DIGI INTERNATIONAL INCDGII
DIGI INTERNATIONAL INC Income Taxes Disclosure
10. INCOME TAXES
The components of income before income taxes are (in thousands):
| Year ended September 30, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| United States | $ | 47,517 | $ | 19,088 | $ | 21,149 | |||||||||||
| International | 2,400 | 3,770 | 3,769 | ||||||||||||||
| Income before income taxes | $ | 49,917 | $ | 22,858 | $ | 24,918 | |||||||||||
10. INCOME TAXES (CONTINUED)
The components of the income tax expense are (in thousands):
| Year ended September 30, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 12,263 | $ | 9,149 | $ | 9,894 | |||||||||||
| State | 2,318 | 1,995 | 1,955 | ||||||||||||||
| Foreign | 1,110 | 832 | 598 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (5,563) | (11,189) | (12,131) | ||||||||||||||
| Foreign | (1,015) | (434) | (168) | ||||||||||||||
| Income tax (benefit) expense | $ | 9,113 | $ | 353 | $ | 148 | |||||||||||
Net deferred tax liability consists of (in thousands):
| As of September 30, | |||||||||||
| 2025 | 2024 | ||||||||||
| Non-current deferred tax asset | $ | 5,131 | $ | 16,141 | |||||||
| Non-current deferred tax liability | (164) | (1,308) | |||||||||
| Net deferred tax asset (liability) | $ | 4,967 | $ | 14,833 | |||||||
| Depreciation and amortization | $ | (5,075) | $ | (4,735) | |||||||
| Lease asset | (1,927) | (2,283) | |||||||||
| Lease liability | 2,783 | 3,183 | |||||||||
| Inventories | 5,737 | 6,614 | |||||||||
| Compensation costs | 6,308 | 5,552 | |||||||||
| Deferred Revenue | 10,863 | 7,595 | |||||||||
| Other accruals | 5,839 | 5,805 | |||||||||
| Tax credit carryforwards | 4,488 | 3,531 | |||||||||
| Net operating loss carryforwards | 9,840 | 323 | |||||||||
| Valuation allowance | (3,217) | (3,317) | |||||||||
| Identifiable intangible assets | (57,926) | (25,533) | |||||||||
| Research and development costs | 27,254 | 18,098 | |||||||||
| Net deferred tax asset (liability) | $ | 4,967 | $ | 14,833 | |||||||
As of September 30, 2025, we had $2.8 million of tax carryforwards (net of reserves) related to state research and development tax credits. We also had $38.7 million of US federal net operating losses, $37.3 million of State net operating losses, U.S. foreign tax credits of $0.1 million and foreign tax credits of $0.1 million. The increase in net operating losses is primarily from the acquisition of Jolt. Digi is currently analyzing the impacts of section 382 on the utilization of these net operating losses. The majority of our state research and development tax credits have a 15-year carryforward period. The majority of our non-U.S. net operating losses and tax credit carryforwards have an unlimited carryforward period. Our non-U.S. tax credit carryforwards will expire in 2034. Our valuation allowance for certain U.S. and foreign attributes was $3.2 million and $3.3 million at September 30, 2025 and September 30, 2024, respectively. The decrease in valuation allowance is primarily the result of reduction in reserves against R&D credits. The deferred tax assets realized 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 future taxable income projections are not realized, an additional valuation allowance may be required. This would be reflected as income tax expense at the time that any such change in future taxable income is determined.
10. INCOME TAXES (CONTINUED)
The reconciliation of the statutory federal income tax amount to our income tax benefit is (in thousands):
| Year ended September 30, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Statutory income tax amount | $ | 10,494 | $ | 4,800 | $ | 5,233 | |||||||||||
| Increase (decrease) resulting from: | |||||||||||||||||
| State taxes, net of federal benefits | 601 | 401 | 636 | ||||||||||||||
| Employee stock purchase plan | 141 | 159 | 165 | ||||||||||||||
| Foreign operations | 1,412 | 1,751 | 984 | ||||||||||||||
| Non-deductible executive compensation | 734 | 519 | 373 | ||||||||||||||
| Utilization of research and development tax credits | (4,000) | (5,224) | (4,678) | ||||||||||||||
| ASU 2016-09 excess stock compensation | (673) | (47) | (1,678) | ||||||||||||||
| Changes from provision to return | 1,123 | (791) | 181 | ||||||||||||||
| Adjustment of tax contingency reserves | 465 | 491 | 238 | ||||||||||||||
| U.S. deduction for foreign export sales | (1,724) | (1,827) | (1,419) | ||||||||||||||
| Other, net | 540 | 121 | 113 | ||||||||||||||
| Income tax (benefit) expense | $ | 9,113 | $ | 353 | $ | 148 | |||||||||||
A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):
| Year ended September 30, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Unrecognized tax benefits at beginning of fiscal year | $ | 3,602 | $ | 3,162 | $ | 3,316 | |||||||||||
| Increases related to: | |||||||||||||||||
| Prior year income tax positions | 579 | 71 | 100 | ||||||||||||||
| Current year income tax positions | 726 | 768 | 858 | ||||||||||||||
| Decreases related to: | |||||||||||||||||
| Prior year income tax positions | (92) | — | (159) | ||||||||||||||
| Expiration of statute of limitations | (503) | (399) | (953) | ||||||||||||||
| Unrecognized tax benefits at end of fiscal year | $ | 4,312 | $ | 3,602 | $ | 3,162 | |||||||||||
The total amount of unrecognized tax benefits ("UTB") at September 30, 2025 that, if recognized, would affect our effective tax rate was $4.1 million. We expect that it is reasonably possible that the total amounts of UTB will decrease by approximately $0.1 million over the next 12 months due to the expiration of various statutes of limitations. Of the $4.3 million of UTB, $3.0 million is included in non-current income taxes payable and $1.3 million is included with non-current deferred tax assets on the consolidated balance sheets at September 30, 2025.
We recognize interest and penalties related to income tax matters in income tax expense. During fiscal 2025 and 2024, there were insignificant amounts of interest and penalties related to income tax matters in income tax expense. We accrued $0.1 million in interest and penalties related to unrecognized tax benefits as of September 30, 2025 and 2024. These accrued interest and penalties are included in our non-current income taxes payable on our consolidated balance sheets.
10. INCOME TAXES (CONTINUED)
We operate in multiple tax jurisdictions both in the U.S. and outside of the U.S. and face audits from various tax authorities regarding transfer pricing, tax credits, and other matters. 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 balance sheets and results of operations.
We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before fiscal year 2021.
On July 4, 2025, the One Big Beautiful Bill Act was signed into law in the U.S., which contains a broad range of tax reform provisions affecting businesses. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. This legislation had no material impact to our consolidated financial statements for the fiscal year ended September 30, 2025.
At September 30, 2025, the majority of undistributed foreign earnings were taxed under the one time transition tax and the global intangible low-taxed income ("GILTI") provision of the Tax Cuts and Jobs Act of 2017. Additionally, the previously un-taxed accumulated undistributed foreign earnings from prior fiscal years are still permanently reinvested and, as such, we have not accrued additional U.S. tax. It is our position that the earnings of our foreign subsidiaries are to be reinvested indefinitely to fund current operations and provide for future international expansion opportunities and only repatriate earnings to the extent that U.S. taxes have already been recorded. As of September 30, 2025, we are permanently reinvested with respect to previously non-taxed accumulated earnings in all jurisdictions.
Although we have no current need to repatriate historical foreign earnings that have not been taxed in the U.S., if we change our assertion from indefinitely reinvesting undistributed foreign earnings, we would have to accrue applicable taxes. The amount of any taxes and the application of any tax credits would be determined based on the income tax laws at the time of such repatriation. Under current tax law, we estimate the unrecognized tax liability to be immaterial.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Nov 21, 2025 | Showing above |
| 2024 | Nov 22, 2024 | |
| 2023 | Nov 22, 2023 | |
| 2022 | Nov 23, 2022 | |
| 2021 | Nov 24, 2021 | |
| 2020 | Nov 25, 2020 | |
| 2019 | Nov 27, 2019 | |
| 2018 | Nov 21, 2018 | |
| 2017 | Nov 22, 2017 | |
| 2016 | Dec 13, 2016 | |
| 2015 | Nov 30, 2015 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.