Digi International Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013. Digi provides machine-to-machine (M2M) networking products and solutions. Results include Etherios from its October 31, 2012 acquisition date.
Financial performance
| Metric | Three months ended March 31, 2013 | Prior-year quarter | Six months ended March 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $48.2 million | $49.0 million | $95.2 million | $95.7 million |
| Gross profit / margin | $25.0 million / 51.8% | $25.8 million / 52.6% | $49.4 million / 51.9% | $50.2 million / 52.5% |
| Operating income | $0.4 million | $3.4 million | $2.1 million | $4.2 million |
| Net income | $1.0 million | $2.1 million | $2.2 million | $2.8 million |
| Diluted EPS | $0.04 | $0.08 | $0.08 | $0.11 |
| Operating cash flow | Not separately presented for the quarter | $3.4 million | $6.1 million |
Quarterly sales declined 1.7%; first-half sales declined 0.5%. First-half gross margin fell 0.6 percentage points, primarily because Etherios consulting services generally have lower margins than Digi’s products. Operating expenses rose $2.2 million in the quarter, including the patent settlement and Etherios expenses. Other income benefited from foreign-exchange gains.
Liquidity, cash flow and capital
- At March 31, cash and cash equivalents were $42.4 million; short-term marketable securities were $37.4 million, for $79.8 million in cash, cash equivalents and short-term securities. Long-term marketable securities were another $22.1 million.
- Working capital was $119.6 million. Total liabilities were $23.1 million; the balance sheet does not report interest-bearing debt.
- Six-month investing cash use was $14.2 million, including $12.9 million net cash paid for Etherios. Financing cash use was $5.9 million, including $6.8 million of treasury-stock purchases. Cash decreased $17.9 million to $42.4 million.
- Management expected positive operating cash flow and said available liquidity, operating cash generation, and potential financing would be sufficient for operations and capital expenditures for the next 12 months and beyond. Fiscal 2013 capital expenditures were estimated at approximately $3.9 million.
Material changes and notable items
- Growth products and services sales increased 2.9% in the quarter and 5.6% for six months; mature-product sales declined 7.1% and 7.3%, respectively. Etherios contributed $2.4 million of quarterly and $3.9 million of first-half sales.
- Management said serial servers, Rabbit-branded modules, chips and USB products are mature and expected to continue declining. The company is shifting toward broader M2M solutions and wireless products and services.
- Digi acquired Etherios for $20.5 million, comprising $13.7 million cash and $6.8 million in stock. Preliminary purchase accounting included $17.1 million of goodwill; some acquired asset and liability valuations remained subject to finalization.
- A $1.5 million patent-litigation settlement was recorded in second-quarter general and administrative expense. The company said its after-tax impact was approximately $1.0 million, or $0.04 per diluted share. The settlement, announced April 22, resolved the USEI claims with no future payment obligations.
- First-half other comprehensive loss was $3.4 million, primarily reflecting a $3.4 million foreign-currency translation loss.
- The company repurchased 707,654 shares for $6.8 million during the first half under a $20 million authorization expiring September 30, 2013.
Outlook, risks and contingencies
No numerical revenue or earnings guidance was provided. Management cautioned that the transition to wireless, solution-based selling may cause uneven demand and longer sales cycles. Identified risks include competition, technology changes, declining mature-product demand, reliance on distributors and third parties, product-development and integration challenges, global economic conditions, acquisition execution, litigation, foreign-currency exposure, and cybersecurity and data-security incidents. The filing also notes that repatriating additional foreign earnings could trigger an estimated $2.5–$3.5 million tax liability. Marketable securities had unrealized losses, which management judged temporary; deteriorating market conditions could lead to impairment charges.
Important facts for investors to verify
- Whether growth in solutions and services can offset continued mature-product declines, and the contribution and profitability of Etherios.
- Whether operating cash flow recovers from the first-half year-over-year decline and how liquidity is deployed, including remaining share-repurchase authorization.
- Final Etherios purchase-price allocation and any resulting changes to goodwill, acquired intangibles or contingent liabilities.
- Progress on cybersecurity controls and exposure to foreign-currency movements, investment-security impairment, litigation and potential foreign-earnings repatriation taxes.
- The settlement was recorded as of March 31 although announced April 22; confirm its accounting treatment and that no further payment obligations remain.