Digi International Inc. — FY2021 Form 10-K
Business context and reporting period. Digi provides IoT connectivity products, services and solutions through IoT Products & Services and IoT Solutions. This filing reports the fiscal year ended September 30, 2021; it does not provide standalone fourth-quarter results. Dollar amounts below are U.S. dollars.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $308.6 million | $279.3 million | +10.5% |
| Gross profit / margin | $166.7 million / 54.0% | $144.0 million / 51.6% | Margin +2.4 points |
| Operating income / margin | $10.5 million / 3.4% | $11.3 million / 4.1% | Income −7.0% |
| Net income | $10.4 million | $8.4 million | +23.2% |
| Diluted EPS | $0.31 | $0.28 | +10.7% |
| Operating cash flow | $57.7 million | $34.5 million | +$23.2 million |
| Cash and cash equivalents, Sept. 30 | $152.4 million | $54.1 million | +$98.3 million |
Revenue growth reflected higher console server and embedded-product sales and growth in SmartSense hardware installations and subscriptions. IoT Products & Services revenue rose 5.9% to $264.2 million; IoT Solutions revenue increased 49.5% to $44.5 million. IoT Products & Services operating income was $18.2 million, down from $27.2 million. IoT Solutions recorded an operating loss of $7.7 million, narrower than its $15.9 million loss in FY2020.
Operating cash flow improved largely due to working-capital movements and higher net income. Investing cash outflow was $21.4 million, including $19.1 million for acquisitions. Financing cash inflow was $62.2 million, including $73.8 million net proceeds from a March 2021 stock offering. Working capital was $187.7 million, versus $108.8 million a year earlier.
At fiscal year-end, debt was $48.1 million under the revolving facility, with $151.9 million of stated capacity available; the company reported compliance with its covenants. The filing reports a subsequent November 1, 2021 financing and acquisition: Digi acquired Ventus for approximately $348 million in cash, funded with cash and a new $350 million term loan B; a $35 million revolver was undrawn. The new term loan bears variable interest and has a seven-year maturity.
Changes, outlook and risks
- Gross margin improved in both segments, aided by product/customer mix and recurring subscription revenue, but supply-chain costs put pressure on performance.
- Operating expenses rose 17.7% to $156.1 million, including higher compensation, $5.8 million of acquisition earn-out expense, and restructuring and acquisition costs. A $1.4 million income-tax benefit also supported net income; the effective tax rate was negative 15.2%.
- Adjusted EBITDA, a non-GAAP measure, was $48.3 million (15.6% of revenue), compared with $40.2 million (14.4%). Adjusted net income was $36.1 million, or $1.08 per diluted share, versus $29.0 million, or $0.98.
- Management expects long-term IoT market expansion and sees greater revenue-growth potential in IoT Solutions. It provided no specific numerical FY2022 guidance and cautioned that results may be inconsistent amid macroeconomic uncertainty, supply disruption and large project timing.
- Supply constraints, component shortages, freight delays and higher input and transportation costs had affected operations; duration and financial impact were uncertain and could be material. COVID-19 remained an ongoing source of uncertainty.
- Other principal risks include reliance on contract manufacturers and some single-source suppliers, competition and technology obsolescence, execution and integration of acquisitions, customer concentration in acquired businesses, cybersecurity, and variable-rate debt and covenant requirements.
- FY2021 acquisitions included Haxiot and Ctek. Ventus was acquired after year-end; its purchase-price allocation was not complete in the filing. Digi reported no goodwill impairment and identified no critical audit matters. The auditor gave unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- Review subsequent filings for Ventus purchase accounting, integration costs, segment classification and contribution to revenue, margins and cash flow.
- Track the new term loan’s balance, variable interest cost, leverage and covenant headroom after the Ventus acquisition.
- Assess whether supply-chain constraints, costs and lead times ease, and whether Digi can fulfill its customer backlog and preserve gross margins.
- Monitor SmartSense and other recurring-service growth, segment profitability, and the sustainability of adjusted results relative to GAAP earnings.
- Check the impact of acquisition earn-outs, tax benefits and other non-recurring items on reported earnings and operating cash conversion.