 31, 2009 and also received $0.8 million more in proceeds from stock option and employee stock
purchase plan transactions during the first half of fiscal 2010 as compared to the same period a
year ago.
We believe the strength of our capital structure provides us with stable access to capital markets.
Historically we have only accessed capital markets on a short-term basis in order to finance our
acquisitions. We may need to access capital markets for future acquisitions. We believe that
current financial resources, cash generated from operations, and our capacity for debt and/or
equity financing will be sufficient to meet currently anticipated growth plans, including capital
expenditures, working capital investments and acquisitions.
The contractual obligations disclosed in our Annual Report on Form 10-K for the year ended
September 30, 2009 did not materially change through March 31, 2010. In January 2010, we paid $3.0
million to the former shareholders of Spectrum as provided in the purchase agreement.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2010, the Financial Accounting Standards Board (FASB) issued an amendment to the
accounting standard related to the recognition and disclosure requirements for subsequent events.
This amendment removes the requirement to disclose the date through which subsequent events have
been evaluated in both issued and revised financial statements for companies that file financial
statements with the Securities and Exchange Commission (SEC). This amendment was effective
immediately. We evaluate subsequent events through the date our financial statements are filed
with the SEC.
In January 2010, the FASB issued an amendment to the accounting standards related to fair value
measurements. This guidance requires disclosure of transfers into and out of Level 1 and Level 2
fair value measurements and the reasons for those transfers and also requires more detailed
disclosure about the activity within Level 3 fair value measurements. We adopted this guidance as
of January 1, 2010, except for the additional disclosures required for the Level 3 reconciliation
which is effective for us beginning with the quarter ending December 31, 2011. We have provided
the requisite disclosure for the transfers into and out of Level 1 and Level 2 fair value
measurements in our consolidated financial statements for the period ended March 31, 2010. We do
not expect the impact of the Level 3 additional disclosures to have a material impact to our
consolidated financial statements.
In October 2009, the FASB issued an amendment to the accounting standards that provides guidance
for identifying separate deliverables in a revenue-generating transaction where multiple
deliverables exist, and for allocating and recognizing revenue based on those separate
deliverables. This guidance is expected to result in more multiple-deliverable arrangements being
separable than under current guidance. This amendment is effective for revenue arrangements
entered into or materially modified in our fiscal year beginning October 1, 2010. Early adoption
is permitted. We are currently evaluating the impact this amendment will have on our consolidated
financial statements.
22
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In October 2009, the FASB issued an amendment to the accounting standards related to certain
revenue arrangements that include software elements. This standard clarifies the existing
accounting guidance such that
tangible products that contain both software and non-software components that function together to
deliver the products essential functionality shall be excluded from the scope of the software
revenue recognition accounting standards. Accordingly, sales of these products may fall within the
scope of other revenue recognition accounting standards or may now be within the scope of this
standard and may require an allocation of the arrangement consideration for each element of the
arrangement. This amendment is effective for revenue arrangements entered into or materially
modified in our fiscal year beginning October 1, 2010. We are currently evaluating the impact this
amendment will have on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. Our marketable
securities are classified as available-for-sale and are carried at fair value. Marketable
securities consist of certificates of deposit, corporate bonds and government 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. Our
portfolio contains no auction rate securities. We do not use derivative financial instruments to
hedge against interest rate risk because the majority of our investments mature in less than a
year.
FOREIGN CURRENCY RISK
We have transactions that are executed in the U.S. Dollar, British Pound, Euro and Japanese Yen.
As a result, we are exposed to foreign currency transaction risk associated with certain sales
transactions being denominated in Euros, British Pounds or Japanese Yen, and foreign currency
translation risk as the financial position and operating results of our foreign subsidiaries are
translated into U.S. Dollars for consolidation. We have not implemented a formal hedging strategy
to reduce foreign currency risk.
For the six months ended March 31, 2010 and 2009, we had approximately $36.0 million and $37.6
million, respectively, of net sales to foreign customers including export sales, of which $12.8
million and $18.0 million, respectively, were denominated in foreign currency, predominantly Euros
and British Pounds. In future periods, we expect a significant portion of sales will continue to
be made in both Euros and British Pounds.
The table below compares the average monthly exchange rates of the Euro, British Pound and Yen to
the U.S. Dollar:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
% increase |
|
|
|
2010 |
|
|
2009 |
|
|
(decrease) |
|
Euro |
|
|
1.4326 |
|
|
|
1.3141 |
|
|
|
9.0 |
% |
British Pound |
|
|
1.5985 |
|
|
|
1.5087 |
|
|
|
6.0 |
% |
Yen |
|
|
0.0111 |
|
|
|
0.0106 |
|
|
|
5.0 |
% |
A 10% change from the first six months of fiscal year 2010 average exchange rate for the Euro,
British Pound and Yen to the U.S. Dollar would have resulted in a 1.5% increase or decrease in net
sales and a 1.7% increase or decrease in stockholders equity. The above analysis does not take
into consideration any pricing adjustments we might consider in response to changes in such
exchange rates.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
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.
Investments are made in accordance with our investment policy and consist of certificates of
deposit, government bonds and corporate bonds. We may have some credit exposure related to the
fair value of our securities, which could change significantly based on changes in market
conditions and continued uncertainties in the credit markets. If these uncertainties continue or
if these securities experience credit rating downgrades, we may incur impairment charges for
securities in our investment portfolio.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of the principal executive officer and principal financial
officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the
principal executive officer and principal financial officer concluded that our disclosure controls
and procedures were effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act was recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms and is
accumulated and communicated to our management, including the principal executive and principal
financial officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting during our most recently
completed fiscal quarter that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The disclosures set forth in Note 11 to the Condensed Consolidated Financial Statements in
Part I, Item 1 of this Form 10-Q are incorporated herein by reference.
ITEM 1A. RISK FACTORS
The risk factor set forth below updates the risk factors section previously disclosed in Item 1A of
Part I of the Companys Annual Report on Form 10-K for
the year ended September 30, 2009.
We are
investigating potential violations of our gifts, travel and entertainment policy, as well as corresponding internal control issues, including any possible violations of law, such as the Foreign
Corrupt Practices Act. The outcome and impact of this investigation are unknown at this time.
We received allegations regarding possible violations of our gifts, travel and entertainment policy
in the
Asia Pacific region by a few employees. We are conducting an investigation of these policy and corresponding internal control
issues,
including any possible related violations of applicable law, such as the Foreign Corrupt Practices
Act, under the direction of the Audit Committee, utilizing outside counsel. We voluntarily disclosed this matter to the United States Department of Justice and the
Securities and
Exchange Commission. Our Chief Financial Officer resigned during the course of this investigation.
Our investigation is not complete; however, as of the date of this filing we are not aware of any
material impact to our reported consolidated financial statements. We cannot predict the outcome of
this matter at this time or whether it will have a materially adverse impact on our business
prospects and our consolidated financial condition, results of operations or cash flow. However, we
do anticipate
additional general and administrative expense in the quarter ending
June 30, 2010 related to the
cost of the investigation, which is expected to be material.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on January 25, 2010. Of the 24,700,896 shares of Digi
common stock entitled to vote at the meeting, 21,893,001 shares were present at the meeting in
person or by proxy. The stockholders voted on the following:
|
a) |
|
The following individuals designated by our Board of Directors as nominees for
director were elected for a three-year term, with voting as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominee |
|
Total Votes For |
|
|
Withhold Authority |
|
|
Broker Non-Vote |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guy C. Jackson |
|
|
9,879,923 |
|
|
|
8,760,181 |
|
|
|
3,252,897 |
|
Ahmed Nawaz |
|
|
10,068,360 |
|
|
|
8,571,744 |
|
|
|
3,252,897 |
|
|
b) |
|
Proposal to approve the Digi International Inc. 2000 Omnibus Stock Plan, as
Amended and Restated as of December 4, 2009. The proposal passed on a vote of 9,820,744
in favor, 8,730,774 against, 88,586 abstentions and 3,252,897 broker non-votes. |
|
c) |
|
Proposal to approve the Digi International Inc. Employee Stock Purchase Plan, as
Amended and Restated as of December 4, 2009. The proposal passed on a vote of
18,277,562 in favor, 336,573 against, 25,969 abstentions and 3,252,897 broker non-votes. |
|
d) |
|
Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ending September 30,
2010. The proposal passed on a vote of 21,764,364 in favor, 108,870 against, 19,767
abstentions and no broker non-votes. |
In addition, the terms of the following directors continued after the meeting:
Directors with a term ending in 2011: Joseph T. Dunsmore and Bradley J. Williams
Directors with a term ending in 2012: Kenneth E. Millard and William N. Priesmeyer
25
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
3 |
(a) |
|
Restated Certificate of Incorporation of the Company, as amended (1) |
|
|
|
|
|
|
3 |
(b) |
|
Amended and Restated By-Laws of the Company (2) |
|
|
|
|
|
|
4 |
(a) |
|
Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells
Fargo Bank, N.A., as Rights Agent (3) |
|
|
|
|
|
|
4 |
(b) |
|
Form of Amended and Restated Certificate of Powers, Designations, Preferences and
Rights of Series A Junior Participating Preferred Shares (4) |
|
|
|
|
|
|
31 |
(a) |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
|
|
|
31 |
(b) |
|
Rule 13a-14(a)/15d-14(a) Certification of Corporate Controller and Acting Principal Financial Officer |
|
|
|
|
|
|
32 |
|
|
Section 1350 Certification |
|
|
|
(1) |
|
Incorporated by reference to Exhibit 3(a) to the Companys Form 10-K for the year ended
September 30, 1993 (File No. 0-17972) |
|
(2) |
|
Incorporated by reference to Exhibit 3(b) to the Companys Form 10-Q for the quarter ended
June 30, 2008 (File No. 1-34033) |
|
(3) |
|
Incorporated by reference to Exhibit 4(a) to the Companys Registration Statement on Form 8-A
filed on April 25, 2008 (File No. 1-34033) |
|
(4) |
|
Incorporated by reference to Exhibit 4(b) to the Companys Registration Statement on Form 8-A
filed on April 25, 2008 (File No. 1-34033) |
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
DIGI INTERNATIONAL INC.
|
|
Date: May 10, 2010 |
By: |
/s/
Brenda Mueller |
|
|
|
Brenda Mueller |
|
|
|
Corporate Controller and Acting Principal Financial Officer (Principal Financial and
Accounting Officer) |
|
27
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit Number |
|
Document Description |
|
Form of Filing |
|
|
|
|
|
|
|
|
3(a) |
|
|
Restated Certificate of Incorporation of
the Company, as Amended (incorporated by
reference to the corresponding exhibit
number to the Companys Form 10-K for the
year ended September 30, 1993 (File No.
0-17972))
|
|
Incorporated by
Reference |
|
|
|
|
|
|
|
|
3(b) |
|
|
Amended and Restated By-Laws of the Company
|
|
Incorporated by
Reference |
|
|
|
|
|
|
|
|
4(a) |
|
|
Share Rights Agreement, dated as of April
22, 2008, between the Company and Wells
Fargo Bank, N.A., as Rights Agent
|
|
Incorporated by
Reference |
|
|
|
|
|
|
|
|
4(b) |
|
|
Form of Amended and Restated Certificate
of Powers, Designations, Preferences and
Rights of Series A Junior Participating
Preferred Shares
|
|
Incorporated by
Reference |
|
|
|
|
|
|
|
|
31(a) |
|
|
Rule 13a-14(a)/15d-14(a) Certification of
Chief Executive Officer
|
|
Filed Electronically |
|
|
|
|
|
|
|
|
31(b) |
|
|
Rule 13a-14(a)/15d-14(a) Certification of
Corporate Controller and Acting Principal Financial Officer |
|
Filed Electronically |
|
|
|
|
|
|
|
|
32 |
|
|
Section 1350 Certification
|
|
Filed Electronically |
28