Digi International
Making Wireless M2M Easy
Annual Report
Annual Report
www.digi.com
www.digi.com
20112011 “Digi is focused on being the leader in providing communications from
any device, anywhere, to any application anywhere. We believe the
‘Internet of Anything’ is a very exciting long-term growth market.”
Joe Dunsmore
Stockholder and Investor Information
Stock Listing
Stock Listing
The Company’s Common Stock trades on the
NASDAQ Global Select tier of the NASDAQ Stock
Market LLC under the symbol DGII.
High and low sale prices for each quarter during the
years ended September 30, 2011 and 2010, as reported
on the NASDAQ Stock Market LLC, were as follows:
Stock Prices
2011 first
second
High $11.62 $ 12.42
$ 9.29
Low
$ 9.29
third
$ 13.43
$ 9.41
fourth
$ 15.39
$ 10.94
2010 first
High $9.57
$6.99
Low
second
$ 12.32
$ 8.87
third
$ 11.48
$ 7.86
fourth
$ 9.55
$ 7.29
Dividend Policy
The Company has never paid cash dividends on its
Common Stock. The Board of Directors presently
intends to retain all earnings for use in the Company’s
business and does not anticipate paying cash dividends
in the foreseeable future.
The Company does not have a Dividend Reinvestment
Plan or a Direct Stock Purchase Plan.
Stockholder Information
Transfer Agent and Registrar
Wells Fargo Bank of Minnesota, N.A.
Wells Fargo Shareowners Services
161 N. Concord Exchange Street
South St. Paul, MN 55075
651-450-4064
800-468-9716
Legal Counsel
Faegre & Benson LLP
2200 Wells Fargo Center
Minneapolis, MN 55402-3901
Independent Public Accountants
PricewaterhouseCoopers LLP
225 South Sixth Street, Suite 1400
Minneapolis, MN 55402
Annual Meeting
The Company’s Annual Meeting of Stockholders will
be held on Monday, January 23, 2012, at 3:30 p.m.,
at the Marriott Southwest, 5801 Opus Parkway,
Minnetonka, Minnesota.
Investor Relations
A copy of the Company’s Form 10-K, filed with the
Securities and Exchange Commission, is available free
upon request. Contact:
Investor Relations Administrator
Digi International Inc.
11001 Bren Road East
Minnetonka, MN 55343
952-912-DIGI
ir@digi.com
To Our Stockholders,
Fiscal 2011 was another solid year for Digi financially. Revenue was $204.2 million for the year compared
to $182.5 million in fiscal 2010, an increase of $21.7 million, or 11.8%. Net income for the year was $11.0
million, or $0.43 per diluted share, compared to net income of $8.9 million, or $0.36 per diluted share, in fiscal
2010, an increase of $2.1 million, or 23.2%.
A further recap of our performance in the past fiscal year, as well as our strategy and outlook for the future are
summarized in the categories below:
1. Leverage Revenue Growth, Especially Across Key Vertical Markets, to Drive Increased Profitability
2. Become a Device Cloud Leader
3. Further Expand Strategic Relationships with Equipment Manufacturers, Applications Providers and
Systems Integrators
1. Leverage Revenue Growth, Especially Across Key Vertical Markets, to Drive Increased Profitability
We recorded revenue growth of 11.8% in fiscal 2011 compared to 10.0% in fiscal 2010. Revenue increased
in all regions compared to the prior fiscal year, despite a tumultuous economic environment both domestically
and abroad. We continued our focus on four key vertical markets that we believe will provide potential for
significant growth: energy, fleet, medical and tank. Our wireless drop-in networking solution set of gateways
and endpoint products, complemented by our iDigi® Device Cloud™ and wireless design services have allowed
large lead customers in our targeted vertical markets to accelerate their deployment and time to market. Our
wireless revenue increased by $18.3 million to $84.7 million, and represented 41.5% of our total revenue in
fiscal 2011, compared to 36.3% of total revenue in fiscal 2010. We anticipate that wireless revenue will grow
and exceed 47% of our total revenue in fiscal 2012.
We have established strong organic growth momentum for the business over the past two years with revenue
growth of 10% in 2010 and 11.8% in 2011, and we expect strong organic growth to continue. More
importantly, I continue to feel strongly that Digi is positioned to benefit from the longer term trends that we are
seeing in the wireless machine-to-machine (M2M) space. We continue to see barriers to deployment reducing at
all levels in the M2M value chain. Ericsson, the leading global infrastructure provider and a thought leader in
M2M, has said that connected devices will grow from 5 billion today to over 50 billion in 2020. I believe that
current market forces will cause acceleration of the growth curve to begin within the next one to three years
and Digi is very well positioned to play a major role in this market. We are confident that our ability to provide
complete wireless networking solutions, combined with Digi’s brand reputation of quality, reliability and strong
customer support, will allow us to be well positioned to take advantage of this tremendous potential for growth.
In addition to growing sales momentum, we also are focused on improving our gross margins through cost
reduction initiatives and reducing our expense to revenue ratios. During fiscal 2011 gross margin improved to
52.2% from 50.5% in fiscal 2010. We engaged outside resources to help us improve supply chain management
and apply lean manufacturing principles to strengthen our inventory turns, lead time and on time shipments
metrics. We also announced plans to consolidate our Breisach, Germany manufacturing operations with our
U.S. production facility in order to centralize outsourced production control in our U.S. production facility and
as a cost savings measure. Our total operating expenses as a percent of revenue improved to 43.9% in fiscal
2011 compared to 45.0% in fiscal 2010, due to good cost control and revenue growth. We reduced our expense
to revenue ratio in fiscal 2011 despite the full reinstatement of our incentive compensation program during the
year. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $25.5 million, or 12.5% of
revenue in fiscal 2011 compared to $20.4 million, or 11.2% of revenue in fiscal 2010, an increase of 25%.
To summarize, we expect to continue to grow sales and leverage our revenue growth by improving our gross
margins and reducing our expense to revenue ratios to drive profitability.
2. Become a Device Cloud Leader
During fiscal 2011 we invested significantly in the development of our iDigi Device Cloud platform as well as
our ability to develop software applications that can leverage the power of iDigi. The iDigi Device Cloud is the
wireless M2M industry’s premier platform for connecting anything, anywhere to any application, anywhere.
It leverages Digi’s 25-plus years of tribal knowledge in device networking to fundamentally bring down the
cost and deployment barriers for M2M application providers. Our go-to-market approach in our key vertical
markets leverages our device connectivity suite of products and capabilities with iDigi cloud services, providing
application providers with unprecedented ability to access to any sensor, device, machine or asset (anything).
Further, we now have the capacity in-house to develop customized software applications for businesses that
want to leverage the power of data that can be pulled from their electronic devices and utilize iDigi. We finished
2011 with over 3,000 companies using the iDigi Device Cloud. Going forward we are excited about our
capacity to now deliver end-to-end solutions for customers as opposed to sales of hardware alone.
3. Further Expand Strategic Relationships with Equipment Manufacturers, Applications Providers and
Systems Integrators
We believe the cost and complexity to deploy connected devices has decreased. We are well positioned to
capitalize on an expanding opportunity for our products and services with not only our customers but also
our strategic partners. As the marketplace for M2M connectivity solutions continues to expand, we believe
there will be more opportunities for us to increase the number of strategic relationships we maintain with
equipment vendors, telecommunications service providers and systems integrators. Like many of our customers,
our strategic partners are also seeing a greater number of opportunities to deploy network enabled devices
and solutions to service their customers and end users. We believe that we are able to create a unique value
proposition by providing a complete end-to-end solution that includes device connection products, cloud
services and wireless design services. We intend to focus more of our sales resources on our existing and
potential strategic sales relationships as we leverage our ability to provide a greater breadth of product and
solutions offerings.
The Digi team shares my enthusiasm as we near the inflection point in wireless M2M connectivity to connect
anything, anywhere.
Joseph T. Dunsmore
Chairman, President and Chief Executive Officer
The following appendix contains further information and a reconciliation to the most directly comparable GAAP
financial measure for earnings before interest, taxes, depreciation and amortization (EBITDA). Digi 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 our results of operations as determined in accordance with GAAP and that these measures should
only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
Additionally, Digi understands that EBITDA does not reflect our cash expenditures, the cash requirements for the
replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital
needs.
Management believes that the presentation of EBITDA as a percentage of net sales is useful to investors because it
provides a reliable and consistent approach to measuring our performance from year to year and in assessing
Digi’s performance against that of other companies. Management believes that such information helps investors
compare operating results and corporate performance exclusive of the impact of Digi’s capital structure and the
method by which assets were acquired. EBTDA, a variant of EBITDA, was also used by management in both fiscal
years 2011 and 2010 as a metric for executive compensation, as well as incentive compensation for the rest of the
employee base, and it is monitored quarterly for these purposes.
The following table reconciles net income to income before interest, taxes, depreciation and amortization for fiscal
years 2011 and 2010 (in thousands):
For the twelve months ended September 30, 2011 % of net sales For the twelve months ended September 30, 2010 % of net sales Net sales204,160$ 100.0%182,548$ 100.0%Net income11,019 5.4%8,941 4.9%Interest income, net(165) -0.1%(217) -0.1%Income tax provision 5,496 2.7%1,578 0.9%Depreciation and amortization9,177 4.5%10,133 5.6%Earnings before interest, taxes, depreciation, and amortization 25,527$ 12.5%20,435$ 11.2%**Percentages presented may not add due to use of rounded numbers.Reconciliation of Net Income to Earnings Before Interest, Taxes, Depreciation and Amortization(In thousands of dollars)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM 10-K
_________________________________________
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 2011
OR
( )
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)
Delaware
(State or other jurisdiction of
incorporation or organization)
41-1532464
(I.R.S. Employer
Identification Number)
11001 Bren Road East
Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
(952) 912-3444
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.01 per share
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 No
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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller Reporting Company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of voting stock held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently
completed second fiscal quarter was $264,853,102 based on a closing price of $10.56 per common share as reported on the NASDAQ Global Select
Market.
Shares of common stock outstanding as of November 17, 2011: 25,641,647
Portions of the Registrant’s Proxy Statement for its 2012 Annual Meeting of Stockholders are incorporated by reference into Part III hereto.
DOCUMENTS INCORPORATED BY REFERENCE
PART I.
ITEM IN FORM 10-K
PAGE/REFERENCE
INDEX
Business .................................................................................................................... 3
Risk Factors .............................................................................................................. 15
Unresolved Staff Comments ..................................................................................... 23
Properties .................................................................................................................. 24
Legal Proceedings ..................................................................................................... 25
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ................................................................ 26
Selected Financial Data............................................................................................. 28
Management’s Discussion and Analysis of Financial Condition and
Results of Operations ................................................................................................ 29
Quantitative and Qualitative Disclosures About Market Risk .................................. 45
Financial Statements and Supplementary Data ......................................................... 46
Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.................................................................................................. 77
Controls and Procedures ........................................................................................... 77
Other Information ..................................................................................................... 77
Directors, Executive Officers and Corporate Governance ....................................... 78
Executive Compensation .......................................................................................... 79
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ..................................................................................... 79
Certain Relationships and Related Transactions, and Director Independence ......... 79
Principal Accounting Fees and Services ................................................................... 79
ITEM 1.
ITEM 1A
ITEM 1B.
ITEM 2.
ITEM 3.
PART II.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV.
ITEM 15.
Exhibits, Financial Statement Schedules ................................................................. 80
2
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report 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 us as of the time of such statements and relate to, among other
things, expectations of the business environment in which we operate, projections of 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 update
or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Our future operating results and performance trends may be affected by a number of factors, including, without
limitation, those described in Item 1A, Risk Factors, of this Form 10-K. 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.
ITEM 1. BUSINESS
General Background and Product Offerings
Digi International Inc. (“Digi”, “we”, “our” or “us”) was incorporated in 1985 as a Minnesota corporation. We
were reorganized as a Delaware corporation in 1989 in conjunction with our initial public offering. Our
common stock is traded on the NASDAQ Global Select Market under the symbol DGII. Our World
Headquarters is located at 11001 Bren Road East, Minnetonka, Minnesota 55343. Our telephone number is
(952) 912-3444.
We are a leading provider of machine to machine (M2M) networking products and solutions that enable the
connection, monitoring and control of local or remote physical assets by electronic means. These networking
products and solutions connect communication hardware to a physical asset so that information about the
asset’s status and performance can be sent to a computer system and used to improve or automate one or more
processes. Increasingly these products and solutions are deployed via wireless networks. This is because the
business or institution seeking to monitor or control a remote physical asset may not have access to the site
where it is located or may not have economical access to a wired network. Our hardware products have been
the historical foundation of our business. In 2009, we introduced a cloud-based internet platform (iDigi® )
which our customers can utilize to monitor and control electronic devices.
Our products are deployed by a wide range of businesses and institutions. We focus a significant amount of our
development, sales and marketing efforts on four vertical markets that represent significant opportunities to
expand our business: energy monitoring and management, fleet vehicle tracking, medical monitoring and
reporting and storage tank monitoring and control.
3
ITEM 1. BUSINESS (CONTINUED)
Our hardware product net sales represented 95.5%, 96.7% and 97.0% of our total net sales in fiscal 2011, 2010
and 2009, respectively. Our non-product revenue, which represented 4.5%, 3.3% and 3.0% of our total net sales
in fiscal 2011, 2010 and 2009, respectively, primarily includes wireless product design and development
services. We also have revenues from cloud-based services, post-contract customer support, fees associated
with technical support, training, royalties and the sale of software licenses.
Our suite of products and solutions primarily includes:
Embedded and non-embedded hardware products and related software solutions which have been the
historical foundation of our business. We report our results based on these two product categories
(including services and software offerings, which are included in our embedded product category
because they do not represent a significant portion of our overall sales at this time):
An embedded product is incorporated by a product developer into an electronic device such as a
utility meter, an environmental sensor or a medical instrument to provide processing power and
wired or wireless connectivity to the device. In order to be properly integrated into the device our
product normally requires some custom hardware and/or software development. Examples of
embedded products include: modules, single board computers, chips and software and development
tools.
A non-embedded product is connected externally to a device or larger system to provide network
connectivity or port expansion. Our non-embedded products often require no additional hardware
development, but often are designed to permit the addition of customized software. Non-embedded
products provide an economical way to network-enable previously deployed electronic devices.
Examples of non-embedded products include: cellular products, console servers, serial cards, serial
servers, USB connected products and wireless communication adaptors.
Wireless product design and development services to provide customers turn-key wireless networking
products that can use a wide range of wireless technology platforms. These services are reported under
our embedded product category.
The iDigi® M2M cloud-based service. iDigi® enables customers to connect enterprise applications to
remote electronic devices. This allows for devices to be monitored and controlled remotely and lets
customers easily collect, interpret and utilize data from many devices to operate their businesses more
efficiently. iDigi® sales are reported under our embedded product category.
For more in-depth descriptions of our primary hardware product sets, please refer to the heading “Listing of
Principal Products” at the end of Part I. Item 1. of this report on Form 10-K.
Our corporate website address is www.digi.com. In the About Us - Investor Relations section of our website,
we make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
any amendments to these reports available free of charge as soon as reasonably practicable after these reports
are filed with or furnished to the United States Securities and Exchange Commission (the “SEC”). Each of
these documents can also be obtained free of charge (except for a reasonable charge for duplicating exhibits to
our reports on Form 10-K, 10-Q or 8-K) in print by any stockholder who requests them from our investor
relations personnel. The Investor Relations email address is ir@digi.com and its mailing address is: Investor
4
ITEM 1. BUSINESS (CONTINUED)
Relations Administrator, Digi International Inc., 11001 Bren Road East, Minnetonka, Minnesota 55343. These
reports can also be accessed via the SEC website, www.sec.gov, or via the SEC’s Public Reference Room
located at 100 F Street, N.E., Washington, D.C. 20549. Information concerning the operation of the SEC’s
Public Reference Room can be obtained by calling 1-800-SEC-0330.
Information on our website is not incorporated by reference into this report or any other report we file with or
furnish to the SEC.
Industry and Marketplace Conditions
Long-Term Growth Prospects
We believe the marketplace for M2M networking products and applications is poised for significant long-term
growth. We also believe our company is well positioned to capitalize on this potential growth given the depth
of our experience and expertise in developing M2M networking products and solutions. We expect there to be
significant growth opportunities for our historical hardware business. We expect hardware that supports
wireless networking connections to be the focal point of this growth. Further, for us to fully participate in the
overall growth of M2M networking solutions, we will need to focus a considerable amount of our resources on
the development and sale of software applications and solutions. We expect the M2M networking marketplace
will attract a wide range of competitors, many of whom likely will have significantly more resources and
operational scale than us.
We believe M2M networking is poised for significant long-term growth for two primary reasons:
The cost of connecting devices, sensors, machines, or other assets has dropped dramatically over the
past several years; and
Businesses and institutions want and need to operate more efficiently and productively in a competitive
global marketplace.
With tens of billions of electronic devices deployed around the world, we believe the capacity of organizations
to conduct more efficient operations by gathering and analyzing data is immense. The willingness of
organizations to deploy networking products and applications to capture and analyze that data will depend on
how efficiently these networking solutions can be deployed and maintained. We therefore believe a critical
element in our ability to grow our business will be whether we can continue to effectively develop and market
M2M networking products and solutions at price points that can provide customers with demonstrable return on
their investment.
Short-Term Impacts of Global Macro-Economic Conditions
While we believe the long-term prospects for M2M networking are strong, we also feel this marketplace is
susceptible to downturns in general economic conditions. Sales cycles for networking equipment and solutions
can be long and require significant expenditures from customers. In turn, the willingness of customers to make
purchases in times of economic or regulatory uncertainty can be compromised. For instance, in the recent
period of economic volatility we have noticed that energy utilities have delayed deployment of networking
solutions that might upgrade the ability to manage energy usage. Similarly, we believe the regulatory
uncertainty that surrounds the medical industry could also result in deployment delays of networking solutions,
some or all of which may involve our products and solutions.
5
ITEM 1. BUSINESS (CONTINUED)
Strategy
Long-Term Goal
Our long-term goal is to be the leading global provider of wireless M2M networking products and end-to-end
solutions that enable electronic devices to be provisioned, maintained, monitored, analyzed and managed
remotely. We consider end-to-end capabilities to require the following components:
design services which develops the customers’ need into a hardware design suitable for the task;
the production of prototypes testing and certification (if required) to ready the device for market;
assistance in connecting the devices to the customers’ application, or, if needed, develop an application
for the customer; and
production and support of the final product.
To achieve this goal we intend to:
continue to develop, manufacture and market a wide range of hardware products that have been the
historical backbone of our business since its inception; and
expand and enhance our deployment of software applications and cloud-based platform solutions that
enable electronic devices to interface with business applications.
Current Business Initiatives
We are particularly focused on the following strategic business initiatives, each of which is designed to advance
our long-term goal:
1. Continued delivery of products and solutions to the following four vertical markets that we believe
promise extensive growth opportunities: energy, fleet, medical and tank monitoring;
2. The enhanced development of software applications, services and our iDigi® cloud-based platform and
a migration of sales and marketing efforts towards end-to-end solutions as opposed to sales of hardware
products alone; and
3. The further expansion of strategic relationships with leading manufacturers, application providers and
systems integrators.
Vertical Sales Markets. We are focused on further expanding our sales in the energy, fleet, medical and tank
monitoring vertical markets. We believe each of these markets possesses the potential for significant long-term
growth. We believe our sales growth in these areas may come from internal initiatives to expand our product
offerings through research and development, through added sales and marketing resources or from acquisitions
of new businesses, products or sales channels that are related to our current product and solutions offerings.
Energy – Our solutions provide connectivity, control and support of devices in the energy industry to
improve its efficiency, security and reliability. Our products are deployed in applications that include
renewable energy sources and utilities such as gas, water and electric. Migrating to IP-based network
communications can be a challenge for utility companies, due to compatibility issues between field
equipment and the applications available to monitor and manage them. Our solutions enable companies
to network-enable existing products in the field without replacing hardware or rewriting existing
application software. Among other uses, our products are deployed in Automated Meter Reading
(AMR), Automated Meter Intelligence (AMI), Energy Management Services, Distribution Automation
and other smart energy applications. Using our gateways and modules and the iDigi® platform, end
6
ITEM 1. BUSINESS (CONTINUED)
users of energy also can be actively engaged with energy producers through devices in their homes or
offices such as meters and in-home displays.
Fleet – Our solutions improve efficiency, reduce costs and meet government regulations for connecting,
tracking, monitoring and managing fleets of vehicles and containers. We provide equipment and
applications primarily focused on long-haul trucking, but extending to other areas of public and private
fleets, including taxis, public transit, emergency service vehicles, heavy equipment and others.
Applications also include container tracking, logistical tracking, stolen vehicle recovery, and recording
driver behavior metrics.
Medical – Our solutions provide a way to enable medical equipment and devices to receive, monitor,
control and report patient information quickly, easily, and accurately. They utilize the hospital’s
existing Ethernet or wireless network and improve patient care and reduce operating costs.
Tank – We provide solutions for remote monitoring and control of storage tanks that contain liquids,
solids and gases. Tank monitoring can reduce supply chain costs by insuring tank-stored inputs to
various processes are available and of necessary quality. Our solutions utilize our wired and wireless
communication gateways, ZigBee modules and adapters to enable the transmission of data. The iDigi®
platform also provides management, messaging and storage services to connect tanks with customized
tank management software applications.
Enhanced Development and Sales of Services and the iDigi® Platform. Historically our hardware devices were
utilized by customers with specific device connectivity needs – often using wired as opposed to wireless
connections. Over time, more and more of our customers have sought broader based wireless solutions that link
numerous devices in various locations to software applications that enable them to monitor, control and analyze
device performance remotely. In turn we have evolved our capacity to deliver these solutions.
We believe the business potential associated with delivering end-to-end wireless solutions is significant.
Through the use of our iDigi® platform, we can derive recurring revenue streams that are not normally
associated with sales of hardware. If we want to remain a leader in M2M networking solutions, we believe we
must continue to evolve our capabilities to develop and sell software applications as well as our iDigi® cloud-
based networking platform.
While we are pleased with our progress our evolution into a company that sells both hardware and software
solutions and related services presents challenges. For instance, sales of end-to-end solutions often involve
more interactions with different functions and individuals within our customers’ organizations than sales of our
hardware products. The product development demands and customer support requirements also are different.
In order to evolve our business to meet these challenges, we likely will expend more research and development
resources on this initiative relative to the level of sales these solutions presently represent in our business. We
also may find it appropriate to acquire businesses, solution sets or sales channels in an effort to expand our
capabilities and accelerate our growth.
Further Expansion of Strategic Relationships. We have established relationships with many of the world’s
largest equipment vendors. We have strategic sales relationships with leading vendors, allowing them to ship
our products and services as component parts of their overall solutions. These vendors include, among others,
Comverge, Inc., Xata and Itron. Many of the world’s leading telecommunications companies and Internet
service providers also rely on our products, including AT&T Inc., Sprint Nextel Corp., Verizon
Communications Inc. and Siemens AG.
7
ITEM 1. BUSINESS (CONTINUED)
As the marketplace for M2M connectivity solutions continues to expand, we believe there will be more
opportunities for us to expand the number of strategic relationships we maintain with equipment vendors,
telecommunications service providers and systems integrators and to broaden their scope. Like many of our
customers, our strategic partners are also seeking to deploy more “intelligent” network enabled devices and
broader based end-to-end solutions to service their customers and end users. We therefore intend to focus more
of our sales resources to further leverage our evolving expertise to provide a greater breadth of product and
solutions offerings to our existing and potential strategic sales relationships.
Acquisitions
We have completed several acquisitions in the past five fiscal years that are consistent with our corporate
strategy.
In April 2008, we acquired Sarian Systems, Ltd. (Sarian), a leader in the European wireless router
market. Sarian designs and develops advanced wireless/cellular IP-based routing equipment for
mission critical applications. Sarian developed its own comprehensive IP-based operating system and
software and can offer customers technical excellence, flexibility and rapid customization. Sarian had a
strong customer base in ATM connectivity, retail and payment systems connectivity, remote monitoring
telemetry, lottery terminal connectivity and wireless backup of wired broadband connections.
In July 2008, we acquired Spectrum Design Solutions, Inc. (Spectrum), a leading design services
organization. Spectrum is a wholly owned subsidiary of Digi International Inc. Spectrum focuses on
solving a customer’s wireless development challenges. Spectrum’s engineers have extensive
experience in wireless technologies such as Global System for Mobile communication (GSM), Code
Division Multiple Access (CDMA), Global Positioning System (GPS), Wi-Fi and proprietary radio
frequency (RF) as well as Application Specific Integrated Circuit (ASIC) design, Field Programmable
Gate Array (FPGA) integration, embedded software and complete turn-key product development which
allows them to address virtually any wireless development need.
In June 2009, we acquired substantially all the assets of MobiApps Holdings Private Limited
(MobiApps), a developer of 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, we acquired the U.S. assets located in Herndon, Virginia. In
addition, we established two subsidiaries, 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.
Sales Channels
We sell our products through a global network of distributors, systems integrators, value added resellers
(VARs) and to original equipment manufacturers (OEMs).
Distributors
Our larger distributors, based on sales we make to them, include Synnex, Arrow Electronics, Inc./NuHorizons,
Ingram Micro, Tech Data Corporation, Future Electronics, Miel, Atlantik Elektronik GmbH, and Express
Systems & Peripherals. We also maintain relationships with many other distributors in the U.S., Canada,
Europe, Asia and Latin America. Additionally, we maintain strong relationships with catalog distributors such
as CDW, Insight, Digi-Key and Mouser Electronics.
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ITEM 1. BUSINESS (CONTINUED)
Strategic Sales Relationships and Partnerships
We maintain strategic alliances with other industry leaders to develop and market technology solutions. These
include many major communications hardware and software vendors, operating system suppliers, computer
hardware manufacturers, cellular carriers and Smart Grid vendors. Among others, key partners include:
VMware, Ember, Freescale, Qualcomm, Ericsson, Itron, AT&T, Sprint, Verizon, Bell Mobility, Rogers and
several other cellular carriers worldwide. Furthermore, we maintain a worldwide network of authorized
developers that extends our reach into certain other technology applications and geographical regions.
Our customer base includes some of the world’s largest equipment vendors. We have strategic sales
relationships with leading vendors, allowing them to ship our products and services as component parts of their
overall solutions. These vendors include, among others, Comverge, Inc., Xata and Itron. Many of the world’s
leading telecommunications companies and Internet service providers also rely on our products, including
AT&T Inc., Sprint Nextel Corp., Verizon Communications Inc. and Siemens AG.
No single customer comprised more than 10% of our net sales for any of the years ended September 30, 2011,
2010 and 2009.
Competition
We compete 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 and software application capabilities, company reputation, brand
recognition, technical support, relationships with partners, quality and reliability, product development
capabilities, price and availability. While we have no competitors that carry a comparable range of products,
we do have various competitors based on specific products. We believe both as the marketplace for M2M
connectivity products and solutions continues to expand and grow and as we continue to expand our product
and service offerings, it is likely we will encounter increased competition; potentially from parties who have
significantly more resources than we possess.
Manufacturing Operations
Our manufacturing operations are conducted through a combination of internal manufacturing and external
subcontractors specializing in various parts of the manufacturing process. We rely on third party foundries for
our semiconductor devices (ASICs). This approach allows us to reduce our fixed costs, maintain production
flexibility and optimize our profits.
Our products are manufactured to our designs with standard and semi-custom components. Most of these
components are available from multiple vendors. We have several single-sourced supplier relationships, either
because alternative sources are not available or because the relationship is advantageous to us. If these
suppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing
delays that could adversely affect our consolidated results of operations.
In July 2011 we announced a restructuring of our manufacturing operations in Breisach, Germany. The
restructuring reduced our manufacturing footprint by consolidating prototype functions and centralized
outsourced production control in our Eden Prairie, Minnesota production facility. The consolidation was driven
by our strategy of driving efficiency improvements and enhancing customer service globally through more
centralized operations.
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ITEM 1. BUSINESS (CONTINUED)
On October 26, 2011, we announced that flooding in Thailand had impacted the operations of our contract
manufacturer located near Bangkok, Thailand. The main manufacturing facility is currently closed, although
efforts are underway to restore operations at the contract manufacturer’s back-up facility, which has not
currently been impacted by flooding and is also located in Bangkok. In addition, we are working on
reallocating production normally done in Thailand to our U.S. manufacturing facility, as well as other contract
manufacturers we currently use. We presently anticipate that the Thailand flooding and the resulting impact on
our subcontract manufacturer in Thailand will decrease revenue in a range of approximately $2 million to $6
million for the first fiscal quarter of 2012, and gross margin will decrease by approximately two percentage
points in the first fiscal quarter of 2012. We expect that the impact of the Thailand flooding for the full fiscal
year 2012 will have a minimal impact on revenue, and the impact to gross margin will be approximately one
percentage point. We expect that earnings per diluted share for fiscal 2012 will be reduced by approximately
$0.07 due to the revenue and gross margin impact previously described. At this time the situation in Thailand
continues to evolve and we can offer no assurance that the impact our operations and financial results will not
be different than the present expectations we have outlined above.
Seasonality
In general, our business is not considered to be highly seasonal, although our first fiscal quarter revenue is often
less than other quarters due to holidays and fewer shipping days.
Working Capital
We fund our business operations through a combination of cash and cash equivalents, marketable securities and
cash generated from operations. We believe that our current financial resources, cash generated from
operations, and our capacity for debt and/or equity financing will be sufficient to fund our business operations
for the next twelve months and beyond.
Research & Development and Intellectual Property Rights
During fiscal years 2011, 2010 and 2009, our research and development expenditures were $31.6 million,
$27.8 million and $26.4 million, respectively. As we expand our capabilities with respect to software
applications and our iDigi® cloud-based platform, we expect to spend a disproportionate amount of our
research and development resources on these initiatives relative to the percent of sales they generate for our
company at present.
Due to rapidly changing technology in the communications technology industry, we believe that our success
depends primarily upon the product development skills of our personnel, and the ability to integrate acquired
technologies with organically developed technologies. We have incurred in-process research and development
charges in connection with our past acquisitions, which were expensed upon consummation of the acquisitions.
Effective October 1, 2009 in-process research and development costs are capitalized according to new
authoritative guidance issued by the Financial Accounting Standards Board (FASB) related to business
combinations. Such acquired in-process research and development charges will be disclosed separately and will
be incremental to our research and development expenditures discussed above. Since this new guidance was
effective, we have not completed any acquisitions.
Our proprietary rights and technology are protected by a combination of copyrights, trademarks, trade secrets
and patents.
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ITEM 1. BUSINESS (CONTINUED)
We have established common law and registered trademark rights on a family of marks for a number of our
products. Our products are sold under the Digi, Rabbit, iDigi®, Digi m -Trak™ and Spectrum brands. We
believe that the Digi and Rabbit brands have established strong identities with our targeted customer base and
our customers associate the Digi brand with “reliability” and the Rabbit brand with “ease of integration.” Many
of our customers choose us because they are building a very complex system solution and they want the highest
level in product reliability. In the core module and semiconductor application environments, we believe ease of
integration is a powerful brand identity.
Our patents are applicable to specific technologies and currently are valid for varying periods of time based on
the date of patent application or patent grant in the U.S. and the legal term of patents in the various foreign
countries where patent protection is obtained. We believe our intellectual property has significant value and is
an important factor in the marketing of our company and products.
Backlog
Backlog as of September 30, 2011 and 2010 was $36.4 million and $26.8 million, respectively. Most of the
backlog at September 30, 2011 is expected to be shipped in fiscal 2012. Our backlog increase as of September
30, 2011 as compared to September 30, 2010 primarily is due to an increase in wireless customer orders.
Backlog as of any particular date is not necessarily indicative of our future sales trends.
Employees
We had 691 employees on September 30, 2011. We consider our relations with our employees to be good.
Geographic Areas and Currency Risks
Our customers are located throughout North America, Europe, Middle East & Africa (EMEA), Asia and Latin
America. We are exposed to foreign currency risk associated with certain sales transactions being denominated
in Euros, British Pounds, Japanese Yen and Indian Rupee 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.
During 2011, we had approximately $85.5 million of net sales related to foreign customers including export
sales, of which $28.8 million was denominated in foreign currency, predominantly the Euro and British Pound.
During both 2010 and 2009, we had approximately $75.2 million of net sales to foreign customers including
export sales, of which $27.6 million and $33.4 million, respectively, were denominated in foreign currency,
predominantly the Euro and British Pound. In future periods, we expect a significant portion of sales will
continue to be made in Euros and British Pounds. Financial information about geographic areas appears in Note
4 to our Consolidated Financial Statements in this Form 10-K.
LISTING OF PRINCIPAL PRODUCTS
Embedded Networking Products
Modules – Developing a device around a chip or microprocessor involves a high level of complexity. A
module is a group of components that are set up to work together, eliminating much of that complexity. An
embedded module may provide somewhat less flexibility than a chip, but is much easier to implement into a
product design. A number of these modules can be connected directly to iDigi®, enabling remote management
and remote application connectivity.
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ITEM 1. BUSINESS (CONTINUED)
LISTING OF PRINCIPAL PRODUCTS (CONTINUED)
Our modules can be divided into two categories: processor modules and communications modules. Processor
modules provide customers with a networked platform for use as the main processor in an embedded system
and the flexibility to add in custom features and functionality, as this ensures a quick time to market
development cycle for a network-enabled device. These modules are targeted as the core processors for
products such as access control systems, Smart Energy devices, Point-of-Sale (POS) systems, Radio Frequency
ID (RFID) readers, medical devices and instrumentation and networked displays. Communication modules are
ideal for network-enabling and web-enabling a device. They enable customers who wish to easily
accommodate both wired and wireless functionality in one product design. These modules make it very easy to
add most any type of connectivity, especially wireless connectivity. Typically with a communication module,
there is another processor performing the central processing. Adding wired or wireless network communication
to a device allows companies to manage that device over a network or by electronic means.
Integrated Circuits (Chips) – A chip (or microprocessor) provides the “brains” and processing power of an
intelligent electronic device or communication sub-system. Some of our higher volume customers choose to
purchase chips and build their own products. Chips are low cost but require the highest level of development
expertise. Building a solution from the chip level offers a low cost of the end design, but the level of
complexity in product development can increase risk and prolong time to market.
Our chips are the building blocks for many of our embedded and non-embedded products. By using our own
microprocessors we can ensure complete hardware/software compatibility for product designs for certain of our
products. We no longer develop new chips and now use Commercial Off the Shelf (COTS) technology from
companies such as Freescale and Ember for our new products, as we do not have a core competency in the
semi-conductor business and we believe that it is more effective to partner with companies who can provide this
expertise.
Software and Development Tools – Coupled with the chips and modules are a variety of development tools
and associated software to make application development easy. We provide software and tools for a variety of
operating environments and developer skill sets. These include Linux® and Microsoft® Windows® Embedded
CE as well as our own Net+OS, Dynamic C and Python based iDigi® Dia.
Single Board Computers – Single-board computers (SBCs) are complete systems on a single circuit board.
They are essentially a programmable box product without the enclosure – everything is on the board and ready
to be embedded into a larger system. They offer the same benefits as the processor modules, but eliminate the
need for additional interface circuitry because they include all of the key device interface components on one
circuit board.
Satellite Communication Devices – Our acquisition of MobiApps Holdings Private Limited (MobiApps) in
June 2009 added satellite communication products that provide worldwide satellite data transmit/receive
capabilities for customers involved in satellite-based tracking and industrial remote communications. Operating
over the ORBCOMM low-earth orbit satellite network, these products can significantly improve asset
utilization by allowing clients to monitor, track and manage their fixed and mobile assets around the world. In
fiscal 2011, we added the support of the Iridium satellite network to some of our gateway products.
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ITEM 1. BUSINESS (CONTINUED)
LISTING OF PRINCIPLE PRODUCTS (CONTINUED)
Non-Embedded Networking Products
Cellular Products:
Routers – Cellular routers provide connectivity for devices over a cellular data network. They can be
used as a cost effective alternative to landlines for primary or backup connectivity for hard to reach sites
and devices. We introduced the first intelligent high-speed cellular router in 2005 to address the
growing need for customers to connect remote sites and devices. These products have been certified by
the major wireless providers in North America and abroad, including AT&T®, Verizon Wireless® ,
Sprint® , Bell Mobility and Rogers. All of our cellular products include a unique remote management
platform that provides secure management of devices across remote networks and can all use iDigi® for
remote management. In addition, application connectivity, management and customization is enabled
via the iDigi® platform for many of these products.
Gateways – A gateway aggregates local wireless data traffic and transports it over a cellular or other
Internet Protocol (IP)-based network, usually back to a central application or database. Our gateway
products enable devices or groups of devices to be networked in locations where there is no existing
network or where access to a network is prohibited. These gateways can work in conjunction with our
wireless adapters and wireless embedded modules to enable customers to monitor and manage remote
devices in a non-intrusive and economical way. All of our gateway products are linked with iDigi® for
secure management of devices across remote networks, application connectivity and customization.
Wireless Communication Adapters – Our wireless communication adapters are small box products that utilize
a variety of wireless protocols for PC-to-device or device-to-device connectivity, often in locations where
deploying a wired network is not possible either because of cost, disruption or impracticality. By supporting
ZigBee®, Wi -Fi® and proprietary RF technologies, we can meet most customer application requirements, such
as serial cable replacement, Ethernet cable replacement, mesh networking, low cost/low power remote
monitoring, simple I/O control functions, environmental sensors and long distance connectivity. In conjunction
with one of our gateways, wireless communication adapters plug into iDigi® for remote management,
application connectivity and customization.
Serial Servers – Serial Servers (also known as device servers and terminal servers) add wired or wireless
network connectivity to a serial device. They transfer data between a serial port and an Ethernet network,
turning a previously isolated device with a serial port into a fully collaborative network component. We believe
that serial servers will remain an important product category as Ethernet based serial connections continue to
extend beyond their current applications into many new markets such as building automation, healthcare,
process control, and secure console port management on servers, routers, switches and other network
equipment. Many of our serial servers can also leverage iDigi® for application connectivity, remote
management and customization.
Console Servers – Console servers, or console management servers, provide access to the serial ports of
network equipment such as servers, routers or switches. Our intelligent console servers enable customers to
access, monitor or manage their network devices across multiple sites, both remotely over the network or via
their console ports even during network outages. These console servers provide advanced auditing and logging
capabilities that complement regulatory compliance efforts such as the Sarbanes-Oxley Act of 2002 and Health
Insurance Portability and Accountability Act of 1996 (HIPAA).
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ITEM 1. BUSINESS (CONTINUED)
LISTING OF PRINCIPLE PRODUCTS (CONTINUED)
USB Connected Products – The Universal Serial Bus (USB) is a “plug-and-play” interface between a
computer and peripheral devices. In recent years, many serial ports on PCs have been replaced with USB ports,
due in large part to the usability and cost effectiveness of USB devices. We have one of the most
comprehensive and advanced USB port expansion product lines in the industry. Our USB-to-serial converters
enable customers to expand a single USB port into multiple serial ports to connect legacy peripheral devices.
The product line also includes USB hubs that add additional USB or powered USB ports, which are often used
in retail environments, and a network-enabled hub that connects USB devices over an IP network, which is an
industry first.
Serial Cards – A serial card plugs into the expansion slot of a computer to provide serial ports for device
connectivity. We are a global leader in this category and offer one of the most extensive serial card product
families. Our products support a wide range of operating systems, port densities, bus types, expansion options
and applications. As Ethernet connections extend beyond current applications, the serial card products are
gradually transitioning to network-attached and/or USB-attached devices. We have strengthened our product
offering to meet customer needs and fully support this mature product line while working to seamlessly
transition customers to newer technologies.
14
ITEM 1A. RISK FACTORS
Multiple risk factors exist which could have a material effect on our operations, results of operations,
profitability, financial position, liquidity, capital resources and common stock.
Risks Relating to Our Business
Our dependence on new product development and the rapid technological change that characterizes our
industry makes us susceptible to loss of market share resulting from competitors’ product introductions and
similar risks.
The M2M networking industry is characterized by rapidly changing technologies, evolving industry standards,
frequent new product introductions, short product life cycles in certain instances and rapidly changing customer
requirements. The introduction of products embodying new technologies and the emergence of new industry
standards can render existing products obsolete and unmarketable. Our future success will depend on our
ability to enhance our existing products, to introduce new products to meet changing customer requirements and
emerging technologies, and to demonstrate the performance advantages and cost-effectiveness of our products
over competing products. Failure by us to modify our products to support new alternative technologies or
failure to achieve widespread customer acceptance of such modified products could cause us to lose market
share and cause our revenues to decline.
We may experience delays in developing and marketing product enhancements or new products that respond to
technological change, evolving industry standards and changing customer requirements. There can be no
assurance that we will not experience difficulties that could delay or prevent the successful development,
introduction, and marketing of these products or product enhancements, or that our new products and product
enhancements will adequately meet the requirements of the marketplace and achieve any significant or
sustainable degree of market acceptance in existing or additional markets. In addition, the future introductions
or announcements of products by us or one of our competitors embodying new technologies or changes in
industry standards or customer requirements could render our then-existing products obsolete or unmarketable.
This risk may become more pronounced as new competitors enter the marketplace, especially if these
competitors have more resources than us to develop new products and technologies. There can be no assurance
that the introduction or announcement of new product offerings by us or one or more of our competitors will not
cause customers to defer their purchase of our existing products, which could cause our revenues to decline.
We intend to continue to devote significant resources to our research and development, which, if not
successful, could cause a decline in our revenues and harm our business.
We intend to continue to devote significant resources to research and development in the coming years to
enhance and develop additional products. For the fiscal years ended 2011, 2010 and 2009, our research and
development expenses comprised 15.5%, 15.2% and 15.9% respectively, of our net sales. If we are unable to
develop new products, applications and services as a result of our research and development efforts, or if the
products, applications and services we develop are not successful, our business could be harmed. Even if we
develop new products, applications and services that are accepted by our target markets, the net revenues from
these products, applications and services may not be sufficient to justify our investment in research and
development.
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ITEM 1A. RISK FACTORS (CONTINUED)
Many of our products, applications and services have been developed through a combination of internally
developed technologies and acquired technologies. Our ability to continue to develop new products,
applications and services is partially dependent on finding and acquiring new technologies in the marketplace.
Even if we identify new technologies that we believe would be complementary to our internally developed
technologies, we may not be successful in acquiring those technologies or we may not be able to acquire the
technologies at a price that is acceptable to us.
A substantial portion of our recent development efforts have been directed toward the development of new
products targeted to manufacturers of intelligent, network-enabled devices and other embedded systems in
various markets, including markets in which networking solutions for embedded systems have not historically
been sold, such as markets for industrial automation equipment and medical equipment. In addition, we expect
to devote a disproportionate amount of our research and development resources to the development of software
applications and our iDigi® cloud-based platform relative to the amount of sales those solutions produce for our
business presently. Our financial performance is dependent upon the development of the intelligent device and
software solutions markets that we are targeting, the increasing adoption of these technologies and our ability to
compete successfully and sell our products and solutions.
Certain of our products are sold into mature markets, which could limit our ability to continue to generate
revenue from these products.
Certain of our products are sold into mature markets that are characterized by a trend of declining demand.
These products provide asynchronous and synchronous data transmissions via add-on cards. As the overall
market for these products decreases due to the adoption of new technologies, we expect that our revenues from
these products will continue to decline. As a result, our future prospects depend in part on our ability to acquire
or develop and successfully market additional products that address growth markets.
Our failure to manage product transitions effectively could have a material adverse effect on our revenues
and profitability.
From time to time, we or our competitors may announce new products, capabilities, or technologies that may
replace or shorten the life cycles of our existing products. Announcements of currently planned or other new
products may cause customers to defer or stop purchasing our products until new products become available.
Furthermore, the introduction of new or enhanced products requires us to manage the transition from older
product inventories and ensure that adequate supplies of new products can be delivered to meet customer
demand. Our failure to manage transitions from older products effectively could result in inventory
obsolescence and have a material adverse effect on our revenues and profitability.
Our failure to compete successfully in our highly competitive market could result in reduced prices and loss
of market share.
The market in which we operate is characterized by rapid technological advances and evolving industry
standards. The market can be affected significantly by new product introductions and marketing activities of
industry participants. Certain of our competitors and potential competitors may have greater financial,
technological, manufacturing, marketing, and personnel resources than us. In addition, the amount of
competition we face in the marketplace may change and grow as the market for M2M networking solutions
grows and new entrants enter the marketplace. Present and future competitors may be able to identify new
markets and develop products more quickly, which are superior to those developed by us. They may also
16
ITEM 1A. RISK FACTORS (CONTINUED)
adapt new technologies faster, devote greater resources to research and development, promote products more
aggressively, and price products more competitively than us. Competition may also intensify or we may no
longer be able to compete effectively in the markets in which we compete.
Our consolidated operating results and financial condition may be adversely impacted by worldwide
economic conditions and credit tightening.
If worldwide economic conditions experience a significant downturn, these conditions may make it difficult or
impossible for our customers and suppliers to accurately forecast and plan future business activities, which may
cause them to slow or suspend spending on products and services. Our customers may find it difficult to gain
sufficient credit in a timely manner, which could result in an impairment of their ability to place orders with us
or to make timely payments to us for previous purchases. If this occurs, our revenue may be reduced, thereby
having a negative impact on our results of operations. In addition, we may be forced to increase our allowance
for doubtful accounts and our days sales outstanding may increase, which would have a negative impact on our
cash position, liquidity and financial condition. We cannot predict the timing or the duration of an economic
downturn in the economy.
Our inability to obtain the appropriate telecommunications or satellite carrier certifications or approvals
from governmental regulatory bodies could impede our ability to grow revenues in our wireless products.
The sale of our wireless products in certain geographical markets is sometimes dependent on the ability to gain
telecommunications or satellite carrier certifications and/or approvals by certain governmental bodies. Failure
to obtain these approvals, or delays in receiving the approvals, could impact our ability to enter our targeted
markets or to compete effectively or at all in these markets and could have an adverse impact on our revenues.
Our participation in a services and solutions model, using cloud-based services, presents execution and
competitive risks.
We are deploying a services and solutions model using our own internally developed hosted services and cloud-
based platform, software, and supporting products. We are employing significant human and financial
resources to develop and deploy this cloud-based platform. While we believe our wireless, device networking
and connectivity expertise, investments in infrastructure, and our innovative environment provide us with a
strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue
required to be successful. Because this is a relatively new solution in the marketplace, we expect we may
encounter competition from other solutions providers, many of whom may have more significant resources than
us with which to compete. Whether we are successful in this new business model depends on a number of
factors, including:
our ability to effectively put in place and continuously evolve the infrastructure to deploy our solution;
the features and functionality of our platform relative to any competing platforms as well as our ability
to effectively market our platform;
competing effectively in our targeted application markets, including energy, tank monitoring, fleet
management and medical; and
deploying complete end-to-end solutions that meet the needs of the marketplace generally as well as the
particular requirements of our customers more effectively and efficiently than competitive solutions.
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ITEM 1A. RISK FACTORS (CONTINUED)
We are dependent on wireless communication networks owned and controlled by others.
Our revenues could decline if we are unable to deliver continued access to satellite and digital cellular wireless
carriers that we depend on to provide sufficient network capacity, reliability and security to our customers. Our
financial condition could be impacted if our wireless carriers were to increase the prices of their services, or to
suffer operational or technical failures.
We do not have any large scale customers that represent more than 10% of our sales and our sales are
subject to fluctuations based on the level of significant one time purchases.
No single customer has represented more than 10% of our sales in any of the last three fiscal years. In addition,
many of our customers make significant one time purchases which are not repeated. As a result our sales may
be subject to significant fluctuations based on whether we are able to close significant sales opportunities. Our
failure to complete one or a series of significant sales opportunities in a particular fiscal period could have a
material adverse effect on our revenues for that period.
The long and variable sales cycle for certain of our products makes it more difficult for us to predict our
operating results and manage our business.
The sale of our products typically involves a significant technical evaluation and commitment of capital and
other resources by potential customers and end users, as well as delays frequently associated with end users’
internal procedures to deploy new technologies within their products and to test and accept new technologies.
For these and other reasons, the sales cycle associated with certain of our products is typically lengthy and is
subject to a number of significant risks, such as end users’ internal purchasing reviews, that are beyond our
control. Because of the lengthy sales cycle and the large size of certain customer orders, if orders forecasted for
a specific customer are not realized or delayed, our operating results could be materially adversely affected.
We depend on manufacturing relationships and on limited-source suppliers, and any disruptions in these
relationships may cause damage to our customer relationships.
We procure all parts and certain services involved in the production of our products and subcontract most of our
product manufacturing to outside firms that specialize in such services. Although most of the components of
our products are available from multiple vendors, we have several single-source supplier relationships, either
because alternative sources are not available or because the relationship is advantageous to us. There can be no
assurance that our suppliers will be able to meet our future requirements for products and components in a
timely fashion. In addition, the availability of many of these components to us is dependent in part on our
ability to provide our suppliers with accurate forecasts of our future requirements. Delays or lost sales could be
caused by other factors beyond our control, including late deliveries by vendors of components. If we are
required to identify alternative suppliers for any of our required components, qualification and pre-production
periods could be lengthy and may cause an increase in component costs and delays in providing products to
customers. Any extended interruption in the supply of any of the key components currently obtained from
limited sources could disrupt our operations and have a material adverse effect on our customer relationships
and profitability. As an example, on October 26, 2011, we announced that flooding in Thailand had impacted
the operations of our contract manufacturer located near Bangkok, Thailand. As a result of lost production, we
announced that our operations and financial results would be impacted by this natural disaster.
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ITEM 1A. RISK FACTORS (CONTINUED)
The impact of natural disasters could negatively impact our supply chain and customers resulting in an
adverse impact to our revenues and profitability.
Certain of our components and other materials used in producing our products are from regions susceptible to
natural disasters as most recently seen in Japan and Thailand. For instance, on October 26, 2011, we announced
that flooding in Thailand had impacted the operations of our contract manufacturer located near Bangkok,
Thailand. As a result of lost production, we announced that our operations and financial results would be
impacted by this natural disaster. If we are unable to procure these materials, we could experience a disruption
to our supply chain that would hinder our ability to produce our products in a timely manner, or cause us to seek
other sources of supply, which may be more costly or which we may not be able to procure on a timely basis.
We also risk damage to any tooling, equipment or inventory at the supplier’s facilities. In addition, our
customers may not follow their normal purchasing patterns or temporarily cease purchasing from us due to
impacts to their businesses in the region, creating unexpected fluctuations or decreases in our revenues and
profitability. Natural disasters in other parts of the world on which our operations are reliant also could have
material adverse impacts on our business.
Our use of suppliers in Southeast Asia involves risks that could negatively impact us.
We purchase printed circuit boards from suppliers in Southeast Asia. Product delivery times may be extended
due to the distances involved, requiring more lead time in ordering. In addition, ocean freight delays may occur
as a result of labor problems, weather delays or expediting and customs issues. Any extended delay in receipt
of the component parts could eliminate anticipated cost savings and have a material adverse effect on our
customer relationships and profitability.
Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.
Our ability to compete depends in part on our proprietary rights and technology. Our proprietary rights and
technology are protected by a combination of copyrights, trademarks, trade secrets and patents.
We enter into confidentiality agreements with all employees, and sometimes with our customers and potential
customers, and limit access to the distribution of our proprietary information. There can be no assurance that
the steps taken by us in this regard will be adequate to prevent the misappropriation of our technology. Our
pending patent applications may be denied and any patents, once issued, may be circumvented by our
competitors. Furthermore, there can be no assurance that others will not develop technologies that are superior
to our technologies. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the
laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will
be adequate or that competing companies will not independently develop similar technology. Our failure to
adequately protect our proprietary rights could have a material adverse effect on our competitive position and
result in loss of revenue.
19
ITEM 1A. RISK FACTORS (CONTINUED)
From time to time, we are subject to claims and litigation regarding intellectual property rights or other
claims, which could seriously harm us and require us to incur significant costs.
The communications technology industry is characterized by frequent litigation regarding patent and other
intellectual property rights. From time to time, we receive notification of a third-party claim that our products
infringe other intellectual property rights. Any litigation to determine the validity of third-party infringement
claims, whether or not determined in our favor or settled by us, may be costly and divert the efforts and
attention of our management and technical personnel from productive tasks, which could have a material
adverse effect on our ability to operate our business and service the needs of our customers. There can be no
assurance that any infringement claims by third parties, if proven to have merit, will not materially adversely
affect our business or financial condition. In the event of an adverse ruling in any such matter, we may be
required to pay substantial damages, cease the manufacture, use and sale of infringing products, discontinue the
use of certain processes or be required to obtain a license under the intellectual property rights of the third party
claiming infringement. There can be no assurance that a license would be available on reasonable terms or at
all. Any limitations on our ability to market our products, or delays and costs associated with redesigning our
products or payments of license fees to third parties, or any failure by us to develop or license a substitute
technology on commercially reasonable terms could have a material adverse effect on our business and
financial condition.
We face risks associated with our international operations and expansion that could impair our ability to
grow our revenues abroad.
We believe that our future growth is dependent in part upon our ability to increase sales in international
markets. These sales are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs,
import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts
receivable payment cycles, potentially adverse tax consequences, and export license requirements. In addition,
we are subject to the risks inherent in conducting business internationally, including political and economic
instability and unexpected changes in diplomatic and trade relationships. There can be no assurance that one or
more of these factors will not have a material adverse effect on our business strategy and financial condition.
Foreign currency exchange rates may adversely affect our results.
We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates
on our costs and revenue. Because our financial statements are denominated in U.S. Dollars and approximately
38% of our revenues are denominated in a currency other than U.S. Dollars, such as Euros, British Pounds,
Indian Rupee and Yen, our sales and earnings may be adversely impacted if the U.S. dollar strengthens
significantly against these foreign currencies.
The loss of key personnel could prevent us from executing our business strategy.
Our business and prospects depend to a significant degree upon the continuing contributions of our executive
officers and key technical and other personnel. Competition for such personnel is intense, and there can be no
assurance that we will be successful in attracting and retaining qualified personnel. Failure to attract and retain
key personnel could result in our failure to execute our business strategy.
20
ITEM 1A. RISK FACTORS (CONTINUED)
Any acquisitions we have made or will make could disrupt our business and seriously harm our financial
condition.
We will continue to consider acquisitions of complementary businesses, products or technologies. In the event
of any future acquisitions, we could issue stock that would dilute our current stockholders’ percentage
ownership, incur debt, assume liabilities, or incur large and immediate write-offs.
Our operation of any acquired business may also involve numerous risks, including but not limited to:
problems combining the purchased operations, technologies, or products;
unanticipated costs;
diversion of management’s attention from our core business;
difficulties integrating businesses in different countries and cultures;
adverse effects on existing business relationships with suppliers and customers;
risks associated with entering markets in which we have no or limited prior experience; and
potential loss of key employees, particularly those of the purchased organization.
We cannot assure that we will be able to successfully integrate any businesses, products, technologies, or
personnel that we have acquired or that we might acquire in the future and any failure to do so could disrupt our
business and have a material adverse effect on our consolidated financial condition and results of operations.
Moreover, from time to time, we may enter into negotiations for a proposed acquisition, but be unable or
unwilling to consummate the acquisition under consideration. This could cause significant diversion of
management’s attention and out-of-pocket expenses for us. We could also be exposed to litigation as a result of
an unconsummated acquisition, including claims that we failed to negotiate in good faith or misappropriated
confidential information.
Our failure to comply effectively with the requirements of applicable environmental legislation and
regulation could have a material adverse effect on our revenues and profitability.
Production and marketing of products in certain states and countries may subject us to environmental and other
regulations. In addition, certain states and countries may pass new regulations requiring our products to meet
certain requirements to use environmentally friendly components. The European Union has issued two
directives relating to chemical substances in electronic products. The Waste Electrical and Electronic
Equipment Directive (WEEE) makes producers of certain electrical and electronic equipment financially
responsible for collection, reuse, recycling, treatment and disposal of equipment placed in the European Union
market. The Restrictions of Hazardous Substances Directive (RoHS) bans the use of certain hazardous
materials in electric and electrical equipment which are put on the market in the European Union. In the future,
China and other countries including the United States are expected to adopt further environmental compliance
programs. If we fail to comply with these regulations, we may not be able to sell our products in jurisdictions
where these regulations apply, which could have a material adverse effect on our revenues and profitability.
Our failure to comply effectively with regulatory laws pertaining to our foreign operations could have a
material adverse effect on our revenues and profitability.
We are required to comply with U.S. government export regulations in the sale of our products to foreign
customers, including requirements to properly classify and screen our products against a denied parties list prior
to shipment. We are also required to comply with the provisions of the Foreign Corrupt Practices Act (FCPA)
and all other anti-corruption laws, such as the UK Anti-Bribery Act, of all other countries in which we do
business, directly or indirectly, including compliance with the anti-bribery prohibitions and the accounting and
21
ITEM 1A. RISK FACTORS (CONTINUED)
recordkeeping requirements of this law. Violations of the FCPA could trigger sanctions, including ineligibility
for U.S. government insurance and financing, as well as large fines. Failure to comply with the aforementioned
regulations could also deter us from selling our products in international jurisdictions, which could have a
material adverse effect on our revenues and profitability.
Negative conditions in the global credit markets may impair a portion of our investment portfolio.
Our investment portfolio consists of certificates of deposit, commercial paper, money market funds, corporate
bonds and government municipal bonds. These marketable securities are classified as available-for-sale and are
carried at fair market value. Some of our investments could experience reduced liquidity and could result in an
impairment charge should the impairment be considered as other-than-temporary. This loss would be recorded
in our consolidated statement of operations, which could materially adversely impact our consolidated results of
operations and financial condition.
Unanticipated changes in our tax rates could affect our future results.
Our future effective tax rates could be favorably or unfavorably affected by unanticipated changes in the mix of
earnings in countries with differing statutory tax rates, changes in the valuation of our deferred tax assets and
liabilities, or by changes in tax laws or our interpretation of such laws. In addition, we may be subject to the
examination of our income tax returns by the Internal Revenue Service and other U.S. and international tax
authorities. We regularly assess the potential outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes. There can be no assurance that the outcomes from these
examinations will not have an effect on our consolidated operating results and financial condition.
We may have additional tax liabilities.
We are subject to income taxes in the United States and many foreign jurisdictions. Significant judgment is
required in determining our worldwide provision for income taxes, including our reserves for uncertain tax
positions. In the ordinary course of business, there are many transactions and calculations where the ultimate
tax determination is uncertain. We regularly are under audit by tax authorities. Although we believe our tax
estimates are reasonable, the final determination of tax audits could be materially different from our historical
income tax provisions and accruals. The results of an audit could have a material effect on our financial
position, results of operations, or cash flows in the period or periods for which that determination is made.
Risks Related to Our Common Stock
If our stock price declines, we may need to recognize an impairment of our goodwill.
If the price of our common stock declines and reduces our market value, we could have an impairment of our
goodwill. Our value is dependent upon continued future growth in demand for our products and solutions. If
such growth does not materialize or our forecasts are significantly reduced, our market value may decline and
impair our goodwill. We perform our annual goodwill impairment assessment on our one reporting unit at June
30 each year.
The price of our common stock has been volatile and could continue to fluctuate in the future.
The market price of our common stock, like that of many other high-technology companies, has fluctuated
significantly and is likely to continue to fluctuate in the future. During fiscal year 2011, the closing price of our
common stock on the NASDAQ Global Select Market ranged from $9.32 to $15.04 per share. Our closing sale
price on November 17, 2011 was $10.53 per share. Announcements by us or others regarding the receipt of
22
ITEM 1A. RISK FACTORS (CONTINUED)
customer orders, quarterly variations in operating results, acquisitions or divestitures, additional equity or debt
financings, results of customer field trials, scientific discoveries, technological innovations, litigation, product
developments, patent or proprietary rights, government regulation and general market conditions and risks may
have a significant impact on the market price of our common stock.
Certain provisions of the Delaware General Corporation Law and our charter documents have an anti-
takeover effect.
There exist certain mechanisms under the Delaware General Corporation Law and our charter documents that
may delay, defer or prevent a change of control. For instance, under Delaware law, we are prohibited from
engaging in certain business combinations with interested stockholders for a period of three years after the date
of the transaction in which the person became an interested stockholder unless certain requirements are met, and
majority stockholder approval is required for certain business combination transactions with interested parties.
Our Certificate of Incorporation contains a “fair price” provision requiring majority stockholder approval for
certain business combination transactions with interested parties, and this provision may not be changed without
the vote of at least 80% of the outstanding shares of our voting stock. Other mechanisms in our charter
documents may also delay, defer or prevent a change of control. For instance, our Certificate of Incorporation
provides that our Board of Directors has authority to issue series of our preferred stock with such voting rights
and other powers as the Board of Directors may determine. Furthermore, we have a classified board of
directors, which means that our directors are divided into three classes that are elected to three-year terms on a
staggered basis. Since the three-year terms of each class overlap the terms of the other classes of directors, the
entire board of directors cannot be replaced in any one year. Under Delaware law, directors serving on a
classified board may not be removed by shareholders except for cause. Also, pursuant to the terms of our
shareholder rights plan, each outstanding share of common stock has one attached right. The rights will cause
substantial dilution of the ownership of a person or group that attempts to acquire us on terms not approved by
the Board of Directors and may have the effect of deterring hostile takeover attempts. The effect of these anti-
takeover provisions may be to deter business combination transactions not approved by our Board of Directors,
including acquisitions that may offer a premium over the market price to some or all stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
23
ITEM 2. PROPERTIES
The following table contains a listing of our current property locations:
In addition to the above locations, we perform research and development activities in various other locations in
the United States and sales activities in various other locations in Europe and Asia which are not deemed to be
principal locations and which are not listed above. We believe that our facilities are adequate for our needs. In
February 2008, we sold our facility in Dortmund, Germany and leased back approximately 40% of the property
for a period of five years, with a renewal option for an additional five years. As a result of the restructuring of
our Breisach, Germany location, the manufacturing, warehousing and administration functions at this location
are scheduled to cease at the end of December 2011.
24
Ownership orApproximateLease Location ofSquareExpirationPropertyUse of FacilityFootageDateMinnetonka, MNResearch & development, sales, sales support,130,000Owned(Corporate headquarters)marketing and administrationEden Prairie, MNManufacturing and warehousing58,000OwnedMinneapolis, MNEngineering services16,837November 2016Waltham, MAResearch & development, sales and sales support6,836October 2015Austin, TXSales, sales support, marketing6,563March 2014and administrationDavis, CASales, sales support, research & development24,000December 2012Lindon, UTSales, marketing, research & development11,986December 2015and administrationHerndon, VASales, marketing and tech support2,416October 2014Hong Kong, ChinaSales, marketing and administration4,061February 2013Beijing, ChinaSales, marketing and administration2,372November 2012Shanghai, ChinaSales, marketing and administration1,251June 2012Dortmund, GermanySales, sales support, marketing and 21,485March 2013administrationBreisach, GermanySales, marketing, research & development, manufacturing, 8,748July 2013warehousing and administrationNeuilly sur Seine, FranceSales and marketing2,895January 2015Ilkley, UKSales, sales support, research & development and marketing 5,475October 2015and administrationLogrono, SpainSales, research & development and administration3,228January 2017Tokyo, JapanSales1,371November 2013Bangalore, IndiaSales, research & development and administration9,189July 2014SingaporeSales, marketing and administration2,530June 2014
ITEM 3. LEGAL PROCEEDINGS
Initial Public Offering Securities Litigation
On April 19, 2002, a consolidated amended class action complaint was filed in the United States District Court
for the Southern District of New York asserting claims relating to the initial public offering (“IPO”) of our
subsidiary NetSilicon, Inc. and approximately 300 other public companies. We acquired NetSilicon on
February 13, 2002. The complaint names us as a defendant along with NetSilicon, certain of its officers and
certain underwriters involved in NetSilicon’s IPO, among numerous others, and asserts, among other things,
that NetSilicon’s IPO prospectus and registration statement violated federal securities laws because they
contained material misrepresentations and/or omissions regarding the conduct of NetSilicon’s IPO underwriters
in allocating shares in NetSilicon’s IPO to the underwriters’ customers. We believe that the claims against the
NetSilicon defendants are without merit and have defended the litigation vigorously. Pursuant to a stipulation
between the parties, the two named officers were dismissed from the lawsuit, without prejudice, on October 9,
2002.
As previously disclosed, the parties advised the District Court on February 25, 2009 that they had reached an
agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the
District Court on April 2, 2009. On June 9, 2009, the District Court preliminarily approved the proposed global
settlement. Notice was provided to the class, and a settlement fairness hearing, at which members of the class
had an opportunity to object to the proposed settlement, was held on September 10, 2009. On October 6, 2009,
the District Court issued an order granting final approval to the settlement. Ten appeals initially were filed
objecting to the definition of the settlement class and fairness of the settlement. Five of those appeals were
dismissed with prejudice on October 6, 2010. On May 17, 2011, the Court of Appeals dismissed four of the
remaining appeals and remanded the final appeal to the District Court to determine whether the appellant has
standing to object to the settlement. On August 25, 2011, the District Court ruled that the last remaining
objector lacks standing to object to the settlement. That objector has appealed that ruling to the Court of
Appeals, and the plaintiffs have moved to dismiss that appeal.
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 per claim. 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 per claim. As of September 30, 2011, 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. This $50,000
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, the losses could have a material adverse effect on our
business and our consolidated results of operations or financial condition.
Patent Infringement Litigation
On March 16, 2011, MOSAID Technologies Incorporated filed a complaint naming us as defendants in federal
court in the Eastern District of Texas. The complaint included allegations against us and 32 other companies
pertaining to the infringement of six patents by products compliant with various Institute of Electrical and
Electronics Engineers standards for implementing wireless local area network computer communications in
certain frequency bands. On September 30, 2011 we reached a settlement involving a royalty-bearing license
agreement for future sales of licensed products sold during the term of the agreement. We do not expect this
license agreement to have a material impact on our consolidated financial statements.
On January 18, 2011, Advanced Processor Technologies LLC filed a complaint naming us as a defendant
in federal court in the Eastern District of Texas. The complaint included allegations against us and eight
other companies pertaining to the infringement of two patents by products containing data processors with
memory management units. On October 17, 2011, we settled the lawsuit for $0.2 million which was
recorded during the fourth quarter of fiscal 2011 (see Note 18 to our consolidated financial statements).
25
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
On May 11, 2010, SIPCO, LLC filed a complaint naming us as a defendant in federal court in the Eastern
District of Texas. This claim subsequently has been moved to the Northern District of Georgia. The complaint
included allegations against us and five other companies pertaining to the infringement of SIPCO’s patents by
wireless mesh networking and multi-port networking products. The complaint seeks monetary and non-
monetary relief. We cannot predict the outcome of these matters or estimate a range of loss 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.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Listing
Our Common Stock trades under the symbol DGII on the NASDAQ Global Select Market tier of the NASDAQ
Stock Market LLC. On November 17, 2011, the number of holders of our Common Stock was approximately
9,179, consisting of 165 record holders.
High and low sale prices for each quarter during the years ended September 30, 2011 and 2010, as reported on
the NASDAQ Stock Market LLC, were as follows:
Stock Prices
Dividend Policy
We have never paid cash dividends on our Common Stock. Our Board of Directors presently intends to retain
all earnings for use in our business, except for periodic stock repurchases, and does not anticipate paying cash
dividends in the foreseeable future.
26
2011FirstSecondThirdFourthHigh11.62$ 12.42$ 13.43$ 15.39$ Low9.29$ 9.29$ 9.41$ 10.94$ 2010FirstSecondThirdFourthHigh9.57$ 12.32$ 11.48$ 9.55$ Low6.99$ 8.87$ 7.86$ 7.29$
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (CONTINUED)
Issuer Repurchases of Equity Securities
On July 23, 2008, our Board of Directors authorized an additional 500,000 shares of our common stock for
repurchase under our previously announced stock repurchase program. The total number of shares authorized
to be repurchased is 1,500,000 shares. We did not repurchase any of our equity securities in the fourth quarter
or fiscal year ended September 30, 2011. Of the 1,500,000 shares authorized to be repurchased, 135,638 shares
remained available for repurchase at September 30, 2011.
Performance Evaluation
The graph below compares the total cumulative stockholders’ return on our Common Stock for the period from
the close of the Nasdaq Stock Market – U.S. Companies on September 30, 2006 to September 30, 2011, the last
day of fiscal 2011, with the total cumulative return on the CRSP Total Return Index for the Nasdaq Stock
Market – U.S. Companies (the “CRSP Index”) and the CRSP Index for Nasdaq Telecommunications Stocks
(the “Peer Index”) over the same period. We have determined that our line of business is mostly comparable to
those companies in the Peer Index. The index level for the graph and table was set to $100 on September 30,
2006, for our Common Stock, the CRSP Index and the Peer Index and assumes the reinvestment of all
dividends.
27
FY06FY07FY08FY09FY10FY11Digi International Inc.100.00105.4875.5663.1170.3081.48CRSP Index100.00118.3793.3395.07107.44112.25Peer Index100.00117.2481.3181.12103.20107.49$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 FY06FY07FY08FY09FY10FY11COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURNDigi International Inc.CRSP IndexPeer Index
ITEM 6. SELECTED FINANCIAL DATA
(In thousands except per common share amounts and number of employees)
28
For the fiscal years ended September 3020112010200920082007Net sales (1)204,160$ 182,548$ 165,928$ 185,056$ 173,263$ Gross profit 106,588$ 92,209$ 81,265$ 97,869$ 91,346$ Sales and marketing 39,549 37,010 35,304 36,879 33,499 Research and development 31,642 27,825 26,381 27,040 24,176 General and administrative (2)18,206 17,889 14,557 16,035 13,343 Restructuring 154 (468) 1,953 - - Acquired in-process research and development- - - 1,900 - Operating income 17,037 9,953 3,070 16,015 20,328 Total other (expense) income, net (3)(522) 566 1,212 2,900 3,396 Income before income taxes16,515 10,519 4,282 18,915 23,724 Income tax provision (4)5,496 1,578 199 6,564 3,951 Net income 11,019$ 8,941$ 4,083$ 12,351$ 19,773$ Net income per common share, basic: Basic0.44$ 0.36$ 0.16$ 0.48$ 0.78$ Diluted0.43$ 0.36$ 0.16$ 0.47$ 0.76$ Balance sheet data as of September 30: Working capital (total current assets less total current liabilities)142,748$ 122,105$ 106,121$ 112,236$ 115,703$ Total assets283,895$ 266,965$ 258,948$ 271,416$ 251,826$ Long-term debt and capital lease obligations-$ -$ 9$ 345$ 358$ Stockholders' equity260,716$ 240,556$ 229,586$ 231,934$ 222,905$ Book value per common share (stockholders' equity divided by outstanding shares)10.17$ 9.59$ 9.29$ 9.14$ 8.73$ Number of employees as of September 30691 648 634 663 564 (1) Acquisitions provided the following net sales during the year of acquisition: MobiApps in fiscal 2009 of $0.4 million, Sarian and Spectrum in fiscal 2008 of $6.5 million and MaxStream in fiscal 2006 of $3.2 million.(2) Included in general and administration expense in fiscal 2010 is investigation and remediation expenses of $1.4 million ($0.9 million after tax).(3) Included in total other (expense) income, net is an other-than-temporary impairment charge of $1.0 million ($0.7 million after tax) recorded during fiscal 2008 on an investment in a bond issued by Lehman Brothers.(4) In fiscal 2011, 2010 and 2009, we recorded net discrete tax benefits of $0.7 million, $2.3 million and $1.2 million, respectively (see Note 10 to our Consolidated Financial Statements). In fiscal 2008 we reversed income tax reserves of $0.5 million primarily due to the statutory closing of a prior U.S. federal and state tax year and the filing of a prior year tax return and adjustments to actual for items reported on the tax returns for fiscal 2007. In fiscal 2007, we reversed income tax reserves of $4.3 million due to the closing of a German tax audit and the statutory closing of a prior U.S. federal and state tax year and other discrete tax benefits for fiscal 2007.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a leading provider of machine to machine (M2M) networking products and solutions that enable the
connection, monitoring and control of local or remote physical assets by electronic means. These networking
products and solutions connect communication hardware to a physical asset so that information about that
asset’s status and performance can be sent to a computer system and used to improve or automate one or more
processes. Increasingly these products and solutions are deployed via wireless networks. Our hardware
products have been the historical foundation of our business. In 2009, we introduced a cloud-based internet
platform (iDigi®) which our customers can utilize to monitor and control electronic devices. Our products are
deployed by a wide range of businesses and institutions.
We have a single operating and reporting segment. Our revenues consist of products that are in non-embedded
and embedded product categories. Non-embedded products are connected externally to a device or larger
system to provide wired or wireless network connectivity or port expansion, while embedded products are used
by a product developer to build an electronic device in which the product provides processing power, wired
Ethernet, or wireless network connectivity to that device. The products included in the non-embedded product
category include cellular products, wireless communication adapters, console and serial servers, USB connected
products and serial cards. The products included in the embedded product category include modules, single-
board computers, chips, software and development tools, design services and satellite communication products.
We utilize many financial, operational, and other metrics to evaluate both our financial condition and our
financial performance. Below we highlight the results of those financial metrics that we feel are most important
in these evaluations:
Net Sales were approximately $204 Million. Our net sales were $204.2 million in fiscal 2011, and
increased by 11.8% compared to net sales of approximately $182.5 million in fiscal 2010. Wireless
product net sales increased by $18.3 million, providing the majority of the $21.7 million increase in
revenue from fiscal 2010 to fiscal 2011.
Gross Profit was approximately $107 Million. Gross profit increased by 15.6% in fiscal 2011 to $106.6
million compared to $92.2 million in fiscal 2010. Our gross margin increased as a percentage of net
sales to 52.2% in fiscal 2011 from 50.5% in fiscal 2010. We focused on cost reduction initiatives that
allowed us to reduce the cost of our products and increase gross profit through purchasing and
manufacturing efficiencies during the fiscal year. Favorable customer and product mix, as well as a
decrease in the amortization of purchased and core technology as certain intangibles were fully
amortized, also contributed to this increase. We expect to continue to focus on gross margin as we
implement our global strategy of consolidation and production centers to drive more efficiency
improvements and enhance customer service.
Operating Expenses Decreased as a Percentage of Net Sales in Fiscal 2011 from Fiscal 2010.
Operating expenses were $89.6 million or 43.9% of net sales in fiscal 2011 versus $82.3 million or
45.0% of net sales in fiscal 2010. The increase in total operating expenses was largely compensation-
related and resulted from a net increase in headcount of 43 people as well as higher non-sales incentive
compensation expenses. We also invested in our iDigi® cloud-based platform during fiscal 2011 as we
worked to evolve our business model. Despite these increases, operating expenses as a percentage of
net sales decreased during fiscal 2011 compared to fiscal 2010.
29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW (CONTINUED)
Net Income in Fiscal 2011 was $11.0 Million. Our net income increased by $2.1 million to $11.0
million in fiscal 2011, or 23.2%, over net income of $8.9 million in fiscal 2010. We leveraged the
increase in net sales, combined with cost reduction initiatives and lower operating expenses as a percent
of net sales to improve our profitability.
Our Balance Sheet and Cash from Operations are Strong. Our current ratio was 8.3 to 1 in fiscal 2011
compared to 6.7 to 1 in fiscal 2010. Cash from operations was $21.8 million in fiscal 2011 compared to
$16.1 million in fiscal 2010.
We accomplished a number of key initiatives in fiscal 2011 and also faced significant challenges relative to our
business.
Accomplishments
We increased revenue and earnings per diluted share in fiscal 2011 compared to the prior fiscal year and
maintained a strong balance sheet and cash flows which we believe provides a solid foundation for
growing our business.
We reduced our manufacturing costs for future periods by consolidating our Breisach, Germany
operations with our U.S. production facility.
We invested significantly in the development of the iDigi® Device Cloud platform and enhanced our
capability to develop customized software applications that leverage iDigi® , which expands our ability
to provide end-to-end solutions to our customers. We finished fiscal 2011 with over 3,500 companies
using the iDigi® Device Cloud.
Challenges
The global economic environment was volatile in fiscal 2011. We monitor our bookings, backlog and
anticipated shipments on a weekly basis which allows us to stay abreast of rapidly changing economic
conditions as we forecast our revenue.
The strengthening of foreign currencies, particularly the Euro and the British Pound, created net foreign
currency losses due to balances held abroad in non-functional currencies such as the U.S. dollar. We put
in place natural hedging and other strategies to minimize this exposure.
Since certain of our components and other materials are purchased from regions susceptible to natural
disasters as most recently seen in Japan and Thailand, we faced challenges in procuring certain
components and other materials used in manufacturing. We believe the impact to our business in fiscal
2011 from the Japan natural disaster was minimal, and we addressed this primarily through the purchase
of additional safety stock for component parts normally sourced from that region. As previously
announced, the recent flooding in Thailand has affected the operations of one of our contract
manufacturers and this will impact our operations and financial results during fiscal 2012.
30
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW (CONTINUED)
We believe we are approaching the inflection point in the wireless M2M market, and that we are
uniquely positioned for growth as we are able to provide customers with complete networking
solutions. The development of a cloud-based platform is a critical component of our overall solution
and go-to-market strategy, and we focused significant human capital and financial resources on this
initiative, while also managing our other strategic objectives.
In order to continue to improve our financial and operational performance, address the growth of our business
and meet our goal of becoming the leading global provider of wireless M2M networking products and end-to-
end solutions, we believe we must focus on the following key priorities:
Continue delivery of products and solutions to the following four vertical markets that we believe
promise extensive growth opportunities: energy, fleet, medical and tank;
Enhance our capacity to develop software applications and our iDigi® cloud -based platform and migrate
our sales and marketing efforts towards end-to-end solutions as opposed to sales of hardware products
alone; and
Further expand our strategic relationships with leading equipment manufacturers, application providers
and systems integrators.
31
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information from our Consolidated Statements of Operations, expressed
as a percentage of net sales and as a percentage of change from year-to-year for the years indicated.
NET SALES
Net sales were $204.2 million in fiscal 2011 compared to $182.5 million in fiscal 2010, an increase of $21.7
million or 11.8%, primarily due to a $26.6 million increase in the net sales of modules, cellular products,
engineering design services, serial servers, chips and iDigi® services. This was partially offset by a $4.9
million decrease in net sales of serial cards, USB devices, wireless communication adaptors and satellite-related
products. The increase in net sales in fiscal 2011 compared to fiscal 2010 is primarily driven by increased unit
volume as a result of increased customer sales, many of which were wireless and in our targeted vertical
markets. We did not experience a material change in revenue due to pricing during fiscal 2011.
Net sales were $182.5 million in fiscal 2010 compared to $165.9 million in fiscal 2009, an increase of $16.6
million or 10.0%, primarily due to an increase of $21.9 million in the net sales of modules, cellular products,
serial servers, wireless communication adaptors, USB products, engineering design services and satellite-related
products. This was partially offset by a decrease of $5.3 million in net sales due to large sales of a discontinued
chip set in fiscal 2009. The increase in net sales in fiscal 2010 compared to fiscal 2009 is primarily driven by
increased volume. We did not experience a material change in revenue due to pricing during fiscal 2010.
Fluctuation in foreign currency rates compared to the prior year’s rates had a favorable impact on net sales of
$0.9 million in fiscal 2011 and unfavorable impacts on net sales of $0.3 million and $5.9 million in fiscal 2010
and 2009, respectively.
32
($ in thousands)% Increase (decrease)20112010Year ended September 30,comparedcompared201120102009to 2010to 2009Net sales204,160$ 100.0 %182,548$ 100.0 %165,928$ 100.0 %11.8 %10.0 %Cost of sales (exclusive of amortization of purchased and core technology shown separately below) 94,702 46.4 86,266 47.3 80,470 48.5 9.8 7.2 Amortization of purchased and core technology2,870 1.4 4,073 2.2 4,193 2.5 (29.5) (2.9) Gross profit106,588 52.2 92,209 50.5 81,265 49.0 15.6 13.5 Operating expenses: Sales and marketing 39,549 19.4 37,010 20.3 35,304 21.3 6.9 4.8 Research and development 31,642 15.5 27,825 15.2 26,381 15.9 13.7 5.5 General and administrative18,206 8.9 17,889 9.8 14,557 8.7 1.8 22.9 Restructuring154 0.1 (468) (0.3) 1,953 1.2 132.9 (124.0) Total operating expenses89,551 43.9 82,256 45.0 78,195 47.1 8.9 5.2 Operating income17,037 8.3 9,953 5.5 3,070 1.9 71.2 224.2 Total other (expense) income, net(522) (0.2) 566 0.3 1,212 0.7 (192.2) (53.3) Income before income taxes16,515 8.1 10,519 5.8 4,282 2.6 57.0 145.7 Income tax provision5,496 2.7 1,578 0.9 199 0.1 248.3 693.0 Net income11,019$ 5.4 %8,941$ 4.9 %4,083$ 2.5 %23.2 %119.0 %
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
Net Sales by Product Category
The following table presents our revenue by embedded and non-embedded categories:
Non-Embedded
Non-embedded products net sales increased $8.4 million, or 8.3%, in fiscal 2011 compared to fiscal 2010 due
primarily to increases in cellular products and serial servers. This was partially offset by decreases in sales of
serial cards, wireless communication adaptors and USB connected products. USB connected products have
decreased due to softening of the retail sector for retail point-of-sale related USB applications in fiscal 2011.
Increased sales to customers in the medical and fleet vertical markets contributed to the increase in fiscal 2011
compared to fiscal 2010.
Non-embedded products net sales increased $8.9 million, or 9.7%, in fiscal 2010 compared to fiscal 2009. The
increase was mostly due to an increase in net sales of cellular products, serial servers, wireless communication
adaptors and USB products.
Embedded
Embedded products net sales increased $13.3 million, or 16.2%, in fiscal 2011 compared to fiscal 2010 due
mostly to increases of net sales of modules, engineering design services and chips. Increased sales to customers
in the medical vertical market contributed to the increase in fiscal 2011 compared to fiscal 2010.
Embedded products net sales increased $7.7 million, or 10.4%, in fiscal 2010 compared to fiscal 2009. The
increase was primarily due to a $13.0 million increase in net sales of modules and satellite-related products,
partially offset by a decrease of $5.3 million primarily related to large sales of a discontinued chip set in fiscal
2009.
Net Sales by Wireless and Wired Categories
The following table presents our revenue by wireless and wired categories:
Wireless products net sales have increased by 27.6% in fiscal 2011 compared to fiscal 2010 and 18.0% in fiscal
2010 compared to fiscal 2009 as a result of our continued investment and focus on wireless M2M products and
solutions. As is the trend with respect to the use of telecommunications generally, we anticipate that our sales
of wireless products will continue to grow proportionately faster than our sales of wired products.
33
($ in millions)% of Net Sales201120102009201120102009Non-embedded108.5$ 100.1$ 91.2$ 53.1%54.9%55.0%Embedded95.7 82.4 74.7 46.9%45.1%45.0%Total204.2$ 182.5$ 165.9$ 100.0%100.0%100.0%Net Sales($ in millions)% of Net Sales201120102009201120102009Wireless84.7$ 66.4$ 56.2$ 41.5%36.3%33.9%Wired119.5 116.1 109.7 58.5%63.7%66.1%Total204.2$ 182.5$ 165.9$ 100.0%100.0%100.0%Net Sales
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
Net Sales by Geographic Area
Our revenue by geographic location of our customers is as follows:
North America net sales in fiscal 2011 increased $11.4 million due to an increase of $6.3 million of embedded
products, of which $2.7 million is related to engineering design services, and $5.1 million of non-embedded
products. The North American sales for fiscal 2011 increased over the prior fiscal year primarily as a result of
larger customer sales, many of which were wireless and in our targeted vertical markets. Net sales in fiscal
2010 for North America increased $16.6 million due to an increase in embedded products of $4.8 million and
non-embedded products of $11.8 million.
Europe, Middle East, and Africa (“EMEA”) net sales increased $4.4 million in fiscal 2011 over fiscal 2010
mostly due to large customer deals. The strengthening of the Euro and British Pound contributed $0.7 million
to the increase in fiscal 2011 compared to fiscal 2010. Net sales in EMEA decreased $8.3 million from fiscal
2009 to fiscal 2010 as fiscal 2009 included large sales of a discontinued chip set and a large sale to a legacy
customer.
Asian countries revenue increased by $4.3 million in fiscal 2011 compared to fiscal 2010 mostly related to
Radio Frequency (RF) modules in the embedded product grouping. Revenue for the Asian countries increased
$7.1 million in fiscal 2010 compared to fiscal 2009 due to an increase of $4.1 million for embedded products
and $3.0 million for non-embedded products. Also in fiscal 2010, we recorded a full year of net sales related to
our acquisition of MobiApps compared to three months of net sales in fiscal 2009.
Latin America revenue increased by $1.6 million in fiscal 2011 compared to fiscal 2010 primarily due to non-
embedded cellular products. Revenue for Latin America increased $1.2 million in fiscal 2010 compared to
fiscal 2009 due to an increase of $0.8 million for embedded products and $0.4 million for non-embedded
products.
Net Sales by Distribution Channel
The following table presents our revenue by distribution channel:
Net sales in the Direct/OEM channel increased $7.1 million, or 10.8% compared to net sales in fiscal 2010.
During fiscal 2011, net sales in the Distributors channel increased by $14.6 million, or 12.4% compared to net
sales in fiscal 2010. Increased customer sales in our targeted vertical markets contributed to the increase in both
34
($ in millions)Net Sales % of Net Sales201120102009201120102009North America118.7$ 107.3$ 90.7$ 58.1%58.8%54.7%Europe, Middle East & Africa52.1 47.7 56.0 25.5%26.2%33.7%Asian countries27.0 22.7 15.6 13.2%12.4%9.4%Latin America6.4 4.8 3.6 3.2%2.6%2.2% Total net sales204.2$ 182.5$ 165.9$ 100.0%100.0%100.0%($ in millions)% of Net Sales201120102009201120102009Direct / OEM channel73.3$ 66.2$ 78.5$ 35.9%36.3%47.3%Distributors channel130.9 116.3 87.4 64.1%63.7%52.7% Total company204.2$ 182.5$ 165.9$ 100.0%100.0%100.0%Net Sales
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
the Distributors channel and the Direct/OEM channel. International sales growth also contributed to the
increase in Distributors channel sales.
During fiscal 2010, net sales in the Distributors channel increased by $28.9 million, or 33% compared to net
sales in fiscal 2009. Net sales in fiscal 2010 in the Direct / OEM channel decreased by $12.3 million, or 15.7%
compared to the prior fiscal year. The increase in net sales in the Distributors channel compared to the
Direct / OEM channel primarily is due to fulfillment of customer orders for wireless products.
Our distribution channel strategy is evolving to support the vertical markets on which we’re focused as well as
to support distribution of our wireless products.
GROSS PROFIT
2011 Compared to 2010
Gross profit was $106.6 million and $92.2 million in fiscal 2011 and 2010, respectively, an increase of $14.4
million, or 15.6%. The gross margin for fiscal 2011 was 52.2% compared to 50.5% in fiscal 2010. Gross
margin increased 1.7 percentage points primarily due to product cost reduction initiatives that allowed us to
reduce the cost of our products and increase gross profit through purchasing and manufacturing efficiencies
during the fiscal year. Favorable customer and product mix, as well as a decrease in the amortization of
purchased and core technology as certain intangibles were fully amortized, also contributed to the increase in
gross profit during fiscal 2011. Amortization of purchased and core technology was $2.9 million or 1.4% of net
sales in fiscal 2011 as compared to $4.1 million or 2.2% of net sales in fiscal 2010.
2010 compared to 2009
Gross profit was $92.2 million and $81.3 million in fiscal 2010 and 2009, respectively, an increase of $10.9
million, or 13.5%. The gross margin for fiscal 2010 was 50.5% compared to 49.0% in fiscal 2009. Gross
margin increased 2.1 percentage points primarily due to a reduction of costs as a result of the business
restructuring in fiscal 2009 and other cost reduction initiatives and also increased 0.3 percentage points related
to a reduction in amortization of purchased and core technology as some technology is fully amortized. This
was partially offset by a 0.9 percentage points decrease in gross margin due to unfavorable product mix
primarily related to cellular and certain embedded products. Amortization of purchased and core technology
was $4.1 million or 2.2% of net sales in fiscal 2010 as compared to $4.2 million or 2.5% of net sales in fiscal
2009.
OPERATING EXPENSES
2011 Compared to 2010
Operating expenses were $89.6 million in fiscal 2011, an increase of $7.3 million or 8.9%, compared to $82.3
million in fiscal 2010 mostly due to increased compensation-related expenses of $5.9 million, including salaries
and incentive compensation, as we fully reinstated our non-sales incentive program for fiscal 2011 and
increased headcount by 43 employees, primarily in sales, marketing and research and development. We also
invested in our iDigi® platform during fiscal 2011 as we worked to evolve our business to include cloud -based
solutions.
Sales and marketing expenses were $39.6 million in fiscal 2011, an increase of $2.6 million or 6.9%, compared
to $37.0 million in fiscal 2010. Sales and marketing expenses increased by $2.0 million for compensation-
35
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
related expenses due to increased headcount and full reinstatement of our non-sales incentive program and $0.6
million for outside services, travel and entertainment and miscellaneous other sales and marketing expenses.
Research and development expenses were $31.6 million in fiscal 2011, an increase of $3.8 million or 13.7%,
compared to $27.8 million in fiscal 2010. Research and development expenses increased by $2.6 million for
compensation-related expenses due to increased headcount and full reinstatement of our non-sales incentive
program, $0.8 million for other research and development expenses mostly related to the investment in our
iDigi® cloud-based platform and $0.4 million for professional services and contract labor.
General and administrative expenses were $18.2 million in fiscal 2011, an increase of $0.3 million or 1.8%,
compared to $17.9 million in fiscal 2010. The increase in general and administrative expenses was due to
increases of $1.3 million for compensation-related expenses mostly related to a full reinstatement of our non-
sales incentive program and $0.2 million related to a litigation settlement discussed in Notes 16 and 18 to our
consolidated financial statements. This partially was offset by a reduction of $1.2 million in professional fees
related to internal investigation and remediation actions we took related to the U.S. Foreign Corrupt Practices
Act incurred in fiscal 2010.
2010 Compared to 2009
Operating expenses were $82.3 million in fiscal 2010, an increase of $4.1 million or 5.2%, compared to $78.2
million in fiscal 2009. Compensation-related expenses, including salaries, incentive compensation,
commissions and stock-based compensation increased $1.8 million as we fully restored the sales commission
program and partially reinstated our non-sales incentive compensation program for fiscal 2010. We also
incurred professional fees of $1.4 million related to the internal investigation and remediation actions we took
related to the U.S. Foreign Corrupt Practices Act as well as incremental ongoing expenses related to the fiscal
2009 MobiApps acquisition of $1.6 million.
Sales and marketing expenses were $37.0 million in fiscal 2010, an increase of $1.7 million or 4.8%, compared
to $35.3 million in fiscal 2009. The increase was due to an increase of $1.0 million in commission expense,
$0.4 million in incremental expenses for MobiApps and $0.3 million of other various sales and marketing
expenses.
Research and development expenses were $27.8 million in fiscal 2010, an increase of $1.4 million or 5.5%,
compared to $26.4 million in fiscal 2009. The increase was due to an increase of $0.9 million in professional
services, contract labor and certification testing, $0.7 million in incremental expenses for MobiApps, and $0.4
million of compensation-related expenses, offset by a net reduction of $0.6 million of expense primarily related
to a development project that was completed in fiscal 2009.
General and administrative expenses were $17.9 million in fiscal 2010, an increase of $3.4 million or 22.9%,
compared to $14.5 million in fiscal 2009. General and administrative expenses increased by $2.0 million due to
increased professional fees which includes $1.4 million of investigation and remediation fees. In addition, the
incremental expenses for MobiApps increased general and administrative expenses by $0.5 million,
compensation-related expenses increased by $0.3 million and other miscellaneous general and administrative
expenses increased by $0.6 million.
36
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESTRUCTURING
2011 Restructuring
On July 21, 2011, we announced a restructuring of our manufacturing operations in Breisach, Germany. The
restructuring reduced our manufacturing footprint by consolidating prototype and production functions and
centralizing outsourced production control in our Eden Prairie, Minnesota production facility. The
consolidation was driven by our strategy of driving efficiency improvements and enhancing customer service
globally through more centralized operations. We will continue to maintain sales and research and development
activities at the leased facility in Breisach, Germany. As a result of these initiatives, we expect the total charge
to be $0.6 million on a pre-tax basis, which consists of $0.5 million for employee termination costs for 25
employees and $0.1 million for asset write-downs. We recorded a charge of $0.2 million in the fourth quarter
of fiscal 2011, and expect to record charges of $0.3 million in the first quarter of fiscal 2012 and $0.1 million in
the second quarter of fiscal 2012. The payments are expected to be completed in the second quarter of fiscal
2012. We expect to cease manufacturing in Breisach by the end of December 2011 and the majority of the
manufacturing positions will be vacated by the end of December 2011.
2009 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 Minnetonka, Minnesota headquarters. We paid a lease cancellation fee
for one of the leased facilities in Davis and had vacated the facility as of September 30, 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 86 positions were vacated as of September 30, 2009. The employee termination costs included
severance and the associated costs of continued medical benefits and outplacement services. The other
restructuring expenses included contract termination fees for non-renewal of lease terms relating to one of
the facilities in Davis, California and relocation expenses for employees.
During fiscal 2010, we recorded an additional $0.1 million for an additional six months of continued
medical benefits as a result of new healthcare legislation passed in December 2009 related to the
aforementioned restructuring. Also during fiscal 2010 we reversed $0.5 million of the restructuring
accrual since costs associated with continued medical benefits and relocation were lower than expected.
During fiscal 2011, we paid a small amount of employee termination costs and reversed the remaining
restructuring accrual.
OTHER (EXPENSE) INCOME, NET
2011 Compared to 2010
Other (expense) income, net was $0.5 million of expense in fiscal 2011, a decrease of $1.1 million compared to
$0.6 million of income in fiscal 2010. The majority of this was due to $0.7 million of foreign currency net
transaction losses in fiscal 2011 compared to foreign currency net transaction gains of $0.3 million in fiscal
2010. We realized interest income on marketable securities and cash and cash equivalents of $0.3 million in
fiscal 2011 compared to $0.4 million in fiscal 2010. Our average investment balance increased from $69.0
million in fiscal 2010 to $85.9 million in fiscal 2011, but our interest income was less than in the prior fiscal
year since we earned an average interest rate of 0.3% in fiscal 2011 compared to 0.5% in fiscal 2010.
37
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER (EXPENSE) INCOME, NET (CONTINUED)
2010 Compared to 2009
Total other income, net was $0.6 million in fiscal 2010, a decrease of $0.6 million compared to $1.2 million in
fiscal 2009. We realized interest income on marketable securities and cash and cash equivalents of $0.4 million
in fiscal 2010 compared to $1.4 million in fiscal 2009. Although our average investment balance during fiscal
2010 was $69.0 million compared to $57.6 million in fiscal 2009, the decrease in interest income was primarily
due to a lower than average interest rate as we earned an average interest rate of 0.5% during fiscal 2010
compared to 2.4% during fiscal 2009. Interest expense was $0.1 million in fiscal 2010 as compared to $0.3
million in fiscal 2009 as we made one of the deferred payments during fiscal 2010 for the Spectrum acquisition.
Other income, net also increased $0.3 million related to a net increase in foreign currency transaction gains in
fiscal 2010 compared to fiscal 2009.
INCOME TAXES
Our effective income tax rate was 33.3%, 15.0% and 4.6% for fiscal years 2011, 2010 and 2009, respectively.
Our effective tax rate will vary based on a variety of factors, including overall profitability, the geographical
mix of income before taxes and related statutory tax rate in each jurisdiction, and discrete events, such as
settlements of audits.
During fiscal 2011, we recorded a tax benefit of $0.7 million primarily related to the release of income tax
reserves due to the expiration of the statutes of limitations from various jurisdictions, primarily foreign. The
enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provided
for the extension of the research and development tax credit that allowed us to record a benefit for tax credits
earned during the last three quarters of fiscal 2010 in the first quarter of fiscal 2011. The aforementioned
income tax benefits resulting from the reversal of income tax reserves and other discrete tax benefits reduced
our effective tax rate by 4 percentage points in fiscal 2011.
During fiscal 2010, we reversed $2.3 million in income tax reserves associated primarily with the closing of
prior tax years through statute expiration and the conclusion of a federal tax audit. While the statutes of
limitations have not expired, U.S. federal income tax returns for the periods ended September 30, 2007 and
September 30, 2008 have been audited by and settled with the Internal Revenue Service. The aforementioned
income tax benefits resulting from the reversal of income tax reserves and other discrete tax benefits reduced
the effective tax rate by 22 percentage points in fiscal 2010.
During fiscal 2009, we reversed $0.6 million in income tax reserves primarily associated with the statutory
closing of a prior U.S. federal and state tax year and settlement of prior liabilities under amnesty programs. We
recorded an additional current discrete tax benefit of $0.5 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. We also recorded adjustments to actual for items reported on the tax returns filed for
fiscal 2007 and 2008. The aforementioned income tax benefits resulting from the reversal of income tax
reserves and other discrete tax benefits reduced the effective tax rate by 27 percentage points in fiscal 2009.
SUBSEQUENT EVENT
On October 26, 2011, we announced that the flooding in Thailand has impacted the operations of our contract
manufacturer located near Bangkok, Thailand. The main manufacturing facility is currently closed, although
efforts are underway to restore operations at the contract manufacturer’s back-up facility, which has not
38
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SUBSEQUENT EVENT (CONTINUED)
currently been impacted by flooding and is also located in Bangkok. In addition, we are working on
reallocating production normally done in Thailand to our U.S. manufacturing facility, as well as other contract
manufacturers we currently use. We presently anticipate that the Thailand flooding and the resulting impact on
our subcontract manufacturer in Thailand will decrease revenue in a range of approximately $2 million to $6
million for the first fiscal quarter of 2012, and gross margin will decrease by approximately two percentage
points in the first fiscal quarter of 2012. We expect that the impact of the Thailand flooding for the full fiscal
year 2012 will have a minimal impact on revenue, and the impact to gross margin will be approximately one
percentage point. We expect that earnings per diluted share for fiscal 2012 will be reduced by approximately
$0.07 due to the revenue and gross margin impact previously described.
INFLATION
Management believes that during fiscal years 2011, 2010 and 2009, inflation has not had a material effect on
our operations or on our consolidated financial position.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations principally with funds generated from operations. We held cash, cash
equivalents and short-term marketable securities of $106.2 million, $87.6 million and $70.7 million at
September 30, 2011, 2010 and 2009, respectively. Our working capital was $142.7 million, $122.1 million and
$106.1 million at September 30, 2011, 2010 and 2009, respectively. Absent a disruption in our business, we
expect our working capital to continue to increase.
Net cash provided by operating activities was $21.8 million during fiscal 2011 compared to $16.1 million
in fiscal 2010, a net increase of $5.7 million. This net increase was due to an increase in net income of
$2.1 million, deferred income taxes of $2.4 million, inventory obsolescence of $1.1 million, net increases
in working capital of $1.0 million and other non-cash items of $0.4 million. This was offset by net
decreases in amortization expense of $1.3 million. Changes in working capital increased cash flows by
$1.0 million due to a $3.8 million increase in accounts receivable as the increase in accounts receivable in
fiscal 2011 was less than the increase in fiscal 2010 and a $1.5 million increase in inventories as
inventories have declined in fiscal 2011. This was offset by a $2.7 million net decrease in accounts
payable and $1.6 million in other assets and accrued expenses.
39
Consolidated Statement of Cash Flow Highlights (in thousands)201120102009Operating activities21,839$ 16,095$ 15,686$ Investing activities(22,399) (15,167) 25,286 Financing activities4,639 2,604 (5,427) Effect of exchange rate changes on cash and cash equivalents(338) (1,023) (1,287) Net increase in cash and cash equivalents3,741$ 2,509$ 34,258$ Year ended September 30,
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash provided by operating activities was $16.1 million during fiscal 2010 compared to $15.7 million
during fiscal 2009, a net increase of $0.4 million. This net increase is due to an increase in net income of
$4.9 million and a net increase of $0.2 million of other non-cash items, offset by a decrease of $1.0 million
for changes in deferred income tax benefits and a $3.7 million decrease due to changes in working capital.
Changes in working capital decreased cash flows by $3.7 million primarily due to an $11.9 million
decrease in accounts receivable as the receivables balance increased due to higher revenue in September
2010 than in September 2009. Inventory levels were approximately the same at September 30, 2010 and
2009, however inventories decreased $3.6 million at September 30, 2009 compared to 2008. This was
offset by a net increase of $6.0 million related to changes in accounts payable and a net increase of $5.8
million related to changes in other assets and accrued expenses.
Net cash used in investing activities was $22.4 million in fiscal 2011 as compared to $15.2 million in fiscal
2010, a net increase of $7.2 million. We used an additional $7.4 million of cash for net purchases of marketable
securities in fiscal 2011 compared to fiscal 2010, offset by $0.2 million fewer capital expenditures in fiscal
2011 as compared to fiscal 2010.
Net cash used by investing activities was $15.2 million in fiscal 2010 as compared to net cash provided by
investing activities of $25.3 million during fiscal 2009, a net decrease of $40.5 million. Net purchases of
marketable securities in fiscal 2010 offset by net settlements of marketable securities in fiscal 2009 resulted in a
net decrease of $41.3 million. We used cash of $3.0 million for a deferred payment related to the Spectrum
acquisition in fiscal 2010. In fiscal 2009 we spent $3.0 million related to the acquisition of the assets of
MobiApps and reduced our capital expenditures by $0.8 million.
Net cash provided by financing activities was $4.6 million in fiscal 2011 as compared to $2.6 million in fiscal
2010, an increase of $2.0 million, resulting from additional exercises of stock options and employee stock
purchase plan transactions.
Net cash provided by financing activities was $2.6 million in fiscal 2010 as compared to net cash used in
financing activities of $5.4 million in fiscal 2009, a net increase of $8.0 million. We spent $6.6 million related
to treasury stock repurchases in fiscal 2009. In fiscal 2010 compared to fiscal 2009, we received an additional
$1.1 million in proceeds from the exercise of stock options and employee stock purchase plan transactions and
spent $0.3 million less in capital lease payments.
We expect positive cash flows from operations and believe that our current cash, cash equivalents and
marketable securities balances, cash generated from operations and our ability to secure debt and/or equity
financing will be sufficient to fund our business operations and capital expenditures for the next twelve months
and beyond.
The following summarizes our contractual obligations at September 30, 2012:
40
(in thousands)TotalLess than 1 year1-3 years3-5 yearsThereafterOperating leases7,563$ 2,759$ 3,209$ 1,453$ 142$ Payments due by fiscal period
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The operating lease agreements included above primarily relate to office space. The table above does not
include possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including
accrued interest and penalties, was $2.6 million as of September 30, 2011. Due to the nature of the underlying
liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable
estimates of the amount or timing of future cash payments that may be required to settle these liabilities.
The above table also does not include our obligation for royalties under a license agreement that we entered into
September 30, 2011 as a result of the patent litigation settlement with MOSAID Technologies Incorporated.
The royalties are calculated based on future sales of licensed products identified in the settlement agreement and
we cannot make reliable estimates of the amount of cash payments.
FOREIGN CURRENCY
We are exposed to foreign currency risk associated with certain sales transactions being denominated in Euros,
British Pounds, Japanese Yen and Indian Rupees 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.
During 2011, we had approximately $85.5 million of net sales related to foreign customers including export
sales, of which $28.8 million was denominated in foreign currency, predominantly the Euro and British Pound.
During both 2010 and 2009, we had approximately $75.2 million of net sales to foreign customers including
export sales, of which $27.6 million and $33.4 million, respectively, were denominated in foreign currency,
predominantly the Euro and British Pound. In future periods, we expect a significant portion of sales will
continue to be made in Euros and British Pounds.
RECENT ACCOUNTING DEVELOPMENTS
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
No. 2011-08, “Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment”. This guidance
provides an update on how an entity tests goodwill for impairment. This revised guidance allows companies an
option to make a qualitative evaluation about the likelihood of goodwill impairment. Under the revised
guidance, a company is permitted to first assess qualitative factors to determine whether goodwill impairment
exists prior to performing analyses comparing the fair value of a reporting unit to its carrying amount. If, based
on the qualitative assessment, a company concludes it is more likely than not that the fair value of the reporting
unit exceeds its carrying value, quantitative testing for impairment is not necessary. This guidance is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is
permitted. We have elected to early adopt this update to be effective for our fiscal year beginning October 1,
2011 and we do not expect that the adoption of this update will have a material impact on our consolidated
financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income
(Topic 220): Presentation of Comprehensive Income”. This guidance eliminates the option to report other
comprehensive income and its components in the consolidated statement of stockholders’ equity. Rather it
requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement
of comprehensive income or in two separate but consecutive statements. This guidance also requires us to
present on the face of the financial statements any reclassification adjustments for items that are reclassified
from other comprehensive income to net income. The guidance is effective for fiscal years, and interim periods
41
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
within those years, beginning after December 15, 2011. We will adopt this guidance beginning with our fiscal
quarter ending December 31, 2012. The adoption of this guidance will have no effect on our consolidated
financial position or results of operations, as it will only impact how certain information related to other
comprehensive income is presented in our consolidated financial statements.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs”. This guidance changes the wording used to describe many of the requirements in U.S. GAAP for
measuring fair value and for disclosing information about fair value measurements to ensure consistency
between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance is to be applied
prospectively and is effective during interim and annual periods beginning after December 15, 2011. We will
adopt this guidance beginning with our fiscal quarter ending March 31, 2012. We do not expect this guidance
to have a material impact on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, the
disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in
acquisitions. We base our estimates on historical experience and various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates.
We believe the following critical accounting policies impact our more significant judgments and estimates used
in the preparation of our consolidated financial statements.
REVENUE RECOGNITION
Our revenues are derived primarily from the sale of embedded and non-embedded products to our distributors
and Direct (end-user) / OEM customers, and to a small extent from the sale of professional and engineering
services, fees associated with technical support, training, software licenses and royalties. We recognize product
revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or
determinable, collectability is reasonably assured and there are no post-delivery obligations other than warranty.
Under these criteria, product revenue is generally is recognized upon shipment of product to customers,
including Direct (end-user)/OEM and distributors. Sales to authorized domestic distributors and Direct / OEMs
are made with certain rights of return and price adjustment provisions. Estimated reserves for future returns and
pricing adjustments are established by us based on an analysis of historical patterns of returns and price
adjustments as well as an analysis of authorized returns compared to received returns, current on-hand inventory
at distributors, and distribution sales for the current period. Estimated reserves for future returns and price
adjustments are charged against revenues in the same period as the corresponding sales are recorded. Material
differences between the historical trends used to determine estimated reserves and actual returns and pricing
adjustments could result in a material change to our consolidated results of operations or financial position. We
have applied consistent methodologies for estimating reserves for future returns and pricing adjustments for all
42
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
years presented. The reserve for future returns and pricing adjustments was $1.3 million at September 30, 2011
and $1.1 million at September 30, 2010.
Our non-product revenue represented 4.5%, 3.3% and 3.0% of net sales in fiscal 2011, 2010 and 2009,
respectively. The majority of the non-product revenue was from professional and engineering services and
represented 4.2%, 2.9% and 2.7% of net sales in fiscal 2011, 2010 and 2009, respectively. We also had revenue
from cloud-based services, post-contract customer support, fees associated with technical support, training,
royalties and the sale of software licenses. Our software development tools and development boards often
include multiple elements, including hardware, software licenses, post-contract customer support, limited
training and basic hardware design review. Our customers purchase these products and services during their
product development process in which they use the tools to build network connectivity into the devices they are
manufacturing. Revenue for professional and engineering services and training is recognized upon
performance. Revenue from software licenses is recognized when earned. Revenues from contracts with
multiple element arrangements are recognized as each element is earned based on the relative fair value of each
element provided the delivered elements have value to customers on a standalone basis. Amounts allocated to
each element are based on its vendor specific objective evidence, such as the sales price for the product or
service when it is sold separately. Revenue from cloud-based services is earned in two ways: a) web-based
management fees are considered to be earned on a monthly basis consistent with a monthly contractual
commitment, and b) transaction fees that are billed to the customer at the larger of the minimum price or the
number of transactions times the stated fee and are considered earned as the transactions occur.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
We regularly monitor and evaluate the realizable value of our marketable securities. When assessing
marketable securities for other-than-temporary declines in value, we consider several factors. These factors
include: how significant the decline in value is as a percentage of the original cost, how long the market value
of the investment has been less than its original cost, the underlying factors contributing to a decline in the
prices of securities in a single asset class, the performance of the issuer’s stock price in relation to the stock
price of its competitors within the industry, expected market volatility, analyst recommendations, the views of
external investment managers, any news or financial information that has been released specific to the investee
and the outlook for the overall industry in which the issuer operates. If events and circumstances indicate that a
decline in the value of these securities has occurred and is other-than-temporary, we would record a charge to
other income (expense).
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts, which reflects the estimate of losses that may result from the
inability of some of our customers to make required payments. The estimate for the allowance for doubtful
accounts is based on known circumstances regarding collectability of customer accounts and historical
collections experience. If the financial condition of one or more of our customers were to deteriorate, resulting
in an inability to make payments, additional allowances may be required. Material differences between the
historical trends used to estimate the allowance for doubtful accounts and actual collection experience could
result in a material change to our consolidated results of operations or financial position. The allowance for
doubtful accounts was $0.3 million at September 30, 2011 and $0.5 million at September 30, 2010.
INVENTORIES
Inventories are stated at the lower of cost or fair market value, with cost determined using the first-in, first-out
method. We reduce the carrying value of our inventories for estimated excess and obsolete inventories equal to
43
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
the difference between the cost of inventory and its estimated realizable value based upon assumptions about
future product demand and market conditions. Once the new cost basis is established, the value is not increased
with any changes in circumstances that would indicate an increase in value after the remeasurement. If actual
product demand or market conditions are less favorable than those projected by management, additional
inventory write-downs may be required that could result in a material change to our consolidated results of
operations or financial position. We have applied consistent methodologies for the net realizable value of
inventories.
GOODWILL
Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is tested for
impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could
indicate impairment. At June 30, 2011, our market capitalization exceeded the carrying value of our reporting
unit by 28.6%; therefore, there was no indication of goodwill impairment. There were no triggering events to
indicate goodwill impairment at September 30, 2011.
INCOME TAXES
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. Tax audits associated with the allocation of this income, and other
complex issues, may require an extended period of time to resolve and could result in adjustments to our
income tax balances that are material to our consolidated financial position and results of operations.
We have unrecognized tax benefits of $2.6 million classified as a long-term liability as we do not expect
significant payments to occur over the next 12 months. The total amount of unrecognized tax benefits that if
recognized would affect our effective tax rate is $2.0 million. We recognize interest and penalties related to
income tax matters in income tax expense.
WARRANTIES
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 one to five years from the date of receipt. We have the option to
repair or replace products we deem defective due 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. The product warranty accrual was $0.9 million at both September 30, 2011 and September 30, 2010.
44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. We do not use derivative
financial instruments to hedge against interest rate risk.
FOREIGN CURRENCY RISK
We are exposed to foreign currency risk associated with certain sales transactions being denominated in Euros,
British Pounds, Japanese Yen or Indian Rupees 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, although we employ natural hedging of assets and liabilities
denominated in foreign currencies to reduce our foreign currency risk.
The table below compares the average monthly exchange rates of the Euro, British Pound, Japanese Yen and
Indian Rupee to the U.S. Dollar:
A 10.0% change from the 2011 average exchange rate for the Euro, British Pound, Yen and Rupee to the U.S.
Dollar would have resulted in a 1.4% increase or decrease in annual net sales and a 2.0% increase or decrease in
stockholders’ equity. The above analysis does not take into consideration any pricing adjustments we may
make in response to changes in the exchange rate.
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,
commercial paper, money market funds, corporate bonds and government municipal bonds. We may have
some credit exposure related to the fair value of our securities, which could change based on changes in market
conditions. If market conditions deteriorate or, if these securities experience credit rating downgrades, we may
incur impairment charges for securities in our investment portfolio. We also may have credit exposure should
there be further market disruptions resulting from U.S. Federal Government credit downgrades.
45
% increase20112010(decrease)Euro1.39551.35742.8%British Pound1.60641.55963.0%Japanese Yen0.01230.011210.5%Indian Rupee0.02210.02171.8%Twelve months ended September 30,
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Digi International Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, of cash flows and of stockholders’ equity and comprehensive income (loss) present fairly, in all
material respects, the financial position of Digi International Inc. and its subsidiaries at September 30, 2011 and
2010, and the results of their operations and their cash flows for each of the three years in the period ended
September 30, 2011 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of September 30, 2011, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Company’s management is responsible for these financial statements
and financial statement schedule, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in Management’s Report
on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and on the Company’s internal
control over financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
46
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 23, 2011
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per common share data)
48
201120102009Net sales 204,160$ 182,548$ 165,928$ Cost of sales (exclusive of amortization of purchased and core technology shown separately below) 94,702 86,266 80,470 Amortization of purchased and core technology 2,870 4,073 4,193 Gross profit106,588 92,209 81,265 Operating expenses: Sales and marketing39,549 37,010 35,304 Research and development31,642 27,825 26,381 General and administrative 18,206 17,889 14,557 Restructuring 154 (468) 1,953 Total operating expenses89,551 82,256 78,195 Operating income 17,037 9,953 3,070 Other (expense) income, net: Interest income251 355 1,406 Interest expense(86) (138) (257) Other (expense) income(687) 349 63 Total other (expense) income, net(522) 566 1,212 Income before income taxes 16,515 10,519 4,282 Income tax provision5,496 1,578 199 Net income11,019$ 8,941$ 4,083$ Net income per common share: Basic0.44$ 0.36$ 0.16$ Diluted0.43$ 0.36$ 0.16$ Weighted average common shares, basic25,312 24,865 24,901 Weighted average common shares, diluted25,819 25,154 25,183 The accompanying notes are an integral part of the consolidated financial statements.Fiscal years ended September 30,
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
49
20112010ASSETSCurrent assets:Cash and cash equivalents54,684$ 50,943$ Marketable securities51,524 36,634 Accounts receivable, net26,433 24,090 Inventories23,986 26,550 Deferred tax assets2,610 3,344 Other2,997 2,141 Total current assets162,234 143,702 Marketable securities, long-term1,603 - Property, equipment and improvements, net15,370 16,396 Identifiable intangible assets, net14,360 19,851 Goodwill86,012 86,210 Deferred tax assets3,771 320 Other545 486 Total assets283,895$ 266,965$ LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable6,492$ 7,449$ Accrued compensation7,758 5,850 Deferred payment on acquisition- 2,914 Other5,236 5,384 Total current liabilities19,486 21,597 Income taxes payable2,620 2,838 Deferred tax liabilities813 1,457 Other noncurrent liabilities260 517 Total liabilities23,179 26,409 Commitments and contingencies (see Notes 15 & 16)Stockholders' equity:Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding- - Common stock, $.01 par value; 60,000,000 shares authorized;29,100,577 and 28,666,311 shares issued 291 287 Additional paid-in capital194,580 185,427 Retained earnings102,668 91,649 Accumulated other comprehensive loss(10,457) (9,589) Treasury stock, at cost, 3,471,930 and 3,584,215 shares(26,366) (27,218) Total stockholders' equity260,716 240,556 Total liabilities and stockholders' equity283,895$ 266,965$ The accompanying notes are an integral part of the consolidated financial statements.As of September 30,
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
50
201120102009Operating activities: Net income 11,019$ 8,941$ 4,083$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, equipment and improvements3,006 2,649 2,581 Amortization of identifiable intangible assets6,171 7,484 7,476 Bad debt/product return provision (benefit), net 90 175 (265) Inventory obsolescence1,935 848 881 Stock-based compensation3,444 3,371 3,518 Excess tax benefits from stock-based compensation(796) (47) (80) Deferred income taxes, net(1,205) (3,656) (2,714) Restructuring154 (468) - Other263 27 (230) Changes in operating assets and liabilities (net of acquisitions): Accounts receivable(2,756) (6,525) 5,384 Inventories623 (891) 2,695 Other assets(602) 749 193 Income taxes receivable(432) (1,235) (1,090) Accounts payable(1,227) 1,486 (4,561) Accrued expenses 2,152 3,187 (2,185) Net cash provided by operating activities21,839$ 16,095$ 15,686$ Investing activities: Purchase of marketable securities(61,506) (38,538) (30,489) Proceeds from maturities of marketable securities44,843 29,335 62,624 Acquisition of businesses, net of cash acquired, including deferred payments(3,000) (3,000) (2,986) Proceeds from sale of property and equipment- 11 10 Purchase of property, equipment, improvements and certain other intangible assets(2,736) (2,975) (3,873) Net cash (used in) provided by investing activities(22,399) (15,167) 25,286 Financing activities: Payments on capital lease obligations- (9) (336) Purchase of treasury stock- - (6,576) Excess tax benefits from stock-based compensation796 47 80 Proceeds from stock option plan transactions2,853 1,672 423 Proceeds from employee stock purchase plan transactions990 894 982 Net cash provided by (used in) financing activities4,639 2,604 (5,427) Effect of exchange rates changes on cash and cash equivalents(338) (1,023) (1,287) Net increase in cash and cash equivalents3,741 2,509 34,258 Cash and cash equivalents, beginning of period50,943 48,434 14,176 Cash and cash equivalents, end of period54,684$ 50,943$ 48,434$ Supplemental Cash Flow Information: Interest paid86$ 159$ 54$ Income taxes paid, net7,065$ 6,479$ 3,944$ The accompanying notes are an integral part of the consolidated financial statements.For the fiscal years ended September 30,
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME (LOSS)
(in thousands)
51
For the years ended September 30, 2011, 2010 and 2009AccumulatedAdditionalOtherTotal Common StockTreasury StockPaid-InRetainedComprehensiveStockholders' SharesPar ValueSharesValueCapitalEarningsIncome (Loss)EquityBalances, September 30, 200828,336 283$ 2,960 (22,691)$ 177,614$ 78,625$ (1,897)$ 231,934$ Net income4,083 4,083 Foreign currency translation adjustment(4,622) (4,622) Net unrealized (loss) gain on investments (net of related tax effect of $2)(4) (4) Reclassification of gain into net income (net of related tax effect of $3)(4) (4) Total comprehensive loss(547) Employee stock purchase issuances(145) 1,106 (124) 982 Purchase of treasury stock893 (6,576) (6,576) Issuance of stock upon exercise of stock options73 1 422 423 Tax benefit realized upon exercise of stock options(148) (148) Stock-based compensation expense3,518 3,518 Balances, September 30, 200928,409 284$ 3,708 (28,161)$ 181,282$ 82,708$ (6,527)$ 229,586$ Net income8,941 8,941 Foreign currency translation adjustment(3,074) (3,074) Net unrealized (loss) gain on investments (net of related tax effect of ($22))34 34 Reclassification of gain into net income (net of related tax effect of $14)(22) (22) Total comprehensive income5,879 Employee stock purchase issuances(124) 943 (49) 894 Issuance of stock upon exercise of stock options257 3 1,669 1,672 Tax benefit realized upon exercise of stock options(846) (846) Stock-based compensation expense3,371 3,371 Balances, September 30, 201028,666 287$ 3,584 (27,218)$ 185,427$ 91,649$ (9,589)$ 240,556$ Net income11,019 11,019 Foreign currency translation adjustment(770) (770) Net unrealized (loss) gain on investments (net of related tax effect of $66)(104) (104) Reclassification of loss into net income (net of related tax effect of ($4))6 6 Total comprehensive income10,151 Employee stock purchase issuances(112) 852 138 990 Issuance of stock upon exercise of stock options435 4 2,849 2,853 Tax benefit realized upon exercise of stock options2,722 2,722 Stock-based compensation expense3,444 3,444 Balances, September 30, 201129,101 291$ 3,472 (26,366)$ 194,580$ 102,668$ (10,457)$ 260,716$ The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
We are a leading provider of machine to machine (M2M) networking products and solutions that enable the
connection, monitoring and control of local or remote physical assets by electronic means. Our products are
deployed by a wide range of businesses and institutions. We focus a significant amount of our development,
sales and marketing efforts on four vertical markets that represent significant opportunities to expand our
business: energy monitoring and management, fleet vehicle tracking, medical monitoring and reporting and
storage tank monitoring and control.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of money market accounts and other highly liquid investments purchased with an
original maturity of three months or less. The carrying amounts approximate fair value due to the short
maturities of these investments.
MARKETABLE SECURITIES
Marketable securities consist of certificates of deposit, commercial paper, corporate bonds and government
municipal bonds. All marketable securities are accounted for as available-for-sale and are carried at fair
value with unrealized gains and losses reported as a separate component of stockholders’ equity. We
obtain quoted market prices and trading activity for each security, where available, review the financial
solvency of each security issuer and obtain other relevant information to estimate the fair value for each
security in our investment portfolio.
We regularly monitor and evaluate the value of our marketable securities. When assessing marketable
securities for other-than-temporary declines in value, we consider several factors. These factors include: how
significant the decline in value is as a percentage of the original cost, how long the market value of the
investment has been less than its original cost, the underlying factors contributing to a decline in the prices of
securities in a single asset class, the performance of the issuer’s stock price in relation to the stock price of its
competitors within the industry, expected market volatility, analyst recommendations, the views of external
investment managers, any news or financial information that has been released specific to the investee and the
outlook for the overall industry in which the issuer operates. If events and circumstances indicate that a decline
in the value of a security has occurred and is other-than-temporary, we would record a charge to other income
(expense).
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the amount we expect to collect, which is net of an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to make required payments. The
following factors are considered when determining the collectability of specific customer accounts: customer
creditworthiness, past transaction history with the customer, and changes in customer payment terms or
practices. In addition, overall historical collection experience, current economic industry trends, and a review
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE (CONTINUED)
of the current status of trade accounts receivable are considered when determining the required allowance for
doubtful accounts. Based on our assessment, we provide for estimated uncollectible amounts through a charge
to earnings and a credit to our allowance for doubtful accounts. Balances that remain outstanding after we have
used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a
credit to accounts receivable.
INVENTORIES
Inventories are stated at the lower of cost or fair market value, with cost determined using the first-in, first-out
method. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating fair
market value.
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET
Property, equipment and improvements are carried at cost, net of accumulated depreciation. Depreciation is
provided by charges to operations using the straight-line method over the estimated asset useful lives. Furniture
and fixtures and other equipment are depreciated over a period of three to seven years. Building improvements
and buildings are depreciated over ten and thirty-nine years, respectively. Equipment under capital lease is
depreciated over the lesser of the lease term or its depreciable life.
Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and
betterments are capitalized. The assets and related accumulated depreciation accounts are adjusted for asset
retirements and disposals with the resulting gain or loss included in operations.
IDENTIFIABLE INTANGIBLE ASSETS
Purchased proven technology, license agreements, covenants not to compete and other identifiable intangible
assets are recorded at fair value when acquired in a business acquisition, or at cost when not purchased in a
business acquisition. Purchased in-process research and development costs (IPR&D) were previously expensed
upon consummation of the related business acquisition. Effective October 1, 2009 in-process research and
development costs are capitalized according to authoritative guidance issued by FASB related to business
combinations. Since this new guidance was effective, we have not completed any acquisitions. All other
identifiable intangible assets are amortized on either a straight-line basis over their estimated useful lives of
three to thirteen years or based on the pattern in which the asset is consumed. Useful lives for identifiable
intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to
derive benefits from the identifiable intangible assets. Amortization of purchased and core technology is
presented as a separate component of cost of sales in the Consolidated Statements of Operations. Amortization
of all other acquired identifiable intangible assets is charged to operating expense as a component of general
and administrative expense.
Identifiable intangible assets are reviewed for impairment annually, at a minimum, or whenever events or
circumstances indicate that undiscounted expected future cash flows are not sufficient to recover the carrying
value amount. We measure impairment loss by utilizing an undiscounted cash flow valuation technique using
fair values indicated by the income approach. Impairment losses, if any, would be recorded in the period the
impairment is identified. No impairments were identified during fiscal years 2011, 2010 or 2009.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is tested for
impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could
indicate impairment. At June 30, 2011, our market capitalization exceeded the carrying value of our reporting
unit by 28.6%; therefore, there was no indication of goodwill impairment. There were no triggering events to
indicate goodwill impairment at September 30, 2011.
At June 30, 2010, our market capitalization was below the carrying value of our reporting unit. However, our
market capitalization plus our estimated control premium of 35% resulted in a fair value in excess of our
carrying value and therefore no impairment was indicated. In order for our carrying value to equal fair value,
we would have required approximately a 14% control premium. At September 30, 2010, our market
capitalization, which is an indicator of fair value, continued to be below the carrying value of our reporting unit;
however, including the control premium there continued to be no indication of goodwill impairment at
September 30, 2010. In order for our carrying value to equal fair value, we would have required approximately
a 1% control premium. The control premium represents the amount an investor would pay over and above
market capitalization in order to obtain a controlling interest in a company. The estimated control premium was
determined by a review of premiums paid for similar companies over the past five years.
The control premium used in our annual goodwill assessment at June 30, 2010 and our further evaluation of
goodwill at September 30, 2010 was based on a control premium study that was performed in fiscal 2009,
resulting in a range of control premium of 25 percent to 35 percent. We concluded that the high end of the
range of control premiums best represented the amount an investor would pay, over and above market
capitalization, in order to obtain a controlling interest given the economic conditions at that time. Based on our
industry knowledge and discussions with an independent third party valuation firm in June 2010, we concluded
that the control premium study performed in the previous year remained valid and the 35 percent control
premium continued to apply to our fiscal 2010 annual goodwill assessment. In order to compute the above
control premium, three methodologies were used, including (1) analyzing individual transactions within our
industry, (2) analyzing industry-wide data, and (3) analyzing global transaction data. Individual transactions in
the Communication Equipment and Computer & Peripherals industries were used to find transactions of target
companies that operated in similar markets and shared similar operating characteristics with Digi. Transaction
screening criteria included selection of transactions with the following characteristics:
At least 50 percent of a target company’s equity sought by an acquirer,
Target company considered operating (not in bankruptcy),
Target company had publicly traded stock outstanding at the transaction date, and
Transactions announced between June 30, 2006 and the valuation date.
In analyzing industry-wide data, transactions in three industries were identified that encompassed the products
offered by us: Office Equipment and Computer Hardware, Communications, and Computer, Supplies and
Services. Finally, control premiums were considered for both domestic and international transactions.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL (CONTINUED)
We have defined the criteria that will result in additional interim goodwill impairment testing. If these
criteria are met, we will undertake an analysis to determine whether a goodwill impairment has occurred,
which could have a material effect on our consolidated financial position and results of operations. The
evaluation of asset impairment may require us to make assumptions about future cash flows and revenues.
These assumptions require significant judgment and actual results may differ from assumed or estimated
amounts. If these estimates and assumptions change, we may be required to recognize impairment losses
in the future.
REVENUE RECOGNITION
We recognize revenue in accordance with authoritative guidance issued by FASB related to revenue
recognition.
Revenue recognized for product sales was 95.5%, 96.7% and 97.0% in fiscal 2011, 2010 and 2009,
respectively. We recognize product revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, collectability is reasonably assured and there are no post-
delivery obligations, other than warranty. Under these criteria, product revenue generally is recognized upon
shipment of product to customers, including Direct (end-user) / OEMs and distributors. Sales to authorized
domestic distributors and Direct / OEMs are made with certain rights of return and price adjustment provisions.
Estimated reserves for future returns and pricing adjustments are established by us based on an analysis of
historical patterns of returns and price adjustments as well as an analysis of authorized returns compared to
received returns, current on-hand inventory at distributors, and distribution sales for the current period.
Estimated reserves for future returns and price adjustments are charged against revenues in the same period as
the corresponding sales are recorded.
Our non-product revenue represented 4.5%, 3.3% and 3.0% of net sales in fiscal 2011, 2010 and 2009,
respectively. The majority of the non-product revenue was from professional and engineering services and
represented 4.2%, 2.9% and 2.7% of net sales in fiscal 2011, 2010 and 2009, respectively. We also had revenue
from cloud-based services, post-contract customer support, fees associated with technical support, training,
royalties and the sale of software licenses. Our software development tools and development boards often
include multiple elements, including hardware, software licenses, post-contract customer support, limited
training and basic hardware design review. Our customers purchase these products and services during their
product development process in which they use the tools to build network connectivity into the devices they are
manufacturing. Revenue for professional and engineering services and training is recognized upon
performance. Revenue from software licenses is recognized when earned. Revenues from contracts with
multiple element arrangements are recognized as each element is earned based on the relative fair value of each
element provided the delivered elements have value to customers on a standalone basis. Amounts allocated to
each element are based on its vendor specific objective evidence, such as the sales price for the product or
service when it is sold separately. Revenue from cloud-based services is earned in two ways: a) web-based
management fees are considered to be earned on a monthly basis consistent with a monthly contractual
commitment, and b) transaction fees that are billed to the customer at the larger of the minimum price or the
number of transactions times the stated fee and are considered earned as the transactions occur.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Research and development costs include
compensation, allocation of corporate costs, depreciation, utilities, professional services and prototypes.
Software development costs are expensed as incurred until the point that technological feasibility and proven
marketability of the product are established. To date, the time period between the establishment of
technological feasibility and completion of software development has been short, and no significant
development costs have been incurred during that period. Accordingly, we have not capitalized any software
development costs to date.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax
basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
Income tax expense is equal to the tax payable for the period and the change during the period in deferred tax
assets and liabilities and also changes in income tax reserves.
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 common equivalent shares outstanding during the period. Our
only potentially dilutive common shares are those that 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):
We use the treasury stock method to calculate the weighted-average shares used in the diluted earnings per
share computation. Under the treasury stock method, the proceeds from exercise of an option, the amount of
compensation cost, if any, for future service that we have not yet recognized, and the amount of estimated tax
56
Years ended September 30,201120102009Numerator: Net income 11,019$ 8,941$ 4,083$ Denominator: Denominator for basic net income per common share - weighted average shares outstanding25,312 24,865 24,901 Effect of dilutive securities: Employee stock options and employee stock purchase plan507 289 282 Denominator for diluted net income per common share - adjusted weighted average shares25,819 25,154 25,183 Basic net income per common share0.44$ 0.36$ 0.16$ Diluted net income per common share0.43$ 0.36$ 0.16$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
benefits that would be recorded in paid-in capital, if any, when the option is exercised are assumed to be used to
repurchase shares in the current period.
Stock options to purchase 1,831,713, 2,493,261 and 3,109,829 common shares at September 30, 2011, 2010 and
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 antidilutive.
STOCK-BASED COMPENSATION
Stock-based compensation expense represents the cost of employee services received in exchange for an
award of equity instruments based on the grant date fair value of the award. This cost must be recognized
over the period during which an employee is required to provide the service (usually the vesting period).
FOREIGN CURRENCY TRANSLATION
Financial position and results of operations of our international subsidiaries are measured using local currencies
as the functional currency, except for our Singapore location which uses the U.S. Dollar as its local currency.
Assets and liabilities of these operations are translated at the exchange rates in effect at the end of each
reporting period. Statements of operations accounts are translated at the weighted average rates of exchange
prevailing during each reporting period. Translation adjustments arising from the use of differing currency
exchange rates from period to period are included in accumulated other comprehensive income (loss) in
stockholders’ equity. Gains and losses on foreign currency exchange transactions, as well as translation gains
or losses on transactions denominated in currencies other than an entity’s functional currency are reflected in
the statement of operations. Net transaction gains and losses are recorded to other income (expense) and
amounted to expense of $0.7 million in fiscal 2011 and income of $0.3 million and $0.1 million for fiscal 2010
and 2009, respectively. We have not implemented a formal hedging strategy, although we employ natural
hedging of assets and liabilities denominated in foreign currencies to reduce our foreign currency risk.
USE OF ESTIMATES AND RISKS AND UNCERTAINTIES
The preparation of consolidated financial statements in conformity with generally accepted accounting
principles in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
COMPREHENSIVE INCOME (LOSS)
Our comprehensive income (loss) is comprised of net income, foreign currency translation adjustments and
unrealized gains and losses on available-for-sale marketable securities, which are charged or credited to the
accumulated other comprehensive income (loss) account in stockholders’ equity.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENT ACCOUNTING DEVELOPMENTS
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
No. 2011-08, “Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment”. This guidance
provides an update on how an entity tests goodwill for impairment. This revised guidance allows companies an
option to make a qualitative evaluation about the likelihood of goodwill impairment. Under the revised
guidance, a company is permitted to first assess qualitative factors to determine whether goodwill impairment
exists prior to performing analyses comparing the fair value of a reporting unit to its carrying amount. If, based
on the qualitative assessment, a company concludes it is more likely than not that the fair value of the reporting
unit exceeds its carrying value, quantitative testing for impairment is not necessary. This guidance is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is
permitted. We have elected to early adopt this update to be effective for our fiscal year beginning October 1,
2011 and we do not expect that the adoption of this update will have a material impact on our consolidated
financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income
(Topic 220): Presentation of Comprehensive Income”. This guidance eliminates the option to report other
comprehensive income and its components in the consolidated statement of stockholders’ equity. Rather it
requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement
of comprehensive income or in two separate but consecutive statements. This guidance also requires us to
present on the face of the financial statements any reclassification adjustments for items that are reclassified
from other comprehensive income to net income. The guidance is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011. We will adopt this guidance beginning with our fiscal
quarter ending December 31, 2012. The adoption of this guidance will have no effect on our consolidated
financial position or results of operations, as it will only impact how certain information related to other
comprehensive income is presented in our consolidated financial statements.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs”. This guidance changes the wording used to describe many of the requirements in U.S. GAAP for
measuring fair value and for disclosing information about fair value measurements to ensure consistency
between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance is to be applied
prospectively and is effective during interim and annual periods beginning after December 15, 2011. We will
adopt this guidance beginning with our fiscal quarter ending March 31, 2012. We do not expect this guidance
to have a material impact on our consolidated financial statements.
2. ACQUISITIONS
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, we 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. At September 30, 2010, it was determined that certain
performance milestones were not achieved; therefore the contingent payment of $0.5 million was not payable.
We have determined that the MobiApps acquisition is not material to our consolidated results of operations or
financial position. Therefore, pro forma financial information is not presented.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
Spectrum Design Solutions, Inc.
On July 23, 2008, we acquired Spectrum Design Solutions, Inc. (“Spectrum”), which is a wholly owned
subsidiary of Digi International Inc. Prior to the acquisition, Spectrum was a privately held Minneapolis-based
corporation and performed wireless design services. The acquisition was a cash merger for $10.0 million of
which $4.0 million was paid on the acquisition date, $3.0 million was paid in January 2010, and the remaining
$3.0 million was paid in July 2011.
We determined that the Spectrum acquisition was not material to our consolidated results of operations or
financial condition. Therefore, pro forma financial information is not presented.
3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET
Identifiable Intangible Assets, net
Amortized identifiable intangible assets, net as of September 30, 2011 and 2010 are comprised of the following
(in thousands):
Amortization expense for fiscal years 2011, 2010 and 2009 is as follows (in thousands):
Estimated amortization expense for the next five years is as follows (in thousands):
59
As of September 30, 2011As of September 30, 2010Gross Gross carryingAccumulatedcarryingAccumulatedamountamortizationNetamountamortizationNetPurchased and core technology46,412$ (41,716)$ 4,696$ 46,484$ (38,917)$ 7,567$ License agreements2,840 (2,610) 230 2,840 (2,537) 303 Patents and trademarks10,341 (7,505) 2,836 9,753 (6,522) 3,231 Customer maintenance contracts700 (674) 26 700 (604) 96 Customer relationships17,437 (10,865) 6,572 17,481 (9,096) 8,385 Non-compete agreements1,036 (1,036) - 1,039 (770) 269 Total78,766$ (64,406)$ 14,360$ 78,297$ (58,446)$ 19,851$ Fiscal yearTotal20116,171$ 20107,484$ 20097,476$ Fiscal yearTotal20124,594$ 20133,527$ 20142,887$ 20151,911$ 2016658$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)
Goodwill
The changes in the carrying amount of goodwill for fiscal 2011 and 2010 are as follows (in thousands):
4. SEGMENT INFORMATION AND MAJOR CUSTOMERS
We have a single operating and reporting segment. Our revenues consist of products that are in non-embedded
and embedded product categories. Non-embedded products are connected externally to a device or larger
system to provide wired or wireless network connectivity or port expansion, while embedded products are used
by a product developer to build an electronic device in which the product provides processing power, wired
Ethernet, or wireless network connectivity to that device. The products included in the non-embedded product
category include cellular products, wireless communication adapters, console and serial servers, USB connected
products and serial cards. The products included in the embedded product category include modules, single-
board computers, chips, software and development tools, design services and satellite communication products.
The following table provides revenue by product categories (in thousands):
The information in the following table provides revenue by the geographic location of the customer for the
fiscal years ended September 30, 2011, 2010 and 2009 (in thousands):
60
201120102009Non-embedded108,435$ 100,146$ 91,262$ Embedded95,725 82,402 74,666 Total net sales204,160$ 182,548$ 165,928$ Year ended September 30,Year ended September 30,201120102009North America118,654$ 107,347$ 90,708$ Europe, Middle East & Africa52,125 47,698 56,018 Asia countries26,939 22,742 15,578 Latin America6,442 4,761 3,624 Total net sales204,160$ 182,548$ 165,928$ 20112010Beginning balance, October 186,210$ 86,558$ Currency translation adjustments(198) (348) Ending balance, September 3086,012$ 86,210$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
Net property, equipment and improvements by geographic location are as follows (in thousands):
Our U.S. export sales comprised 37.5%, 34.1% and 32.5% of net sales for the fiscal years ended September 30,
2011, 2010 and 2009, respectively.
We had one customer whose accounts receivable balance comprised 10.2% of total accounts receivable at
September 30, 2009 for which multiple payments were in transit and received within three business days of
September 30, 2009. No single customer exceeded 10% of accounts receivable or sales for any other period
presented.
5. SELECTED BALANCE SHEET DATA
61
As of September 30, (in thousands)20112010Accounts receivable, net: Accounts receivable26,772$ 24,639$ Less allowance for doubtful accounts339 549 26,433$ 24,090$ Inventories:Raw materials18,960$ 21,678$ Work in process653 418 Finished goods4,373 4,454 23,986$ 26,550$ Property, equipment and improvements, net:Land1,800$ 1,800$ Buildings10,522 10,522 Improvements3,916 3,904 Equipment13,753 12,625 Purchased software11,801 11,157 Furniture and fixtures3,035 2,886 44,827 42,894 Less accumulated depreciation and amortization29,457 26,498 15,370$ 16,396$ As of September 30,201120102009United States14,169$ 15,015$ 15,324$ International, primarily Europe1,201 1,381 1,354 Total net property, equipment and improvements15,370$ 16,396$ 16,678$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. MARKETABLE SECURITIES
Our marketable securities consist of certificates of deposit, commercial paper, corporate bonds and government
municipal bonds.
We analyze our available-for-sale marketable securities for impairment on an ongoing basis. We consider
factors such as the length of time and extent to which the securities have been in an unrealized loss position and
the trend of any unrealized losses. We also consider whether an unrealized loss is a temporary loss or an other-
than-temporary loss such as: (a) whether we have the intent to sell the security, (b) whether it is more likely
than not that we will be required to sell the security before its anticipated recovery, or (c) permanent impairment
due to bankruptcy or insolvency.
In order to estimate the fair value for each security in our investment portfolio, where available, we obtain
quoted market prices and trading activity for each security. We also review the financial solvency of each
security issuer and obtain other relevant information from our investment advisor. As of September 30, 2011,
54 of our securities were trading below our amortized cost basis. We determined each decline in value to be
temporary based upon the above described factors. 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. All of our current holdings are
classified as available-for-sale marketable securities and are recorded at fair value on our consolidated balance
sheet with the unrealized gains and losses recorded in accumulated other comprehensive loss.
Our marketable securities at September 30, 2011 were comprised of the following (in thousands):
Our marketable securities at September 30, 2010 were comprised of the following (in thousands):
62
Amortized Unrealized Unrealized Cost (1) Gains Losses (2) Fair Value (1) Current marketable securities:Corporate bonds $ 22,694 $ 18 $ (144) $ 22,568 Commercial paper 4,998 - (3) 4,995 Certificates of deposit 8,775 - (9) 8,766 Government municipal bonds 15,200 3 (8) 15,195 Current marketable securities 51,667 21 (164) 51,524 Non-current marketable securities:Corporate bonds 1,613 - (10) 1,603 Total marketable securities $ 53,280 $ 21 $ (174) $ 53,127 (1) Included in amortized cost and fair value is purchased and accrued interest of $478.(2) The aggregate related fair value of securities with unrealized losses as of September 30, 2011 was $43,755. Amortized Unrealized Unrealized Cost (1) Gains Losses (2) Fair Value (1) Current marketable securities:Corporate bonds $ 26,163 $ 7 $ (9) $ 26,161 Certificates of deposit 5,001 6 - 5,007 Government municipal bonds 5,463 5 (2) 5,466 Current marketable securities $ 36,627 $ 18 $ (11) $ 36,634 (1) Included in amortized cost and fair value is purchased and accrued interest of $451.(2) The aggregate related fair value of securities with unrealized losses as of September 30, 2010 was $18,909.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FAIR VALUE MEASUREMENTS
Fair value is defined as 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. This standard 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 the following three levels:
•
•
•
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 and 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.
Fair value is applied to financial assets such as our marketable securities, which are classified and accounted for
as available-for-sale. These items are stated at fair value at each reporting period using the above guidance.
The following tables provide information by level for financial assets that are measured at fair value on a
recurring basis (in thousands):
63
Total•carryingQuoted•price•in•Significant•otherSignificant•value at active markets observable•inputsunobservable inputsSeptember 30,•2011 (Level•1) (Level•2) (Level•3)Cash equivalents:Money market $ 30,474 $ 30,474 $ - $ - Available-for-sale marketable securities: Corporate bonds 24,171 - 24,171 - Commercial paper 4,995 - 4,995 - Certificates of deposit 8,766 - 8,766 - Government municipal bonds 15,195 - 15,195 - Total cash equivalents and marketablesecurities measured at fair value $ 83,601 $ 30,474 $ 53,127 $ - Fair•Value•Measurements•at•September 30,•2011•Using:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FAIR VALUE MEASUREMENTS (CONTINUED)
Cash equivalents are measured at fair value using quoted market prices in active markets for identical assets.
We value our Level 2 assets using inputs that are based on market indices of similar assets within an active
market. There were no transfers in to or out of our Level 2 financial assets during the twelve months ended
September 30, 2011.
We have no financial assets valued with Level 3 inputs as of September 30, 2011 nor have we purchased or sold
any Level 3 financial assets during the twelve months ended September 30, 2011.
The use of different assumptions, applying different judgment to matters that are inherently subjective and
changes in future market conditions could result in different estimates of fair value of our securities, currently
and in the future. If market conditions deteriorate, we may incur impairment charges for securities in our
investment portfolio.
8. PRODUCT WARRANTY OBLIGATION
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 one 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. The following table summarizes the activity associated with the product warranty accrual for the years
ended September 30, 2011, 2010 and 2009 (in thousands):
We are not responsible and do not warrant that customer software versions created by original equipment
manufacturer (OEM) customers based upon our software source code will function in a particular way, 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.
64
FiscalBalance atWarrantiesSettlementsBalance atyearOctober 1,issuedmadeSeptember 30,2011877$ 885$ (821)$ 941$ 2010970$ 738$ (831)$ 877$ 20091,214$ 612$ (856)$ 970$ Total•carryingQuoted•price•in•Significant•otherSignificant•value at active markets observable•inputsunobservable inputsSeptember 30,•2010 (Level•1) (Level•2) (Level•3)Cash equivalents:Money market $ 29,416 $ 29,416 $ - $ - Available-for-sale marketable securities: Corporate bonds 26,161 - 26,161 - Certificates of deposit 5,007 - 5,007 - Government municipal bonds 5,466 - 5,466 - Total cash equivalents and marketablesecurities measured at fair value $ 66,050 $ 29,416 $ 36,634 $ - Fair•Value•Measurements•at•September 30,•2010•using:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING
2011 Restructuring
On July 21, 2011, we announced a restructuring of our manufacturing operations in Breisach, Germany. The
restructuring reduced our manufacturing footprint by consolidating prototype and production functions and
centralizing outsourced production control in our Eden Prairie, Minnesota production facility. The
consolidation was driven by our strategy of driving efficiency improvements and enhancing customer service
globally through more centralized operations. We will continue to maintain sales and research and development
activities at the leased facility in Breisach, Germany. As a result of these initiatives, we expect the total charge
to be $0.6 million on a pre-tax basis, which consists of $0.5 million for employee termination costs for 25
employees and $0.1 million for asset write-downs. We recorded a charge of $0.2 million in the fourth quarter
of fiscal 2011, and expect to record charges of $0.3 million in the first quarter of fiscal 2012 and $0.1 million in
the second quarter of fiscal 2012. The payments are expected to be completed in the second quarter of fiscal
2012. We expect to cease manufacturing in Breisach by the end of December 2011 and the majority of the
manufacturing positions will be vacated by the end of December 2011.
A summary of the restructuring charges and other activity within the restructuring accrual is listed below (in
thousands):
2009 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 Minnetonka, 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 $0.2 million for contract termination fees and other relocation
costs.
All of the 86 positions were vacated in fiscal 2009. The employee termination costs included severance and the
associated costs of continued medical benefits and outplacement services. The other restructuring expenses
included contract termination fees for non-renewal of lease terms relating to one of the facilities in Davis,
California and relocation expenses for employees.
65
EmployeeTermination CostsOtherTotalRestructuring charge148$ 76$ 224$ Foreign currency fluctutation(3) (1) (4) Balance at September 30, 2011145$ 75$ 220$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING (RESTRUCTURING)
A summary of the restructuring charges and other activity within the restructuring accrual is listed below (in
thousands):
During fiscal 2010, we recorded an additional $0.1 million for an additional six months of continued
medical benefits as a result of new healthcare legislation passed in December 2009 related to the
aforementioned restructuring. Also during fiscal 2010 we reversed $0.5 million of the restructuring
accrual since costs associated with continued medical benefits and relocation were lower than expected.
During fiscal 2011, we paid a small amount of employee termination costs and reversed the remaining
restructuring accrual.
10. INCOME TAXES
The components of income before income taxes are as follows (in thousands):
The components of the income tax provision are as follows (in thousands):
66
201120102009United States10,173$ 7,080$ 1,582$ International6,342 3,439 2,700 16,515$ 10,519$ 4,282$ For the years ended September 30,201120102009Current: Federal3,880$ 3,072$ 1,160$ State342 327 292 Foreign2,479 1,835 1,461 Deferred: U.S.(776) (3,052) (1,829) Foreign(429) (604) (885) 5,496$ 1,578$ 199$ For the years ended September 30,EmployeeTermination CostsOtherTotalBalance at September 30, 2008-$ -$ -$ Restructuring charge1,766 187 1,953 Payments(1,146) (86) (1,232) Balance at September 30, 2009620$ 101$ 721$ Restructuring charge75 - 75 Payments(244) (11) (255) Reversal(438) (30) (468) Balance at September 30, 201013$ 60$ 73$ Payments(3) - (3) Reversal(10) (60) (70) Balance at September 30, 2011-$ -$ -$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The net deferred tax asset at September 30 consists of the following (in thousands):
As of September 30, 2011, we have tax credit carryforwards in a foreign jurisdiction of $0.2 million, the
majority of which will expire in 2015.
We have concluded that it is more likely than not that our deferred tax assets will be realized based on future
projected taxable income and the anticipated future reversal of deferred tax liabilities. The amount of the
deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of
future reversals of existing deferred tax liabilities or changes in the amounts of future taxable income. If our
future taxable income projections are not realized, a valuation allowance may be required, and would be
reflected as income tax expense at the time that any such change in future taxable income is determined. Our
valuation allowance as of September 30, 2011 and 2010 was $0.4 million and $0.1 million, respectively.
During the fourth quarter of fiscal 2011, we recorded an additional valuation allowance of $0.3 million for our
India and Singapore subsidiaries’ net operating losses, based on a lack of historical earnings and an uncertainty
about future taxable income.
The reconciliation of the statutory federal income tax rate to our effective income tax rate for the years ended
September 30 is as follows:
67
201120102009Statutory income tax rate35.0 %35.0 %34.0 %Increase (decrease) resulting from: State taxes, net of federal benefits0.9 1.1 1.8 Utilization of tax credits(1.7) (0.9) (15.6) Manufacturing deduction (3.1) (2.9) (2.9) Foreign tax rate differential0.4 (0.2) (3.0) Research and development credit related to prior years(0.3) - (13.3) Adjustment of tax contingency reserves(1.1) (18.9) 2.7 Foreign true-up to return(0.1) (0.3) (6.0) Domestic true-up to return1.0 0.2 2.4 Non-deductible stock-based compensation 0.6 0.9 3.3 Valuation reserve1.7 0.7 1.0 Other, net- 0.3 0.2 33.3 %15.0 %4.6 %20112010Current deferred tax assets2,610$ 3,344$ Non-current deferred tax asset3,771 320 Current deferred tax liability(137) (82) Non-current deferred tax liability(813) (1,457) Net deferred tax asset 5,431$ 2,125$ 20112010Uncollectible accounts and other reserves1,454$ 2,387$ Depreciation and amortization183 654 Inventories913 856 Compensation costs6,106 3,323 Tax credit carryforwards417 297 Identifiable intangible assets(3,642) (5,392) Net deferred tax asset 5,431$ 2,125$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
All of our unrecognized tax benefits are classified as a long-term liability as we do not expect significant
payments or receipts to occur over the next 12 months. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
The total amount of unrecognized tax benefits that if recognized would affect the effective tax rate is
$2.0 million.
We recognize interest and penalties related to income tax matters in income tax expense. During fiscal years
2011 and 2010 we recorded an immaterial benefit and in fiscal year 2009 we recorded an immaterial expense
for interest and penalties related to income tax matters in the provision for income taxes. As of both September
30, 2011 and 2010 we have accrued interest and penalties related to unrecognized tax benefits of $0.6 million
included in long-term income taxes payable on our consolidated balance sheet.
We estimate that it is reasonably possible that the total amounts of unrecognized tax benefits will significantly
decrease over the next 12 months due to the lapse of the applicable foreign statute of limitations. We estimate
the range of this change to be between $0.2 million and $0.4 million in taxes, penalties and interest.
During fiscal 2011, we recorded a tax benefit of $0.7 million primarily related to the release of income tax
reserves due to the expiration of the statutes of limitations from various jurisdictions, primarily foreign. The
enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provided
for the extension of the research and development tax credit that allowed us to record a benefit for tax credits
earned during the last three quarters of fiscal 2010 in the first quarter of fiscal 2011. The aforementioned
income tax benefits resulting from the reversal of income tax reserves and other discrete tax benefits reduced
our effective tax rate by 4 percentage points in fiscal 2011.
During fiscal 2010, we reversed $2.3 million in income tax reserves associated primarily with the closing of
prior tax years through statute expiration and the conclusion of a federal tax audit. While the statutes of
limitations have not expired, U.S. federal income tax returns for the periods ended September 30, 2007 and
September 30, 2008 have been audited by and settled with the Internal Revenue Service. The aforementioned
income tax benefits resulting from the reversal of income tax reserves and other discrete tax benefits reduced
the effective tax rate by 22 percentage points in fiscal 2010.
68
201120102009Unrecognized tax benefits at beginning of fiscal year2,265$ 4,146$ 3,652$ Increases related to: Prior year income tax positions32 36 200 Current year income tax positions392 195 838 Decreases related to: Settlements- (1,740) (94) Expiration of the statute of limitations(628) (372) (450) Unrecognized tax benefits at end of fiscal year2,061$ 2,265$ 4,146$ Fiscal year ended September 30,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
During fiscal 2009, we reversed $0.6 million in income tax reserves primarily associated with the statutory
closing of a prior U.S. federal and state tax year and settlement of prior liabilities under amnesty programs. We
recorded an additional current discrete tax benefit of $0.5 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. We also recorded adjustments to actual for items reported on the tax returns filed for
fiscal 2007 and 2008. The aforementioned income tax benefits resulting from the reversal of income tax
reserves and other discrete tax benefits reduced the effective tax rate by 27 percentage points in fiscal 2009.
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. Tax audits associated with the allocation of this income, and other
complex issues, may require an extended period of time to resolve and may result in adjustments to our income
tax balances in those years that are material to our consolidated financial position and results of operations. We
are no longer subject to income tax examination for taxable years prior to fiscal 2009 and 2007 in the case of
U.S. federal and non-U.S. income tax authorities, respectively, and for tax years generally before fiscal 2007, in
the case of state taxing authorities, consisting primarily of Minnesota and California.
At September 30, 2011, we have approximately $11.9 million of accumulated undistributed earnings of
controlled foreign subsidiaries that are considered to be reinvested indefinitely as of such date pursuant to
authoritative guidance issued by FASB related to undistributed earnings of subsidiaries and corporate joint
ventures. Accordingly, no deferred tax has been provided on such earnings. If the applicable earnings were
remitted to us, the earnings would be taxed at the U.S. federal tax rate.
11. STOCK-BASED COMPENSATION
Stock-based awards are granted under the terms of the 2000 Omnibus Stock Plan as amended and restated as of
December 4, 2009 (the Omnibus Plan), as well as our Stock Option Plan as amended and restated as of
November 27, 2006 (the Stock Option Plan) and Non-Officer Stock Option Plan as amended and restated as of
November 27, 2006 (the Non-Officer Plan), both of which expired during the first quarter of fiscal 2007 (the
Plans). Additional awards cannot be made under the Stock Option Plan or the Non-Officer Plan. The authority
to grant options under the Omnibus Plan and set other terms and conditions rests with the Compensation
Committee of the Board of Directors.
The Stock Option Plan and the Non-Officer Plan include non-statutory stock options (NSOs) and the Stock
Option Plan also includes incentive stock options (ISOs) to employees and others who provide services to us,
including consultants, advisers and directors. Options granted under these plans generally vest over a four year
service period and will expire if unexercised after ten years from the date of grant. Share awards vest upon
continued employment. The exercise price for ISOs and non-employee director options granted under the Stock
Option Plan was set at the fair market value of our common stock based on the closing price on the date of
grant. The exercise price for NSOs granted under the Stock Option Plan or the Non-Officer Plan was set by the
Compensation Committee of the Board of Directors and was set to the exercise price based on the closing price
on the date of grant.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK-BASED COMPENSATION (CONTINUED)
The Omnibus Plan authorizes the issuance of up to 5,750,000 common shares in connection with awards of
stock options, stock appreciation rights, restricted stock, performance units or stock awards. Eligible
participants include our employees, non-employee directors, consultants and advisors. Awards may be granted
under the Omnibus Plan until December 4, 2019 as an authorization to issue an additional 2,500,000 common
shares was ratified on January 25, 2010 at the Annual Meeting of Stockholders. Options under the Omnibus
Plan can be granted as either ISOs or NSOs. The exercise price shall be determined by our Compensation
Committee but shall not be less than the fair market value of our common stock based on the closing price on
the date of grant.
We recorded cash received from the exercise of stock options of $2.9 million, $1.7 million and $0.4 million
during fiscal years 2011, 2010 and 2009, respectively. The excess tax benefits from stock-based compensation
were $0.8 million during fiscal 2011 and immaterial during fiscal years 2010 and 2009. Upon exercise, we
issue new shares of stock. The Plans have provisions allowing employees to elect to pay their withholding
obligation through share reduction. No employees elected to pay income tax withholding obligations through
share reduction during fiscal years 2011, 2010 or 2009.
Also, we sponsor an Employee Stock Purchase Plan as amended and restated as of December 4, 2009 and
November 27, 2006 (the Purchase Plan), covering all domestic employees with at least 90 days of continuous
service and who are customarily employed at least 20 hours per week. The Purchase Plan allows eligible
participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at
the beginning or end of each three-month offering period. The Purchase Plan was ratified on January 25, 2010
at the Annual Meeting of Stockholders to increase the number of shares reserved for future purchases to the
Purchase Plan by 250,000 shares bringing the total number of shares to 2,000,000 shares of our Common Stock
that may be purchased under the plan. Employee contributions to the Purchase Plan were $1.0 million in the
fiscal year ending 2011, $0.9 million in fiscal 2010 and $1.0 million in the fiscal year ended 2009. Pursuant to
the Purchase Plan, 112,285, 124,087, and 145,316 common shares were issued to employees during the fiscal
years ended 2011, 2010 and 2009, respectively. Shares are issued under the Purchase Plan from treasury stock.
As of September 30, 2011, 315,157 common shares were available for future issuances under the Purchase Plan.
Stock-based compensation expense is included in the consolidated results of operations as follows (in
thousands):
Stock-based compensation cost capitalized as part of inventory was immaterial as of September 30, 2011, 2010
and 2009.
70
201120102009Cost of sales136$ 149$ 152$ Sales and marketing1,156 1,185 1,269 Research and development771 739 833 General and administrative1,381 1,298 1,264 Stock-based compensation before income taxes3,444 3,371 3,518 Income tax benefit(1,143) (1,121) (1,141) Stock-based compensation after income taxes2,301$ 2,250$ 2,377$ Year ended September 30,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK-BASED COMPENSATION (CONTINUED)
A summary of options and common shares reserved for grant under the Plans and Assumed Plans are as follows
(in thousands, except per common share amounts):
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $11.00 as of September 30, 2011,
which would have been received by the option holders had all option holders exercised their options as of that date.
The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its
exercise price. The total intrinsic value of all options exercised during each of the twelve months ended
September 30, 2011, 2010 and 2009 was $2.4 million, $0.6 million and $0.2 million, respectively.
The table below shows the weighted average fair value, which was determined based upon the fair value of each
option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:
The fair value of each option award granted during the periods presented was estimated using the Black-Scholes
option valuation model that uses the assumptions noted in the table above. Expected volatilities are based on
the historical volatility of our stock. We use historical data to estimate option exercise and employee
termination information within the valuation model; separate groups of grantees that have similar historical
exercise behaviors are considered separately for valuation purposes. The expected term of options granted is
derived from the vesting period and historical information and represents the period of time that options granted
are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at
the time of the grant whose maturity equals the expected term of the option.
71
Weighted OptionsWeightedAverageAggregateAvailableOptionsAverageContractual TermIntrinsicfor GrantOutstandingExercise Price(in years)Value (1)Balance at September 30, 20103,537 4,628 10.34$ Granted(1,196) 1,196 10.21 Exercised- (434) 6.57 Cancelled176 (207) 8.59 Balance at September 30, 20112,517 5,183 10.70$ 6.46,854$ Exercisable at September 30, 20113,367 11.28$ 5.23,923$ 201120102009Fair value of options granted (in thousands)4,948$ 3,445$ 2,667$ Weighted average per option grant date fair value4.14$ 3.39$ 3.27$ Assumptions used for option grants: Risk free interest rate1.58% - 2.14%1.86% - 2.4%1.57% - 2.41% Expected term5.25 years4.5 - 5 years 4.5 - 5 years Expected volatility41% - 44%43% - 45%41% - 45% Weighted average volatility43%44%42% Expected dividend yield000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK-BASED COMPENSATION (CONTINUED)
A summary of our non-vested options as of September 30, 2011 and changes during the twelve months then
ended is presented below (in thousands, except per common share amounts):
We use historical data to estimate pre-vesting forfeiture rates. The pre-vesting forfeiture rate used in fiscal 2011
was 2.0%. As of September 30, 2011 the total unrecognized compensation cost related to non-vested stock-
based compensation arrangements, net of expected forfeitures, was $5.8 million and the related weighted
average period over which it is expected to be recognized is approximately 2.8 years.
At September 30, 2011, the weighted average exercise price and remaining life of the stock options are as
follows (in thousands, except remaining life and exercise price):
The total fair value of shares vested was $3.7 million in fiscal 2011, $2.9 million in fiscal 2010 and $3.2 million
in fiscal 2009.
12. COMMON STOCK REPURCHASE
On July 23, 2008, our Board of Directors authorized an additional 500,000 shares of our common stock for
repurchase under our previously announced stock repurchase program bringing the total number of shares
authorized to 1,500,000 shares. During fiscal 2008, we began to repurchase our common stock and purchased
471,200 shares for $5.1 million. During fiscal 2009, we purchased an additional 893,162 shares for $6.6
million. We did not repurchase any of our stock during fiscal 2010 or fiscal 2011. As of September 30, 2011,
135,638 shares remain available for repurchase.
72
Weighted AverageGrant DateNumber ofFair Value perOptionsCommon ShareNonvested at September 30, 20101,4213.42$ Granted1,1964.14$ Vested(761)4.90$ Forfeited(41)3.84$ Nonvested at September 30, 20111,8153.27$ Options Outstanding Options ExercisableWeighted Average Remaining Weighted Number of Weighted Range of OptionsContractual LifeAverage SharesAverage Exercise PricesOutstanding ( In Years) Exercise Price Vested Exercise Price$2.19 - $8.002763.766.03$ 2736.02$ $8.01 - $9.001,3177.678.22$ 7448.26$ $9.01 - $10.001,2788.009.69$ 3119.76$ $10.01 - $11.004654.9810.67$ 34910.61$ $11.01 - $13.005845.2412.47$ 51712.52$ $13.01 - $15.007404.9113.96$ 66813.87$ $15.01 - $16.885235.6715.29$ 50515.29$ $2.19 - $16.885,183 6.4310.70$ 3,367 11.28$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SHARE RIGHTS PLAN
Under our share rights plan, each right entitles its holder to buy one one-hundredth of a share of a Series A
Junior Participating Preferred Stock at an exercise price of $60, subject to adjustment. The rights are not
exercisable until a specified distribution date as defined in the Share Rights Agreement. The Rights will expire
on June 30, 2018, unless extended or earlier redeemed or exchanged by us as defined in the Share Rights
Agreement.
14. EMPLOYEE BENEFIT PLANS
We currently have a savings and profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code
(the Code), whereby eligible employees may contribute up to 25% of their pre-tax earnings, not to exceed
amounts allowed under the Code.
We provide a match of 100% on the first 3% of each employee’s bi-weekly contribution and a 50% match on
the next 2% of each employee’s bi-weekly contribution. In addition, we may make contributions to the plan at
the discretion of the Board of Directors. We provided matching contributions of $1.3 million, $1.1 million and
$1.2 million in the fiscal years ended September 30, 2011, 2010 and 2009, respectively.
15. COMMITMENTS
We have entered into various operating lease agreements for office facilities and equipment, the last of which
expires in fiscal 2017. The office facility leases generally require us to pay a pro-rata share of the lessor’s
operating expenses. Certain operating leases contain escalation clauses and are being amortized on a straight-
line basis over the term of the lease.
The following schedule reflects future minimum rental commitments under noncancelable operating leases:
The following schedule shows the composition of total rental expense for all operating leases for the years
ended September 30 (in thousands):
73
201120102009Rentals3,275$ 3,447$ 3,602$ Less: sublease rentals(17) - - 3,258$ 3,447$ 3,602$ AmountFiscal Year(in thousands)20122,759$ 20131,977 20141,232 2015898 2016555 Thereafter142 Total minimum payments required7,563$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONTINGENCIES
Initial Public Offering Securities Litigation
On April 19, 2002, a consolidated amended class action complaint was filed in the United States District Court
for the Southern District of New York asserting claims relating to the initial public offering (“IPO”) of our
subsidiary NetSilicon, Inc. and approximately 300 other public companies. We acquired NetSilicon on
February 13, 2002. The complaint names us as a defendant along with NetSilicon, certain of its officers and
certain underwriters involved in NetSilicon’s IPO, among numerous others, and asserts, among other things,
that NetSilicon’s IPO prospectus and registration statement violated federal securities laws because they
contained material misrepresentations and/or omissions regarding the conduct of NetSilicon’s IPO underwriters
in allocating shares in NetSilicon’s IPO to the underwriters’ customers. We believe that the claims against the
NetSilicon defendants are without merit and have defended the litigation vigorously. Pursuant to a stipulation
between the parties, the two named officers were dismissed from the lawsuit, without prejudice, on October 9,
2002.
As previously disclosed, the parties advised the District Court on February 25, 2009 that they had reached an
agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the
District Court on April 2, 2009. On June 9, 2009, the District Court preliminarily approved the proposed global
settlement. Notice was provided to the class, and a settlement fairness hearing, at which members of the class
had an opportunity to object to the proposed settlement, was held on September 10, 2009. On October 6, 2009,
the District Court issued an order granting final approval to the settlement. Ten appeals initially were filed
objecting to the definition of the settlement class and fairness of the settlement. Five of those appeals were
dismissed with prejudice on October 6, 2010. On May 17, 2011, the Court of Appeals dismissed four of the
remaining appeals and remanded the final appeal to the District Court to determine whether the appellant has
standing to object to the settlement. On August 25, 2011, the District Court ruled that the last remaining
objector lacks standing to object to the settlement. That objector has appealed that ruling to the Court of
Appeals, and the plaintiffs have moved to dismiss that appeal.
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 per claim. 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 per claim. As of September 30, 2011, 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. This $50,000
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, the losses could have a material adverse effect on our
business and our consolidated results of operations or financial condition.
Patent Infringement Lawsuits
On March 16, 2011, MOSAID Technologies Incorporated filed a complaint naming us as defendants in federal
court in the Eastern District of Texas. The complaint included allegations against us and 32 other companies
pertaining to the infringement of six patents by products compliant with various Institute of Electrical and
Electronics Engineers standards for implementing wireless local area network computer communications in
certain frequency bands. On September 30, 2011 we reached a settlement involving a royalty-bearing license
agreement for future sales of licensed products sold during the term of the agreement. We do not expect this
license agreement to have a material impact on our consolidated financial statements.
On January 18, 2011, Advanced Processor Technologies LLC filed a complaint naming us as a defendant
in federal court in the Eastern District of Texas. The complaint included allegations against us and eight
other companies pertaining to the infringement of two patents by products containing data processors with
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONTINGENCIES (CONTINUED)
memory management units. On October 17, 2011, we settled the lawsuit for $0.2 million which was
recorded during the fourth quarter of fiscal 2011 (see Note 18 to our consolidated financial statements).
On May 11, 2010, SIPCO, LLC filed a complaint naming us as a defendant in federal court in the Eastern
District of Texas. This claim subsequently has been moved to the Northern District of Georgia. The complaint
included allegations against us and five other companies pertaining to the infringement of SIPCO’s patents by
wireless mesh networking and multi-port networking products. The complaint seeks monetary and non-
monetary relief. We cannot predict the outcome of these matters or estimate a range of loss at this time or
whether it will have a materially adverse impact on our business prospects and our consolidated financial
condition, results of operations or cash flow.
In addition to the matters discussed above, in the normal course of business, we are subject to various claims
and litigation, including patent infringement and intellectual property claims. Our management expects that
these various claims and litigation will not have a material adverse effect on our consolidated results of
operations or financial condition.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per common share data)
75
Dec. 31Mar. 31June 30Sept. 302011 Net sales48,334$ 49,716$ 54,274$ 51,836$ Gross profit24,666 25,651 28,755 27,516 Net income (1)(2)2,316 2,239 3,615 2,849 Net income per common share - basic0.09 0.09 0.14 0.11 Net income per common share - diluted0.09 0.09 0.14 0.11 2010 Net sales42,968$ 45,076$ 47,238$ 47,266$ Gross profit21,713 22,748 23,718 24,030 Net income (1)(2)(3)1,199 1,686 3,812 2,244 Net income per common share - basic0.05 0.07 0.15 0.09 Net income per common share - diluted0.05 0.07 0.15 0.09 (1) During 2011 and 2010, we recorded discrete income tax benefits of $0.7 million and $2.3 million, respectively. We recorded $0.6 million in the first quarter and $0.1 million in the fourth quarter of fiscal 2011 resulting from the reversal of previously established income tax reserves from various jurisdictions, primarily foreign, for the expiration of statute of limitations and from the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 providing for the extension of the research and development tax credit. Discrete income tax benefits for fiscal 2010 were recorded of $0.1 million in the first quarter and $2.2 million in the third quarter related to the reversal of tax reserves primarily due to the closure of prior tax years through statute expiration and audit. (2) We reversed a business restructuring accrual of $0.1 million ($0.0 million after tax) in the first quarter of fiscal 2011 and recorded a restructuring charge of $0.2 million ($0.1 million after tax) during the fourth quarter of fiscal 2011. We reversed a business restructuring accrual of $0.4 million ($0.2 million after tax) in the second quarter of fiscal 2010 and $0.1 million ($0.1 million after tax) in the fourth quarter of fiscal 2010. (3) We incurred investigation expenses of $1.1 million ($0.7 million after tax) in the third quarter of fiscal 2010 and $0.3 million ($0.2 million after tax) in the fourth quarter of fiscal 2010.Quarter ended
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS
On October 17, 2011, we settled the lawsuit with Advanced Processor Technologies LLC, who filed a patent
infringement lawsuit against us in federal court in the Eastern District of Texas on January 18, 2011. The
lawsuit included allegations against Digi and eight other companies pertaining to the infringement of two
patents by products containing data processors with memory management units. The settlement amounted to
$0.2 million which was recorded during the fourth quarter of fiscal 2011 in general and administrative expense.
On October 26, 2011, we announced that the flooding in Thailand has impacted the operations of our contract
manufacturer located near Bangkok, Thailand. The main manufacturing facility is currently closed, although
efforts are underway to restore operations at the contract manufacturer’s back-up facility, which has not
currently been impacted by flooding and is also located in Bangkok. In addition, we are working on
reallocating production normally done in Thailand to our U.S. manufacturing facility, as well as other contract
manufacturers we currently use.
76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 acting 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 acting principal
financial officer concluded that our disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
We assessed the effectiveness of our internal control over financial reporting as of September 30, 2011 using
the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control – Integrated Framework. Based on this assessment, management concluded that our
internal control over financial reporting was effective as of September 30, 2011. The effectiveness of our
internal control over financial reporting as of September 30, 2011 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8 of this
report.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation
required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarterly period ended
September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None
77
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated into this item by reference is the information appearing under the headings “Proposal No. 1 –
Election of Directors” and “Security Ownership of Principal Stockholders and Management” in our Proxy
Statement for our 2012 Annual Meeting of Stockholders we will file with the SEC (the “Proxy Statement”).
Executive Officers of the Registrant
As of the date of filing this Form 10-K, the following individuals were executive officers of the Registrant:
Name
Joseph T. Dunsmore
Steven E. Snyder
Age
53
55
Position
Chairman, President and Chief Executive Officer
Senior Vice President, Chief Financial Officer and
Treasurer
Lawrence A. Kraft
45
Senior Vice President of Worldwide Sales and Marketing
Joel K. Young 47
and Chief Technical Officer
Senior Vice President of Research and Development
Mr. Dunsmore joined our company in October 1999 as President and Chief Executive Officer and a member of
the Board of Directors and was elected Chairman of the Board in May 2000. Prior to joining us, Mr. Dunsmore
was Vice President of Access for Lucent Microelectronics, a telecommunications company now known as
Agere Systems Inc., since June 1999. From October 1998 to June 1999, he acted as an independent consultant
to various high technology companies. From February 1998 to October 1998, Mr. Dunsmore was Chief
Executive Officer of NetFax, Inc., a telecommunications company. From October 1995 to February 1998, he
held executive management positions at US Robotics and then at 3COM after 3COM acquired US Robotics in
June 1997. Prior to that, Mr. Dunsmore held various marketing management positions at AT&T Paradyne
Corporation from May 1983 to October 1995. Mr. Dunsmore is also a director of Analysts International
Corporation.
Mr. Snyder joined our company in November 2010 as Senior Vice President, Chief Financial Officer and
Treasurer. Prior to joining us, Mr. Snyder most recently served as Chief Financial Officer at Gearworks, Inc.
from November 2008 to September 2009. In August 2009, Gearworks, Inc. merged with Xora, Inc. From
January 2003 to June 2008, he served as an officer at Xiotech Corporation, a privately held data storage
company. He served as Chief Financial Officer and Vice President manufacturing from his hiring in October
2007 and as the General Manager of the storage solutions group from October 2007 to June 2008. Prior to that,
Mr. Snyder served as Chief Financial Officer at several companies, including Ancor Communications, Inc.,
then a publicly traded developer and manufacturer of fiber channel switching products for data center networks
which was acquired by QLogic Corporation in 2000. Mr. Snyder also spent ten years at Cray Research, Inc. in
progressively responsible financial roles. Earlier roles include seven years in various financial positions at
Control Data Corporation and two years with KPMG Peat Marwick.
Mr. Kraft joined our company as Vice President of Americas Sales and Marketing in February 2003 and was
named Senior Vice President of Worldwide Sales and Marketing in November 2005. Prior to joining us, Mr.
Kraft was Vice President of Marketing for Advanced Switching Communications (ASC), a provider of
broadband access platforms, from June 1999 to February 2002. From July 1998 to October 1998, Mr. Kraft was
Vice President of Marketing for NetFax, Inc., a telecommunications company. Mr. Kraft also previously held
78
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(CONTINUED)
the positions of Manager of Product Marketing at 3COM/U.S. Robotics, Vice President of Marketing for ISDN
Systems Corporation, and Group Products Manager for the Internet access program at Sprint Corporation.
Mr. Young joined our company in July 2000 as Vice President of Engineering and was named Vice President of
Research and Development and Chief Technical Officer in November 2005. In October 2006, Mr. Young was
named Senior Vice President of Research and Development and Chief Technical Officer. Prior to joining us,
Mr. Young served as a Vice President for Transcrypt International, a provider of encryption products, in various
engineering, sales and marketing positions from February 1996 to June 2000. Before that, he held various
engineering and management positions at AT&T and AT&T Bell Laboratories from 1986 to 1996.
Code of Ethics
We have in place a “code of ethics” within the meaning of Rule 406 of Regulation S-K, which is applicable to
our senior financial management, including specifically our principal executive officer, principal financial
officer and controller. A copy of this code of ethics is included as an exhibit to this report. We intend to satisfy
our disclosure obligations regarding any amendment to, or a waiver from, a provision of this code of ethics by
posting such information on our website at www.digi.com. We also have a “code of conduct” that applies to all
directors, officers and employees, a copy of which is available through our website (www.digi.com) under the
“About us – Investor Relations – Corporate Governance” caption.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated into this item by reference is the information appearing under the heading “Compensation of
Directors,” “Executive Compensation,” the information regarding compensation committee interlocks and
insider participation under the heading “Proposal No. 1 – Election of Directors” on our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Incorporated into this item by reference is the information appearing under the headings “Security Ownership of
Principal Stockholders and Management” and “Equity Compensation Plan Information” in our Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Incorporated into this item by reference is the information regarding director independence under the heading
“Proposal No. 1 – Election of Directors” and the information regarding related person transactions under the
heading “Related Person Transaction Approval Policy” on our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated into this item by reference is the information under “Proposal No. 4 – Ratification of Independent
Registered Public Accounting Firm” in our Proxy Statement.
79
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Consolidated Financial Statements and Schedules of the Company (filed as part of this Annual Report
on Form 10-K)
1. Consolidated Statements of Operations for the fiscal years ended September 30, 2011, 2010 and
2009
Consolidated Balance Sheets as of September 30, 2011 and 2010
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2011, 2010 and
2009
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the fiscal years
ended September 30, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
2. Schedule of Valuation and Qualifying Accounts
3. Report of Independent Registered Public Accounting Firm
(b) Exhibits
Exhibit
Number
2(a)
3(a)
3(b)
4(a)
Description
Share Purchase Agreement dated April 28, 2008 among Digi International Limited, a
subsidiary of Digi International Inc., and all of the shareholders of Sarian Systems Limited
(excluding schedules and exhibits which the Registrant agrees to furnish supplementally to
the Securities and Exchange Commission upon request) (1)
Restated Certificate of Incorporation of the Company, as amended (2)
Amended and Restated By-Laws of the Company (3)
Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells Fargo
Bank, N.A., as Rights Agent (4)
4(b)
Form of Amended and Restated Certificate of Powers, Designations, Preferences and Rights
of Series A Junior Participating Preferred Shares (5)
10(a)
English Language Summary of Sale and Leaseback Agreement dated February 18, 2008
between Digi International GmbH and Deutsche Structured Finance GmbH & Co. Alphard
KG (6)
10(b)
Digi International Inc. Stock Option Plan as Amended and Restated as of November 27,
2006* (7)
10(b)(i) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi
International Inc. Stock Option Plan)* (8)
10(c)
Digi International Inc. Non-Officer Stock Option Plan, as Amended and Restated as of
November 27, 2006 (9)
80
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
10(d)
Digi International Inc. Employee Stock Purchase Plan, as amended and restated as of
December 4, 2009* (10)
10(e)
Digi International Inc. 2000 Omnibus Stock Plan, as amended and restated as of December
4, 2009* (11)
10(e)(i) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi
International Inc. 2000 Omnibus Stock Plan before January 26, 2010)* (12)
10(e)(ii) Form of Notice of Grant of Stock Options and Option Agreement (amended form for grants
under Digi International Inc. 2000 Omnibus Stock Plan on or after January 26, 2010
provided Addendum 1A applies only to certain grants made on and after November 22,
2011)*
10(f)
Form of indemnification agreement with directors and officers of the Company* (13)
10(g)
Agreement between the Company and Lawrence A. Kraft, dated February 4, 2003* (14)
10(g)(i) Amendment to Agreement between the Company and Lawrence A. Kraft dated July 30,
2007* (15)
10(h)
Employment Agreement between the Company and Joseph T. Dunsmore dated September
27, 2006* (16)
10(i)
10(j)
21
23
24
Agreement between the Company and Joel K. Young dated July 30, 2007* (17)
Offer Letter Agreement, dated as of October 28, 2010 between the Company and Steven E.
Snyder* (18)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Powers of Attorney
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 Chief Financial Officer
32
Section 1350 Certification
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
(1)
(2)
(3)
(4)
(5)
Incorporated by reference to Exhibit 2(a) to the Company’s Form 10-Q for the quarter ended March 31, 2008 (File no. 1-34033).
Incorporated by reference to Exhibit 3(a) to the Company’s Form 10-K for the year ended September 30, 1993
(File no. 0-17972).
Incorporated by reference to Exhibit 3 to the Company’s Form 8-K dated January 18, 2011 (File no. 1-34033).
Incorporated by reference to Exhibit 4(a) to the Company’s Registration Statement on Form 8-A filed on April 25, 2008
(File no. 1-34033).
Incorporated by reference to Exhibit 4(b) to the Company’s Registration Statement on Form 8-A filed on April 25, 2008
(File no. 1-34033).
81
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
(6)
(7)
(8)
(9)
(10)
Incorporated by reference to Exhibit 10(a) to the Company's Form 10-Q for the quarter ended March 31, 2008
(File no. 1-34033).
Incorporated by reference to Exhibit 10(a) to the Company’s Form 10-K for the year ended September 30, 2006
(File no. 0-17972).
Incorporated by reference to Exhibit 10(a) to the Company’s Form 8-K dated September 13, 2004 (File no. 0-17972).
Incorporated by reference to Exhibit 10(g) to the Company’s Form 10-K for the year ended September 30, 2006
(File no. 0-17972).
Incorporated by reference to Exhibit 10(b) to the Company’s Form 10-Q for the quarter ended December 31, 2009
(File no. 1-34033).
(11) Incorporated by reference to Exhibit 10(a) to the Company’s Form 10-Q for the quarter ended December 31, 2009
(File no. 1-34033).
(12) Incorporated by reference to Exhibit 10(o) to the Company’s Form 10-K for the year ended September 30, 2008
(File no. 1-34033).
(13) Incorporated by reference to Exhibit 10 to the Company’s Form 10-Q for the quarter ended June 30, 2010 (File no. 1-34033).
(14) Incorporated by reference to Exhibit 10(m) to the Company’s Form 10-K for the year ended September 30, 2006
(File no. 0-17972).
(15) Incorporated by reference to Exhibit 10(a) to the Company’s Form 10-Q for the quarter ended June 30, 2007 (File no. 0-17972).
(16) Incorporated by reference to Exhibit 10(d) to the Company’s Form 10-K for the year ended September 30, 2006
(File no. 0-17972).
(17) Incorporated by reference to Exhibit 10(b) to the Company’s Form 10-Q for the quarter ended June 30, 2007 (File no. 0-17972).
(18) Incorporated by reference to Exhibit 10 to the Company’s Form 10-Q for the quarter ended December 31, 2010
(File no. 1-34033).
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on
November 29, 2011.
DIGI INTERNATIONAL INC.
By: /s/ Joseph T. Dunsmore
Joseph T. Dunsmore
Chairman, President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on November 29, 2011.
By: /s/ Joseph T. Dunsmore
Joseph T. Dunsmore
Chairman, President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Steven E. Snyder
Steven E. Snyder
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
By: *
Guy C. Jackson
Director
By: *
Kenneth E. Millard
Director
By: *
Ahmed Nawaz
Director
By: *
William N. Priesmeyer
Director
By: *
Bradley J. Williams
Director
* Joseph T. Dunsmore, by signing his name hereto, does hereby sign this document on behalf of each of the above named directors of
the Registrant pursuant to Powers of Attorney duly executed by such persons.
By: /s/ Joseph T. Dunsmore
Joseph T. Dunsmore
Attorney-in-fact
83
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
DIGI INTERNATIONAL INC.
(in thousands)
84
IncreaseBalance at(Decrease) to Balance atbeginningcosts andend ofDescriptionof periodexpensesDeductionsperiodValuation account - doubtful accounts September 30, 2011549$ (96)$ 114$ (1)339$ September 30, 2010624$ 132$ 207$ (1)549$ September 30, 2009697$ (1)$ 72$ (1)624$ Reserve for future returns and pricing adjustments September 30, 20111,106$ 5,156$ 4,982$ 1,280$ September 30, 20101,058$ 4,916$ 4,868$ 1,106$ September 30, 20091,369$ 3,756$ 4,067$ 1,058$ (1) Uncollectible accounts charged against allowance, net of recoveries
EXHIBIT INDEX
Exhibit
Number
2(a)
Description
Share Purchase Agreement dated April 28, 2008 among Digi
International Limited, a subsidiary of Digi International Inc., and all of
the shareholders of Sarian Systems Limited
3(a)
Restated Certificate of Incorporation of the Company, as amended
3(b)
Amended and Restated By-Laws of the Company
4(a)
4(b)
10(a)
10(b)
Share Rights Agreement, dated as of April 22, 2008, between the
Company and Wells Fargo Bank, N.A., as Rights Agent
Form of Amended and Restated Certificate of Powers, Designations,
Preferences and Rights of Series A Junior Participating Preferred
Shares
English Language Summary of Sale and Leaseback Agreement dated
February 18, 2008 between Digi International GmbH and Deutsche
Structured Finance GmbH & Co. Alphard KG
Digi International Inc. Stock Option Plan as Amended and Restated as
of November 27, 2006
10(b)(i)
Form of Notice of Grant of Stock Options and Option Agreement
10(c)
10(d)
10(e)
Digi International Inc. Non-Officer Stock Option Plan, as Amended
and Restated as of November 27, 2006
Digi International Inc. Employee Stock Purchase Plan, as amended and
restated as of December 4, 2009
Digi International Inc. 2000 Omnibus Stock Plan, as amended and
restated as of December 4, 2009
10(e)(i)
Form of Notice of Grant of Stock Options and Option Agreement
10(e)(ii)
Form of Notice of Grant of Stock Options and Option Agreement
10(f)
10(g)
10(g)(i)
10(h)
Form of indemnification agreement with directors and officers of the
Company
Agreement between the Company and Lawrence A. Kraft, dated
February 4, 2003
Amendment to Agreement between the Company and Lawrence A.
Kraft dated July 30, 2007
Employment Agreement between the Company and Joseph T.
Dunsmore dated September 27, 2006
Method of Filing
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Electronically
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
Incorporation by
Reference
85
EXHIBIT INDEX
Exhibit
Number
Description
10(i)
10(j)
21
23
24
31(a)
31(b)
32
Agreement between the Company and Joel K. Young dated July 30,
2007
Offer Letter Agreement, dated as of October 28, 2010 between the
Company and Steven E. Snyder
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Powers of Attorney
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certification
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Method of Filing
Incorporation by
Reference
Incorporation by
Reference
Electronically
Electronically
Electronically
Electronically
Electronically
Electronically
Electronically
Electronically
Electronically
Electronically
Electronically
Electronically
86
Stockholder and Investor Information
Stock Listing
Stock Listing
The Company’s Common Stock trades on the
NASDAQ Global Select tier of the NASDAQ Stock
Market LLC under the symbol DGII.
High and low sale prices for each quarter during the
years ended September 30, 2011 and 2010, as reported
on the NASDAQ Stock Market LLC, were as follows:
Stock Prices
2011 first
second
High $11.62 $ 12.42
$ 9.29
Low
$ 9.29
third
$ 13.43
$ 9.41
fourth
$ 15.39
$ 10.94
2010 first
High $9.57
$6.99
Low
second
$ 12.32
$ 8.87
third
$ 11.48
$ 7.86
fourth
$ 9.55
$ 7.29
Dividend Policy
The Company has never paid cash dividends on its
Common Stock. The Board of Directors presently
intends to retain all earnings for use in the Company’s
business and does not anticipate paying cash dividends
in the foreseeable future.
The Company does not have a Dividend Reinvestment
Plan or a Direct Stock Purchase Plan.
Stockholder Information
Transfer Agent and Registrar
Wells Fargo Bank of Minnesota, N.A.
Wells Fargo Shareowners Services
161 N. Concord Exchange Street
South St. Paul, MN 55075
651-450-4064
800-468-9716
Legal Counsel
Faegre & Benson LLP
2200 Wells Fargo Center
Minneapolis, MN 55402-3901
Independent Public Accountants
PricewaterhouseCoopers LLP
225 South Sixth Street, Suite 1400
Minneapolis, MN 55402
Annual Meeting
The Company’s Annual Meeting of Stockholders will
be held on Monday, January 23, 2012, at 3:30 p.m.,
at the Marriott Southwest, 5801 Opus Parkway,
Minnetonka, Minnesota.
Investor Relations
A copy of the Company’s Form 10-K, filed with the
Securities and Exchange Commission, is available free
upon request. Contact:
Investor Relations Administrator
Digi International Inc.
11001 Bren Road East
Minnetonka, MN 55343
952-912-DIGI
ir@digi.com
To Our Stockholders,
Fiscal 2011 was another solid year for Digi financially. Revenue was $204.2 million for the year compared
to $182.5 million in fiscal 2010, an increase of $21.7 million, or 11.8%. Net income for the year was $11.0
million, or $0.43 per diluted share, compared to net income of $8.9 million, or $0.36 per diluted share, in fiscal
2010, an increase of $2.1 million, or 23.2%.
A further recap of our performance in the past fiscal year, as well as our strategy and outlook for the future are
summarized in the categories below:
1. Leverage Revenue Growth, Especially Across Key Vertical Markets, to Drive Increased Profitability
2. Become a Device Cloud Leader
3. Further Expand Strategic Relationships with Equipment Manufacturers, Applications Providers and
Systems Integrators
1. Leverage Revenue Growth, Especially Across Key Vertical Markets, to Drive Increased Profitability
We recorded revenue growth of 11.8% in fiscal 2011 compared to 10.0% in fiscal 2010. Revenue increased
in all regions compared to the prior fiscal year, despite a tumultuous economic environment both domestically
and abroad. We continued our focus on four key vertical markets that we believe will provide potential for
significant growth: energy, fleet, medical and tank. Our wireless drop-in networking solution set of gateways
and endpoint products, complemented by our iDigi® Device Cloud™ and wireless design services have allowed
large lead customers in our targeted vertical markets to accelerate their deployment and time to market. Our
wireless revenue increased by $18.3 million to $84.7 million, and represented 41.5% of our total revenue in
fiscal 2011, compared to 36.3% of total revenue in fiscal 2010. We anticipate that wireless revenue will grow
and exceed 47% of our total revenue in fiscal 2012.
We have established strong organic growth momentum for the business over the past two years with revenue
growth of 10% in 2010 and 11.8% in 2011, and we expect strong organic growth to continue. More
importantly, I continue to feel strongly that Digi is positioned to benefit from the longer term trends that we are
seeing in the wireless machine-to-machine (M2M) space. We continue to see barriers to deployment reducing at
all levels in the M2M value chain. Ericsson, the leading global infrastructure provider and a thought leader in
M2M, has said that connected devices will grow from 5 billion today to over 50 billion in 2020. I believe that
current market forces will cause acceleration of the growth curve to begin within the next one to three years
and Digi is very well positioned to play a major role in this market. We are confident that our ability to provide
complete wireless networking solutions, combined with Digi’s brand reputation of quality, reliability and strong
customer support, will allow us to be well positioned to take advantage of this tremendous potential for growth.
In addition to growing sales momentum, we also are focused on improving our gross margins through cost
reduction initiatives and reducing our expense to revenue ratios. During fiscal 2011 gross margin improved to
52.2% from 50.5% in fiscal 2010. We engaged outside resources to help us improve supply chain management
and apply lean manufacturing principles to strengthen our inventory turns, lead time and on time shipments
metrics. We also announced plans to consolidate our Breisach, Germany manufacturing operations with our
U.S. production facility in order to centralize outsourced production control in our U.S. production facility and
as a cost savings measure. Our total operating expenses as a percent of revenue improved to 43.9% in fiscal
2011 compared to 45.0% in fiscal 2010, due to good cost control and revenue growth. We reduced our expense
to revenue ratio in fiscal 2011 despite the full reinstatement of our incentive compensation program during the
year. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $25.5 million, or 12.5% of
revenue in fiscal 2011 compared to $20.4 million, or 11.2% of revenue in fiscal 2010, an increase of 25%.
To summarize, we expect to continue to grow sales and leverage our revenue growth by improving our gross
margins and reducing our expense to revenue ratios to drive profitability.
North America
Europe
Asia Pacific
Digi International Sarl
31 rue des Poissonniers
92200 Neuilly sur Seine, France
Tel. +33-1-55-61-98-98
Digi International GmbH
Joseph-von-Fraunhofer
Strasse 23
D-44227 Dortmund
Germany
Tel. +49-231-9747-0
Digi International (UK) Ltd.
Beacon House, Unit A
Riverside Business Park
Dansk Way
Leeds Road
Ilkley, West Yorkshire
LS29 8JZ UK
Tel. +44 (0) 1943 605055
Digi International GmbH
Kueferstrasse 8
D - 79206 Breisach
Germany
Tel. +49-7667-908-0
Digi International S.A.U.
Milicias 13 - Bajo
Logroño, La Rioja
E-26003 Spain
Tel. +34-941-27-00-60
Digi International N.V.
Keizersgracht 62-64
1015 CS Amsterdam
Netherlands
Tel. +31-20-5207-566
Digi International Inc.
Worldwide Headquarters
11001 Bren Road East
Minnetonka, MN 55343
Tel. 877-912-3444
952-912-3444
Email: info@digi.com
Digi International Inc.
Regional Office
2900 Spafford Street
Davis, CA 95618
Tel. 530-757-8400
Digi International Inc.
Regional Office
411 Waverley Oaks Road
Suite 321
Waltham, MA 02452
Tel. 800-243-2333
781-647-1234
Digi International Inc.
Regional Office
355 South 520 West
Suite 180
Lindon, UT 84042
Tel. 801-765-9885
Digi International Inc.
Regional Office
115 Wild Basin Road S.
Suite 210
Austin, TX 78746
Tel. 512-306-0600
Digi International Inc.
Regional Office
610 Herndon Parkway
Suite 500
Herndon, VA 20170
Tel. 240-395-1900
Spectrum Design Solutions Inc.
110 North 5th Street
Minneapolis, MN 55403
Tel. 612-435-0789
Digi International (HK) Ltd.
Asia Pacific Headquarters
Unit 3206-08A, 32/F, AIA Tower,
183 Electric Road, North Point,
Hong Kong
Tel. +852-2833-1008
Digi International (HK) Ltd.
Beijing Representative Office
Rm 7A7, 7/F, Han Wei Plaza
No.7 Guang Hua Road
Chao Yang District
Beijing 100004, China
Tel. +86-10-6561-8310
Digi International (HK) Ltd.
Shanghai Representative Office
Rm L, 26/F, Cross Region Plaza
No. 899 Lingling Road
Shanghai 200030, China
Tel. +86-21-5150-6898
Digi International (HK) Ltd
Shenzhen Representative Office
Level 26
4018 Jin Tian Road
Futian District
Shenzhen 518026, China
Tel. +86-755 2594-2718
Digi Wireless Singapore Pte. Ltd.
31 Kaki Bukit Road 3
#06-15 Techlink
Singapore 417818
Tel. +65-6213-5380
Digi International K.K.
NES Building South 8F
22-14 Sakuragaoka-cho, Shibuya-ku
Tokyo 150-0031, Japan
Tel. +81-3-5428-0261
Digi m2m Solutions India Pvt. Ltd.
52/A, 100 Feet Road, 4th Block
Koramangala, Bangalore 560034
India
Tel. +91-80-4151-2000
Digi International
Making Wireless M2M Easy
Annual Report
Annual Report
www.digi.com
www.digi.com
20112011