UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
July 23, 2008
Date of report (date of earliest event reported)
Digi International Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 1-34033 | 41-1532464 | ||
| (State of Incorporation) | (Commission file number) | (I.R.S. Employer Identification No.) |
| 11001 Bren Road East, Minnetonka, Minnesota | 55343 | |
| (Address of principal executive offices) | (Zip Code) |
Telephone Number: (952) 912-3444
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy
the filing obligation of the registrant under any of the following provisions (see General
Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition.
On July 23, 2008, Digi International Inc. (the “Company”) reported its financial results for
the third quarter of fiscal 2008. See the Company’s press release dated July 23, 2008, which is
furnished as Exhibit 99 and incorporated by reference in this Current Report on Form 8-K.
NON-GAAP FINANCIAL MEASURES
The press release furnished as Exhibit 99 and certain information the Company intends to
disclose on the conference call include certain non-GAAP financial measures. These measures include
(i) earnings before taxes, depreciation, amortization (“EBTDA”) and (ii) operating income, net
income and net income per diluted share exclusive of the impact certain non-recurring items. The
non-recurring items consist of in-process research and development, acquisition-related expenses
and reversal of tax reserves and other discrete tax benefits. The reconciliations of these measures
to the most directly comparable GAAP financial measures are provided in the press release or are
included below.
Management understands that there are material limitations on the use of non-GAAP measures.
Non-GAAP measures are not substitutes for GAAP measures, such as operating income or net income,
for the purpose of analyzing financial performance. The disclosure of these measures does not
reflect all charges and gains that were actually recognized by the Company. Additionally, EBTDA
does not reflect the Company’s cash expenditures, the cash requirements for the replacement of
depreciated and amortized assets, or changes in or cash requirements for the Company’s working
capital needs. These non-GAAP measures are not in accordance with, or an alternative for measures
prepared in accordance with, generally accepted accounting principles and may be different from
non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on
any comprehensive set of accounting rules or principles. Management believes that non-GAAP
measures have limitations in that they do not reflect all of the amounts associated with the
Company’s results of operations as determined in accordance with GAAP and that these measures
should only be used to evaluate the Company’s results of operations in conjunction with the
corresponding GAAP measures.
Management believes that providing operating income, net income and net income per diluted
share exclusive of the impact of non-recurring items permits investors to compare results with
prior periods that did not include these items. Additionally, the management believes that the
presentation of EBTDA as a percentage of net sales is useful to investors because it provides a
reliable and consistent approach to measuring the Company’s performance from year to year and in
assessing the Company’s performance against other companies. Management believes that such
information helps investors compare operating results and corporate performance exclusive of the
impact of the Company’s capital structure and the method by which assets were acquired. Management
uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and
trends and to gain an understanding of the comparative operating performance of the Company. In
addition, shareholders in the Company have expressed an interest in seeing financial performance
measures exclusive of the impact of decisions relating to acquisitions and taxes, which while
important are not central to the core operations of the Company’s business.
2
Reconciliation of Income before Income Taxes to Earnings before Taxes, Depreciation and
Amortization and Acquired In-Process Research and Development
(In thousands of dollars and as a percent of Net Sales)
Amortization and Acquired In-Process Research and Development
(In thousands of dollars and as a percent of Net Sales)
| For the three | For the three | |||||||||||||||
| months ended | months ended June | |||||||||||||||
| March 31, 2008 | % of net sales | 30, 2008 | % of net sales | |||||||||||||
Net sales |
$ | 43,070 | 100.0 | % | $ | 46,995 | 100.0 | % | ||||||||
Income before income taxes |
$ | 4,662 | 10.8 | % | $ | 3,697 | 7.9 | % | ||||||||
Acquired in-process research and development |
— | 0.0 | % | 1,900 | 4.0 | % | ||||||||||
Acquisition-related expenses |
— | 0.0 | % | 162 | 0.3 | % | ||||||||||
Depreciation and amortization |
2,295 | 5.3 | % | 2,135 | 4.5 | % | ||||||||||
Earnings before taxes, depreciation, and
amortization and acquired in-process
research and development |
$ | 6,957 | 16.2 | % | $ | 7,894 | 16.8 | % | ||||||||
3
Item 9.01 Financial Statements and Exhibits.
The following Exhibit is furnished herewith:
| 99 | Press Release dated July 23, 2008, announcing financial results for the third quarter of fiscal 2008. |
4
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned duly authorized.
Date: July 23, 2008
| DIGI INTERNATIONAL INC. |
||||
| By: | /s/ Subramanian Krishnan | |||
| Subramanian Krishnan | ||||
| Senior Vice President, Chief Financial Officer and Treasurer |
||||
5
EXHIBIT INDEX
| Manner of | ||||
| No. | Exhibit | Filing | ||
99
|
Press Release dated July 23, 2008, announcing financial results for the third quarter of fiscal 2008. | Filed Electronically |
6
EXHIBIT
99
Digi International Reports 8% Revenue Increase for Third Fiscal Quarter of 2008 Compared to
Third Fiscal Quarter of 2007
Third Fiscal Quarter of 2007
| • | Revenue and Net Income Per Diluted Share Exceed Street Consensus Estimates | ||
| • | Share Repurchase Authority Raised to 1.5 Million Shares |
(Minneapolis, MN, July 23, 2008) — Digi International® Inc. (NASDAQ: DGII, http://www.digi.com)
reported revenue of $47.0 million for the third fiscal quarter of 2008, compared with $43.5 million
for the third fiscal quarter of 2007, an increase of $3.5 million, or 8.0%. Sarian Systems, Ltd.
was acquired on April 28, 2008; revenue from Sarian-branded products was $2.4 million for the third
fiscal quarter of 2008 from date of acquisition.
Digi reported operating income for the third fiscal quarter of 2008 of $3.0 million on a generally
accepted accounting principles (GAAP) basis and operating income on a non-GAAP basis of $5.2
million for the same period. Net income and net income per diluted share were $2.0 million and
$0.08, respectively, on a GAAP basis, and $3.9 million and $0.15 on a non-GAAP basis for the same
period. See footnotes below.
1
Digi International Reports Third Fiscal Quarter 2008 Results
GAAP Results
| (in thousands, except per share amounts) | Q3 2008 | Q3 2007 | ||||||
Net Sales |
$ | 46,995 | $ | 43,527 | ||||
Operating Income |
$ | 2,985 | $ | 5,098 | ||||
Net Income |
$ | 1,985 | $ | 6,798 | ||||
Net Income per Diluted Share |
$ | 0.08 | $ | 0.26 | ||||
Non-GAAP Results
| (in thousands, except per share amounts) | Q3 2008 | Q3 2007 | ||||||
Operating Income |
$ | 5,230 | (1) | $ | 5,098 | |||
Net Income |
$ | 3,873 | (2) | $ | 3,871 | (3) | ||
Net Income per Diluted Share |
$ | 0.15 | (2) | $ | 0.15 | (3) | ||
| (1) | Non-GAAP operating income for the third fiscal quarter of 2008 excludes a charge for in-process research and development and other acquisition-related expenses totaling $2.2 million. | |
| (2) | Non-GAAP net income and net income per diluted share for the third fiscal quarter of 2008 excludes a charge for in-process research and development of $1.9 million and other acquisition-related expenses of $0.2 million, net of taxes, or $0.08 per diluted share, and a tax benefit of $0.2 million for the reversal of tax reserves, or $0.01 per diluted share. | |
| (3) | Non-GAAP net income and net income per diluted share for the third fiscal quarter of 2007 excludes a tax benefit of $2.9 million for the reversal of tax reserves, or $0.11 per diluted share. |
More detailed reconciliations between GAAP operating income and non-GAAP operating income, and
between GAAP net income and net income per diluted share to non-GAAP net income and net income per
diluted share, are provided below in this earnings release.
“We are pleased with our third quarter 2008 results which overachieved the Street concensus
estimates for both revenue and profitability and we look forward to finishing the year with what we
expect to be another good quarter,” said Joe Dunsmore, Digi’s Chief Executive Officer. “Strong
international growth, fueled by our recent acquisition of Sarian, continues to offset the weakness
that we are currently experiencing in the North American markets.”
Revenue from embedded products in the third fiscal quarter of 2008 was $20.7 million
compared to $18.8
2
Digi International Reports Third Fiscal Quarter 2008 Results
million in the third fiscal quarter of 2007, an increase of $1.9 million, or
10.1%. Revenue from non-embedded products was $26.3 million in the third fiscal quarter of 2008
compared to $24.8 million in the third fiscal quarter of 2007, an increase of 1.5 million, or 6.4%.
Revenue from non-embedded products includes all Sarian-branded revenue of $2.4 million for the
third fiscal quarter of 2008 from date of acquisition.
Revenue in North America was $26.1 million in the third fiscal quarter of 2008 compared to $28.0
million in the third fiscal quarter of 2007, a decrease of $1.9 million, or 6.6%. Revenue in
Europe was $14.5 million in the third fiscal quarter of 2008, including all Sarian-branded revenue
of $2.4 million, compared to $10.7 million in the comparable quarter a year ago, an increase of
$3.8 million, or 36.1%. Revenue in the Asia Pacific region was $5.1 million in the third fiscal
quarter of 2008 compared to $3.8 million in the third fiscal quarter of 2007, an increase of $1.3
million, or 33.0%. Other international revenue was $1.3 million in the third fiscal quarter of
2008, compared to $1.1 million in the comparable quarter a year ago, an increase of $0.2 million,
or 18.5%.
The gross profit margin, as a percentage of net sales, was 52.9% in the third fiscal quarter of
2008 compared to 52.8% in the third fiscal quarter of 2007. The favorable product mix from both
embedded and non-embedded products was offset by a decrease in gross profit margin from
Sarian-branded products which provide lower gross profit margins. In addition, the gross profit
margin was slightly higher than the comparable quarter a year ago due to decreased amortization of
purchased and core technology.
Total operating expenses in the third fiscal quarter of 2008 were $21.9 million, or 46.5% of
revenue, compared to $17.9 million, or 41.1% of revenue, in the third fiscal quarter of 2007. The
increase in operating expenses in the third fiscal quarter of 2008 is primarily due to a charge of
$2.1 million for in-process research and development and other acquisition-related expenses, as
well as incremental ongoing operating expenses for Sarian from the date of acquisition of $0.6
million. In addition, operating expenses increased compared to the third quarter of fiscal 2007 as
a result of Digi’s Drop-In Networking initiative.
Digi reported operating income of $3.0 million, or 6.4% of net sales, in the third fiscal quarter
of 2008 compared to $5.1 million, or 11.7% of net sales, in the third fiscal quarter of 2007.
Operating income for the third fiscal quarter of 2008 was $5.2 million, or 11.1% of net sales,
excluding the charge for in-process research and development and other acquisition-related
expenses.
3
Digi International Reports Third Fiscal Quarter 2008 Results
Net income was $2.0 million in the third fiscal quarter of 2008, or $0.08 per diluted share,
compared to $6.8 million, or $0.26 per diluted share, in the third fiscal quarter of 2007. The
charge of $1.9 million for in-process research and development and other acquisition-related
expenses of $0.2 million, net of tax, reduced net income per diluted share by $0.08 in the third
quarter of fiscal 2008, which was partially offset by a tax benefit of $0.2 million resulting from
the reversal of tax reserves associated with the closure of a prior tax year, equating to an
increase in net income per diluted share of $0.01. In the third fiscal quarter of 2007, Digi
recorded a tax benefit of $2.9 million associated with the closing of a domestic tax return and the
settlement of a foreign tax audit, which allowed for the reversal of previously established tax
reserves equating to $0.11 per diluted share. Net income and net income per diluted share for the
third fiscal quarter of 2008 were $3.9 million, or $0.15 per diluted share, excluding the charges
for in-process research and development and other acquisition-related expenses and the reversal of
tax reserves. Net income and net income per diluted share for the third fiscal quarter of 2007
were $3.9 million, or $0.15 per diluted share, excluding the reversal of tax reserves.
Results for the Nine Months Ended June 30, 2008
For the nine months ended June 30, 2008, Digi reported revenue of $134.6 million compared to
revenue of $128.2 million for the nine months ended June 30, 2007, an increase of $6.4 million or
5.0%. Revenue from embedded products in the first nine months of fiscal 2008 was $63.1 million,
compared to $53.8 million in the first nine months of fiscal 2007, an increase of $9.3 million, or
17.2%. Revenue from non-embedded products, including Sarian-branded products, was $71.5 million in
the first nine months of 2008, compared to $74.4 million in the comparable period in 2007, a
decrease of $2.9 million, or 3.8%.
Revenue in North America was $78.2 million in the first nine months of fiscal 2008 compared to
$83.5 million in the same period a year ago, a decrease of $5.3 million, or 6.4%. Revenue in
Europe, including all Sarian-branded products revenue, was $38.4 million for the first nine months
of fiscal 2008 compared to $30.6 million in the comparable period a year ago, an increase of $7.8
million, or 25.8%. Revenue in the Asia Pacific region was $14.2 million in the first nine months of
fiscal 2008 compared to $11.0 million in the first nine months of fiscal 2007, an increase of $3.2
million, or 29.0%. Other international revenue was $3.8 million in the first nine months of fiscal
2008 compared to $3.1 million in the first nine months of fiscal 2007, an increase of $0.7 million,
or 22.9%.
Digi reported operating income of $11.2 million, or 8.3% of net sales, in the first nine months of
fiscal 2008 compared to $14.1 million, or 11.0% of net sales, in the first nine months of fiscal
2007. Operating income for the first nine months of fiscal 2008 was $13.5 million, or 10.0% of net
sales, excluding the charge for in-process research and development and other acquisition-related
expenses.
For the nine months ended June 30, 2008, Digi reported net income of $8.8 million, or $0.33 per
diluted share, compared to net income for the nine months ended June 30, 2007, of $14.2 million, or
$0.55 per diluted share. Net income and net income per diluted share for
the first nine months of fiscal 2008 were $10.7 million and $0.40, respectively, excluding the
impact of in-process research and development and other acquisition-related expenses, net of taxes,
and the reversal of tax reserves. Net income and net income per diluted share for the first nine
months of fiscal 2007 were $10.8 million and $0.41, respectively, excluding the impact of the
reversal of tax reserves and other discrete income tax benefits.
4
Digi International Reports Third Fiscal Quarter 2008 Results
Digi’s cash and cash equivalents and marketable securities balance, including long-term marketable
securities, was $77.5 million at June 30, 2008, a decrease of $10.1 million over the cash and cash
equivalents and marketable securities balance at September 30, 2007. Digi spent $30.9 million on
the acquisition of Sarian, excluding cash acquired of $3.1 million, during the third quarter of
fiscal 2008. At June 30, 2008, Digi’s current ratio was 6.1 to 1, and the Company had no debt
other than capital lease obligations.
Third Fiscal Quarter 2008 Business Highlights:
Digi continues to expand its wireless Drop-In Networking product family, with several
announcements:
| • | Digi International and TXU Energy partnered with Comverge, Inc., to launch the nation’s first ZigBee-Enabled demand response program over broadband Internet. This technology allows customers to manage their energy consumption over the Internet using a smart thermostat from Comverge. | ||
| • | Digi introduced XBee® sensors — battery powered, long life wireless sensors for easy integration into Drop-in Networking applications or ZigBee networks. This technology allows customers to easily collect real-time data from multiple nodes across a ZigBee network and is ideal for applications in building automation, security, energy management, food management, freight/vehicle monitoring and many more. | ||
| • | Digi again extended its line of Drop-in Networking gateways with the introduction of industrial-grade cellular gateway and wireless adapters. The industrial-grade versions of the ConnectPort™ X4 gateway and XBee® adapters extend performance and reliability in outdoor applications. | ||
| • | With the XBee-PRO® XSC, Digi introduced a powerful, cost-effective 900 MHz embedded RF module that provides up to fifteen miles RF line-of-sight transmission in the postage-stamp sized XBee form factor. The XBee-PRO XSC is ideal for wireless solutions requiring long-range performance in a cost-optimized, easy-to-deploy module solution. |
Other announcements during the quarter included:
| • | Digi acquired Sarian Systems, Limited., a privately held U.K. based corporation and a leader in the European wireless router market. The acquisition extended Digi’s wireless portfolio and solidified the company’s position as a global leader in commercial grade cellular/wireless routers. | ||
| • | Digi CEO Joe Dunsmore was named a winner for the Ernst & Young Entrepreneur of the Year 2008 Award in the Upper Midwest Region. | ||
| • | Sarian Systems, a Digi company, announced that EDF Energy, one of the largest energy companies in the UK, is deploying Sarian’s mobile routing technology to remotely monitor the performance of four hundred of its electricity substations across London and southeast England. | ||
| • | Digi introduced the industry’s first microprocessors, the NS9215 and NS9210, to include Flexible Interface Modules (FIMS) that provide different hardware interfaces based on the needs of the product or application. FIMs reduce product design complexity and cost by cutting the number of electronic components in a product. | ||
| • | Rabbit released an updated version of the Secure Embedded Web Application Kit. The Rabbit® 4000 based-kit combines new security sample programs and software tools, allowing customers to implement web and data security easily into their embedded application. |
5
Digi International Reports Third Fiscal Quarter 2008 Results
| • | Digi announced the release of the low power XBee ZB and extended range XBee-PRO® ZB ZigBee modules based upon the ZigBee PRO feature set. The ZigBee PRO feature set enables deployment of larger, more stable and interoperable ZigBee networks with advanced features. |
Reconciliation Tables:
| Reconciliation of Operating Income to Operating Income excluding In-Process Research and Development and Other | ||||||||||||||||||||||||||||||||
| Acquisition-Related Expenses | ||||||||||||||||||||||||||||||||
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||||||||||
| % of net | % of net | % of net | % of net | |||||||||||||||||||||||||||||
| (In thousands) | 2008 | sales | 2007 | sales | 2008 | sales | 2007 | sales | ||||||||||||||||||||||||
Operating income
for the three
months and nine
months ended June
30 (GAAP basis) |
$ | 2,985 | 6.4 | % | $ | 5,098 | 11.7 | % | $ | 11,237 | 8.3 | % | $ | 14,117 | 11.0 | % | ||||||||||||||||
Purchase accounting
inventory
adjustment included
in cost of sales |
162 | — | 162 | — | ||||||||||||||||||||||||||||
In-process research
and development and
other
acquisition-related
expenses included
in total operating
expenses |
2,083 | — | 2,083 | — | ||||||||||||||||||||||||||||
Operating income
excluding
in-process research
and development and
other
acquisition-related
expenses, net of
taxes (Non-GAAP
basis) |
$ | 5,230 | 11.1 | % | $ | 5,098 | 11.7 | % | $ | 13,482 | 10.0 | % | $ | 14,117 | 11.0 | % | ||||||||||||||||
| Reconciliation of Net Income and Net Income per Diluted Share to Net Income and Net Income per Diluted | ||||||||||||||||||||||||||||||||
| Share, Excluding In-Process Research and Development and Other Acquisition-Related Expenses and Reversal | ||||||||||||||||||||||||||||||||
| of Tax Reserves and Other Discrete Tax Benefits | ||||||||||||||||||||||||||||||||
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||||||||||
| (In thousands, except per share amounts) | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||||||||||||
Net income and net income per common share, diluted
(GAAP basis) |
$ | 1,985 | $ | 0.08 | $ | 6,798 | $ | 0.26 | $ | 8,752 | $ | 0.34 | $ | 14,197 | $ | 0.55 | ||||||||||||||||
Acquisition-related expenses included in cost of sales |
87 | 0.00 | — | 101 | 0.00 | — | ||||||||||||||||||||||||||
In-process research and development and other
acquisition-related expenses included in total
operating expenses |
1,998 | 0.08 | — | 2,015 | 0.08 | — | ||||||||||||||||||||||||||
Reversal of tax reserves and other discrete tax benefits |
(197 | ) | (0.01 | ) | (2,927 | ) | (0.11 | ) | (197 | ) | (0.01 | ) | (3,432 | ) | (0.13 | ) | ||||||||||||||||
Net income and net income per common share, diluted,
adjusted for in-process research and development and
other acquisition-related expenses, net of taxes, and
reversal of tax reserves and other discrete tax
benefits (Non-GAAP basis) |
$ | 3,873 | $ | 0.15 | $ | 3,871 | $ | 0.15 | $ | 10,671 | $ | 0.40 | $ | 10,765 | $ | 0.41 | ||||||||||||||||
6
Digi International Reports Third Fiscal Quarter 2008 Results
Guidance
With respect to both revenue and net
income per diluted share, Digi affirms the current street consensus estimates for the fiscal year
of $184.2 million and $0.40 per diluted share, respectively. In addition, Spectrum Design
Solutions expects to generate approximately $0.6 million in revenue from the date of acquisition.
Spectrum Design
Solutions expects to contribute a net loss of $0.01 to $0.02 per diluted share. The acquisition
of Spectrum was announced in a separate press release today.
Additional 500,000 Share Repurchase Authorization Announced; New Total is 1.5 Million
Shares
Digi also announced that it has added an additional 500,000 shares to its existing 1 million share
repurchase authorization. Joe Dunsmore stated, “We believe our shares are currently undervalued.
Our share repurchase initiative demonstrates our Board’s confidence in our strategy for the company
and our future. Even though it’s been our strategy to utilize our financial resources and strong
cash flow for acquisitions and other growth initiatives, we believe that buying our own shares at
current prices is a sensible and sound move for the benefit of our shareholders.”
Third Fiscal Quarter 2008 Conference Call Details
Digi invites all those interested in hearing management’s discussion of its quarter, on Wednesday,
July 23, 2008 after market close at 5:00 p.m. EDT (4:00 p.m. CDT), to join the call by dialing
(866) 202-1971 and entering passcode 12573847. International participants may access the call by
dialing (617) 213-8842 and entering passcode 12573847. A replay will be available two hours after
the completion of the call, and for one week following the call, by dialing (888) 286-8010 for
domestic participants or (617) 801-6888 for international participants and entering access code
28469204 when prompted. Participants may also access a live webcast of the conference call through
the investor relations section of Digi’s website, www.digi.com.
About Digi International
Digi International, based in Minneapolis, is the leader in device networking for business. Digi
develops reliable products and technologies that enable companies to connect and securely manage
local or remote electronic devices over the network or via the web.
Forward-Looking Statements
This press release contains statements that constitute “forward-looking statements” 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, which generally can be identified by the use of forward-looking
terminology such as “anticipate,” “believe,” “target,” “estimate,” “may,” “will,” “expect,” “plan,”
“project,” “should,” or “continue” or the negative thereof or other variations thereon or similar
terminology. Such statements are based on information available to management as of the time of
such statements and relate to, among other things, expectations of the business environment in
which the Company operates, projections of future performance, perceived opportunities in the
market and statements regarding the Company’s mission and vision. Such statements are not
guarantees of future performance and involve certain risks, uncertainties and assumptions,
including risks related to the highly competitive market in which the Company operates, rapid
changes in technologies that may displace products sold by the Company, declining prices of
networking products, the Company’s reliance on distributors, delays in the Company’s
product development efforts, uncertainty in consumer acceptance of
7
Digi International Reports Third Fiscal Quarter 2008 Results
the Company’s products,
continued or increasing weakness in North America and developing weakness in other regions due to
changes in economic conditions, and changes in the Company’s level of revenue or profitability.
These and other risks, uncertainties and assumptions identified from time to time in the Company’s
filings with the Securities and Exchange Commission, including without limitation, its annual
report on Form 10-K for the year ended September 30, 2007 and its quarterly reports on Form 10-Q,
could cause the Company’s future results to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Many of such factors are beyond the
Company’s ability to control or predict. These forward-looking statements speak only as of the date
for which they are made. The Company disclaims any intent or obligation to update publicly any
forward-looking statements, whether as a result of new information, future events or otherwise.
This release includes non-GAAP operating income, non-GAAP net income and earnings per diluted share
data.
Management understands that there are material limitations on the use of non-GAAP measures.
Non-GAAP measures are not substitutes for GAAP measures, such as operating income or net income,
for the purpose of analyzing financial performance. The disclosure of these measures does not
reflect all charges and gains that were actually recognized by the Company. These non-GAAP
measures are not in accordance with, or an alternative for measures prepared in accordance with,
generally accepted accounting principles and may be different from non-GAAP measures used by other
companies. In addition, these non-GAAP measures are not based on any comprehensive set of
accounting rules or principles. Digi believes that non-GAAP measures have limitations in that they
do not reflect all of the amounts associated with Digi’s results of operations as determined in
accordance with GAAP and that these measures should only be used to evaluate Digi’s results of
operations in conjunction with the corresponding GAAP measures.
Digi believes that providing operating income and net income and earnings per diluted share
exclusive of the impact of in-process research and development and other acquisition-related
expenses, and the impact of the reversal of tax reserves and other discrete tax benefits permits
investors to compare results with prior periods that did not include these items. Management uses
the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends
and to gain an understanding of the comparative operating performance of the Company. In addition,
shareholders in the Company have expressed an interest in seeing financial performance measures
exclusive of the impact of decisions relating to acquisitions and taxes, which while important are
not central to the core operations of Digi’s business.
Investor Contacts:
S. (Kris) Krishnan
Digi International
952-912-3125
Email: S. (Kris) Krishnan
S. (Kris) Krishnan
Digi International
952-912-3125
Email: S. (Kris) Krishnan
Erika Moran
The Investor Relations Group
212-825-3210
Email: The Investor Relations Group
The Investor Relations Group
212-825-3210
Email: The Investor Relations Group
For more information, visit Digi’s Web site at www.digi.com, or call 877-912-3444 (U.S.) or
952-912-3444 (International).
8
Digi International Reports Third Fiscal Quarter 2008 Results
Digi International Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Net sales |
$ | 46,995 | $ | 43,527 | $ | 134,639 | $ | 128,193 | ||||||||
Cost of sales (exclusive of amortization of purchased
and core technology shown separately below) |
21,200 | 19,392 | 59,729 | 57,257 | ||||||||||||
Amortization of purchased and core technology |
938 | 1,132 | 2,981 | 3,409 | ||||||||||||
Gross profit |
24,857 | 23,003 | 71,929 | 67,527 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
9,493 | 8,517 | 27,213 | 25,102 | ||||||||||||
Research and development |
6,995 | 6,039 | 20,113 | 18,079 | ||||||||||||
General and administrative |
2,994 | 2,688 | 9,711 | 8,243 | ||||||||||||
Intangibles amortization |
490 | 661 | 1,755 | 1,986 | ||||||||||||
Acquired in-process research and development |
1,900 | — | 1,900 | — | ||||||||||||
Total operating expenses |
21,872 | 17,905 | 60,692 | 53,410 | ||||||||||||
Operating income |
2,985 | 5,098 | 11,237 | 14,117 | ||||||||||||
Interest income, net |
712 | 855 | 2,760 | 2,385 | ||||||||||||
Income before income taxes |
3,697 | 5,953 | 13,997 | 16,502 | ||||||||||||
Income tax provision |
1,712 | (845 | ) | 5,245 | 2,305 | |||||||||||
Net income |
$ | 1,985 | $ | 6,798 | $ | 8,752 | $ | 14,197 | ||||||||
Net income per common share, basic |
$ | 0.08 | $ | 0.27 | $ | 0.34 | $ | 0.56 | ||||||||
Net income per common share, diluted |
$ | 0.08 | $ | 0.26 | $ | 0.33 | $ | 0.55 | ||||||||
Weighted average common shares, basic |
25,742 | 25,294 | 25,683 | 25,186 | ||||||||||||
Weighted average common shares, diluted |
26,079 | 26,152 | 26,353 | 26,032 | ||||||||||||
9
Digi International Reports Third Fiscal Quarter 2008 Results
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
(In thousands)
(Unaudited)
| June 30, 2008 | September 30, 2007 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 16,751 | $ | 18,375 | ||||
Marketable securities |
52,877 | 67,111 | ||||||
Accounts receivable, net |
26,032 | 21,022 | ||||||
Inventories |
28,529 | 26,130 | ||||||
Other |
4,885 | 4,961 | ||||||
Total current assets |
129,074 | 137,599 | ||||||
Marketable securities, long-term |
7,921 | 2,081 | ||||||
Property, equipment and improvements, net |
15,382 | 19,987 | ||||||
Identifiable intangible assets, net |
32,951 | 24,214 | ||||||
Goodwill |
82,831 | 66,817 | ||||||
Restricted cash — non-current |
421 | — | ||||||
Other |
1,035 | 1,128 | ||||||
Total assets |
$ | 269,615 | $ | 251,826 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Capital lease obligations, current portion |
$ | 278 | $ | 379 | ||||
Accounts payable |
10,667 | 6,554 | ||||||
Accrued compensation |
5,015 | 7,080 | ||||||
Other accrued expenses |
3,982 | 4,727 | ||||||
Income taxes payable |
1,183 | 3,156 | ||||||
Total current liabilities |
21,125 | 21,896 | ||||||
Capital lease obligations, net of current portion |
135 | 358 | ||||||
Net deferred tax liabilities |
7,596 | 6,667 | ||||||
Income taxes payable — long-term |
3,983 | — | ||||||
Deferred gain on building sale — leaseback |
1,120 | — | ||||||
Total liabilities |
33,959 | 28,921 | ||||||
Total stockholders’ equity |
235,656 | 222,905 | ||||||
Total liabilities and stockholders’ equity |
$ | 269,615 | $ | 251,826 | ||||
10
Digi International Reports Third Fiscal Quarter 2008 Results
Digi International Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Three months ended | Nine months ended | |||||||
| June 30, 2008 | June 30, 2008 | |||||||
Operating activities: |
||||||||
Net income |
$ | 1,985 | $ | 8,752 | ||||
Adjustments to reconcile net income to
net cash provided by operating activities: |
||||||||
Depreciation of property, equipment and improvements |
601 | 1,894 | ||||||
Amortization of identifiable intangible assets and other assets |
1,534 | 5,033 | ||||||
Gain on sale of property, equipment and improvements |
26 | (94 | ) | |||||
Excess tax benefits from stock-based compensation |
(12 | ) | (177 | ) | ||||
Stock-based compensation |
926 | 2,702 | ||||||
Deferred income taxes |
(776 | ) | (2,696 | ) | ||||
In-process research and development |
1,900 | 1,900 | ||||||
Other |
70 | 222 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
206 | (2,903 | ) | |||||
Inventories |
(172 | ) | (924 | ) | ||||
Other assets |
16 | 253 | ||||||
Accounts payable and accrued expenses |
(1,134 | ) | (156 | ) | ||||
Income taxes payable |
524 | 1,221 | ||||||
Net cash provided by operating activities |
5,694 | 15,027 | ||||||
Investing activities: |
||||||||
Purchase of held-to-maturity marketable securities |
(5,582 | ) | (57,273 | ) | ||||
Proceeds from maturities of held-to-maturity marketable securities |
18,486 | 65,667 | ||||||
Acquisition of Sarian, Inc., net of cash acquired |
(27,811 | ) | (27,811 | ) | ||||
Contingent purchase price payments related to business acquisitions |
— | (1,315 | ) | |||||
Increase in restricted cash — non-current |
— | (392 | ) | |||||
Proceeds from the sale of property, equipment, improvements |
421 | 6,915 | ||||||
Purchase of property, equipment, improvements and certain
other intangible assets |
(659 | ) | (2,567 | ) | ||||
Net cash provided by (used in) investing activities |
(15,145 | ) | (16,776 | ) | ||||
Financing activities: |
||||||||
Payments on capital lease obligations |
(105 | ) | (293 | ) | ||||
Borrowing on note payable |
25,000 | 25,000 | ||||||
Payment on note payable |
(25,000 | ) | (25,000 | ) | ||||
Excess tax benefits from stock-based compensation |
12 | 177 | ||||||
Proceeds from stock option plan transactions |
43 | 1,679 | ||||||
Proceeds from employee stock purchase plan transactions |
454 | 802 | ||||||
Net cash provided by financing activities |
404 | 2,365 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(1,337 | ) | (2,240 | ) | ||||
Net increase in cash and cash equivalents |
(10,384 | ) | (1,624 | ) | ||||
Cash and cash equivalents, beginning of period |
27,135 | 18,375 | ||||||
Cash and cash equivalents, end of period |
$ | 16,751 | $ | 16,751 | ||||
11