Digi International Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are identified separately below. Digi provides IoT connectivity products, services and solutions through IoT Products & Services and IoT Solutions (SmartSense by Digi).
Financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $279.3 million | $254.2 million |
| Gross profit / margin | $144.0 million / 51.6% | $119.0 million / 46.8% |
| Operating income / margin | $11.3 million / 4.1% | $10.1 million / 4.0% |
| Net income / diluted EPS | $8.4 million / $0.28 | $10.0 million / $0.35 |
| Operating cash flow | $34.5 million | $29.0 million |
| Cash and cash equivalents | $54.1 million | $92.8 million |
| Working capital | $108.8 million | $148.1 million |
| Debt outstanding | $63.1 million | None reported |
FY2020 adjusted EBITDA, a non-GAAP measure, was $40.2 million, or 14.4% of revenue, versus $26.5 million, or 10.4%, in FY2019. Adjusted net income was $29.0 million ($0.98 per diluted share) versus $19.0 million ($0.66). These measures exclude specified items and should be considered alongside GAAP results.
Fourth-quarter FY2020 revenue was $73.2 million and net income was $4.4 million; the comparable FY2019 quarter reported $65.0 million and $2.3 million, respectively.
Changes versus FY2019
- Revenue increased 9.9%, mainly from the December 2019 Opengear acquisition; organic results included prior-year large customer sales that did not repeat.
- IoT Products & Services revenue rose 15.9% to $249.5 million. Its gross margin increased to 51.8%, supported by Opengear and higher support-services sales.
- IoT Solutions revenue declined 23.6% to $29.7 million as COVID-19 delayed customer rollouts, expansions and equipment upgrades, and some large prior-year deals did not recur. Sites served increased to over 70,000 from just over 63,000.
- Net income and diluted EPS fell 15.5% and 20%, respectively. Higher interest expense tied to acquisition financing and the absence of FY2019’s building-sale gain were notable factors. FY2020 included a $0.9 million income-tax benefit.
- Operating cash flow improved by $5.5 million. Investing cash outflow was $137.0 million, principally reflecting $136.1 million paid for Opengear net of cash acquired; cash declined by $38.7 million overall.
Liquidity, debt and capital
At year-end, Digi had $48.1 million outstanding on its term loan and $15.0 million on its revolving loan, with $85 million available under the revolver, subject to facility terms. The $150 million secured credit facility matures in December 2024 and carries variable-rate debt. Digi reported compliance with its financial covenants at September 30, 2020. Management said cash, operating cash flow and borrowing capacity should fund operations and capital expenditures for the next 12 months and beyond.
The company voluntarily repaid a $9.0 million Paycheck Protection Program loan, plus interest, in May 2020. No cash dividends are paid, and management said it intends to retain earnings. Current assets included $51.6 million of inventory, up from $39.8 million; the filing also reports a higher doubtful-accounts allowance.
Outlook, commentary and risks
- No numerical FY2021 revenue or earnings guidance is provided. Management expects modest revenue and profitability growth in IoT Products & Services and is pursuing stronger growth in IoT Solutions, while describing the outlook as uncertain.
- Management cited delayed or deferred project deployments and weaker SmartSense customer activity amid COVID-19. It saw some improvement in new IoT Solutions sales in the fourth quarter, but cautioned that pandemic and macroeconomic uncertainty could make FY2021 results inconsistent.
- FY2021 priorities include SmartSense growth, new-product-led growth, potential strategic acquisitions, and optimizing the company’s third-party manufacturing footprint. Management expects mature infrastructure product revenue to decline over time and believes recurring subscription growth could support margins.
- Key risks include pandemic-related demand and supply-chain disruption; dependence on contract manufacturers and some single-source suppliers; long, project-based sales cycles; intense competition and technology obsolescence; cybersecurity and cloud-service risks; acquisition integration and goodwill impairment; foreign-exchange exposure; and compliance with secured-credit covenants.
- Opengear increased goodwill and acquired intangibles; no goodwill impairment was recorded, and both reporting units’ estimated fair values exceeded carrying values by more than 10% in the annual test. COVID-19 or weaker future results could require a future impairment charge.
- A Canadian customer alleges Digi products contributed to street-lighting malfunctions and claims damages of just over CAD 1.0 million. Digi intends to defend the case; the company said it could not assess the likelihood or amount of loss.
- After year-end, Digi approved a reorganization expected to eliminate about 20 positions in FY2021’s first quarter, with estimated severance charges of $0.8–$0.9 million.
Important facts for investors to verify
- How much of FY2020 growth and improved margins came from Opengear versus existing operations, and whether acquisition synergies persist.
- Whether SmartSense customer deployments and revenue recover, given the FY2020 segment contraction and management’s uncertain outlook.
- Revolver availability, variable interest costs, repayment schedule and ongoing covenant compliance.
- Inventory growth, receivables quality and the adequacy of reserves, particularly if customer payment conditions worsen.
- Opengear integration and controls: the FY2020 internal-control assessment excluded the acquired business, which represented 34% of year-end assets and 19% of annual revenue.
- Potential exposure from the CAD 1.0 million litigation claim, acquisition earn-outs and future goodwill or intangible-asset impairment.