THE DESCARTES SYSTEMS GROUP INC.
2011 ANNUAL REPORT
US GAAP FINANCIAL RESULTS FOR 2011 FISCAL YEAR
TABLE OF CONTENTS
Letter from the CEO.......................................................................................................................................................... 3
Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................................... 4
Overview ........................................................................................................................................................................ 6
Consolidated Operations ................................................................................................................................................ 9
Quarterly Operating Results ........................................................................................................................................ 16
Liquidity and Capital Resources .................................................................................................................................. 18
Commitments, Contingencies and Guarantees ............................................................................................................ 21
Outstanding Share Data ............................................................................................................................................... 22
Application of Critical Accounting Policies ................................................................................................................ 23
Change In / Initial Adoption of Accounting Policies ................................................................................................... 25
Controls and Procedures .............................................................................................................................................. 26
Trends / Business Outlook ........................................................................................................................................... 27
Certain Factors That May Affect Future Results ......................................................................................................... 30
Management’s Report on Financial Statements and Internal Control Over Financial Reporting ................................... 41
Report of Independent Registered Chartered Accountants ............................................................................................. 42
Consolidated Financial Statements
Consolidated Balance Sheets ....................................................................................................................................... 44
Consolidated Statements of Operations ....................................................................................................................... 45
Consolidated Statements of Shareholders’ Equity ....................................................................................................... 46
Consolidated Statements of Cash Flows ...................................................................................................................... 47
Notes to Consolidated Financial Statements ................................................................................................................ 48
Corporate Information ..................................................................................................................................................... 77
2
LETTER FROM THE CEO
Dear Shareholders,
Fiscal 2011 was a very successful year for Descartes’ customers and, as a result, our business. We continued our
unbridled focus on helping our customers achieve superior results using our leading logistics technology. Our
customers placed their trust in our dedicated and experienced team members to guide them with efficient, profitable
and compliant solutions that help them ship goods and deliver service. As our customers succeeded, our business
achieved similar success.
Our business also grew in fiscal 2011 as we listened to our customers’ suggestions for enhancements to our Global
Logistics Network. Early in the year, we combined with Belgium-based Porthus to expand our market-leading global
trade compliance expertise. We then acquired Canadian company Imanet to add solutions to help our customs broker
customers. Finally, we joined with Belgium-based Routing International to enhance our European mobile resource
management expertise. With these combinations, we find ourselves a bigger, stronger and more experienced business
that has an even broader depth of functionality available for our customers.
In fiscal 2011, our team members were focused on putting TIME on our side, with Thought leadership, Initiatives,
Market making and Excellence in operations. Our fiscal 2012 FOCUS is to Federate Our Customers by Uniting
Systems. What does this mean? We federate our customers by serving as a central coordination point operating a
network of connected networks. This federated network brings people, networks, communities, systems and
ecosystems together to solve complex problems. Our 2012 FOCUS is to expand this federated network by adding
complementary platforms through our “United by Design” partner program and enhanced functionality by acquiring
businesses that share our customer service priorities.
We believe that our federated network is ideal to solve logistics problems. Our customers face complicated delivery
challenges that require cooperation and collaboration between numerous parties, such as carriers (airplanes, trucks,
boats and trains), intermediaries (freight forwarders, third-party logistics providers and customs brokers), government
authorities (customs, census, taxation and security agencies) and the parties receiving or sending the shipment. These
complex problems need solutions that harness the power and participants of the entire logistics network and
community. Our Global Logistics Network has taken the numerous relationships that must exist to move a shipment
from Point A to Point B and made them available in the cloud. We have seen other businesses take collegial
relationships on-line to create an electronic Social Network. We’ve taken business relationships that are needed to
move goods and created the Global Logistics Network.
This technology and network is only as good as the results it helps our customers achieve. By keeping this in mind, we
were able to deliver superior operating results in fiscal 2011 and end the year with an exclamation point. We entered
fiscal 2012 with a strong balance sheet, a proven ability to execute and a landscape of consolidation opportunities that
can help make our customers even more successful. With continued FOCUS, we can continue to execute.
We look forward to continuing to deliver for you and our customers in the coming year.
Arthur Mesher,
Chief Executive Officer
Member of the Board of Directors
3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains
references to Descartes using the words “we,” “us,” “our” and similar words and the reader is referred to using the
words “you,” “your,” and similar words.
This MD&A also refers to our fiscal years. Our fiscal year commences on February 1st of each year and ends on
January 31st of the following year. Our fiscal year, which ended on January 31, 2011, is referred to as the “current
fiscal year,” “fiscal 2011,” “2011” or using similar words. Our fiscal year, which ended on January 31, 2010, is
referred to as the “previous fiscal year,” “fiscal 2010,” “2010” or using similar words. Other fiscal years are referenced
by the applicable year during which the fiscal year ends. For example, 2012 refers to the annual period ending January
31, 2012 and the “fourth quarter of 2012” refers to the quarter ending January 31, 2012.
This MD&A, which is prepared as of March 11, 2011, covers our year ended January 31, 2011, as compared to years
ended January 31, 2010 and 2009. You should read the MD&A in conjunction with our audited consolidated financial
statements for 2011. We prepare and file our consolidated financial statements and MD&A in United States (“US”)
dollars and in accordance with US generally accepted accounting principles (“GAAP”). All dollar amounts we use in
the MD&A are in US currency, unless we indicate otherwise.
We have prepared the MD&A with reference to the Form 51-102F1 MD&A disclosure requirements established under
National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities
Administrators.
Additional information about us, including copies of our continuous disclosure materials such as our annual
information form, is available on our website at http://www.descartes.com, through the EDGAR website at
http://www.sec.gov or through the SEDAR website at http://www.sedar.com.
Certain statements made in this Annual Report, including, but not limited to, statements in the “Trends / Business
Outlook” section and statements regarding our expectations concerning future revenues and earnings, including
potential variances from period to period; our baseline calibration; our future business plans and business planning
process; use of proceeds from previously completed financings or other transactions, including our October 2009
bought deal public share offering; future purchase price that may be payable pursuant to completed acquisitions and
the sources of funds for such payments; allocation of purchase price for completed acquisitions; the impact of our
customs compliance business on our revenues; mix of revenues between services revenues and license revenues and
potential variances from period to period; our expectations regarding the cyclical nature of our business, including an
expectation that our third quarter will be strongest for shipping volumes and our first quarter will be the weakest, and
that we will see a smaller increase in our second fiscal quarter going forward due to recent departures of customers for
our legacy ocean services; our plans to continue to allow customers to elect to license technology in lieu of subscribing
to services; our anticipated loss of revenues and customers in fiscal 2012 and beyond, and our ability to replace any
corresponding loss of revenue; our ability to keep our operating expenses at a level below our baseline revenues; our
expectations regarding future cost-reduction activities; expenses, including amortization of intangibles and stock-based
compensation; goodwill impairment tests and the possibility of future impairment adjustments; capital expenditures;
the effect of a weak US dollar on income; liabilities from our equity compensation awards; income tax provision and
expense; effective tax rates applicable to future fiscal periods; anticipated tax benefits; statements regarding increases
or decreases to deferred tax assets; acquisition-related costs; our liability with respect to various claims and suits
arising in the ordinary course; any commitments referred to in the “Commitments, Contingencies and Guarantees”
section of this MD&A; our intention to actively explore future business combinations and other strategic transactions;
our liability under indemnification obligations; anticipated geographic break-down of business and revenues; our
reinvestment of earnings of subsidiaries back into such subsidiaries; the sufficiency of capital to meet working capital
and capital expenditure requirements; our ability to raise capital; the impact of new accounting pronouncements; the
expensing of acquisition-related expenses for business combination transactions pursuant to ASC Topic 805 (as
defined herein); and other matters related thereto constitute forward-looking information for the purposes of applicable
4
securities laws (“forward-looking statements”). When used in this document, the words “believe,” “plan,” “expect,”
“anticipate,” “intend,” “continue,” “may,” “will,” “should” or the negative of such terms and similar expressions are
intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties
and assumptions that may cause future results to differ materially from those expected. Factors that may cause such
differences include, but are not limited to, the factors discussed under the heading “Certain Factors That May Affect
Future Results” appearing in the MD&A. If any of such risks actually occur, they could materially adversely affect our
business, financial condition or results of operations. In that case, the trading price of our common shares could
decline, perhaps materially. Readers are cautioned not to place undue reliance upon any such forward-looking
statements, which speak only as of the date made. Forward-looking statements are provided for the purpose of
providing information about management’s current expectations and plans relating to the future. Readers are cautioned
that such information may not be appropriate for other purposes. Except as required by applicable law, we do not
undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking
statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances
on which any such statements are based.
5
OVERVIEW
We are a global provider of federated network and
global logistics technology solutions that help our
customers make and receive shipments and manage
related resources. Using our federated network and
technology solutions, companies can reduce costs,
improve operational performance, save time, comply
with regulatory requirements and enhance the service
that they deliver to their own customers. Our network-
based solutions, which primarily consist of services
and software, connect people to their trading partners
and enable business document exchange (bookings,
bills of lading and status messages); regulatory
compliance and customs filing; route and resource
planning, execution and monitoring; inventory and
asset visibility; rate and transportation management;
and warehouse operations. Our pricing model provides
our customers with flexibility in purchasing our
solutions either on a perpetual license, subscription or
transactional basis. Our primary focus is on serving
transportation providers (air, ocean and truck modes),
third-party
logistics service providers
logistics providers, freight forwarders and customs
brokers) and distribution-intensive companies where
delivery is either a key or a defining part of their own
product or service offering, or where there is an
opportunity to reduce costs and improve service levels
by optimizing the use of their assets.
(including
for
resources
integrated
The Market
Supply chain management has been evolving over the
past several years as companies are increasingly
seeking automation and real-time control of their
supply chain activities. We believe companies are
looking
in motion
management solutions (or RiMMS) for managing
inventory in transit, conveyance units, people and
business documents. RiMMS systems integrate mobile
resource management applications (MRM) with end-
to-end supply chain execution (SCE) applications,
transportation management, routing and
such as
scheduling, inventory visibility, and global trade and
with compliance systems, such as customs filing and
Global Trade & Compliance (GT&C).
logistics-intensive organizations are
We believe
seeking new ways
reduce operating costs,
differentiate themselves, and improve margins that are
to
6
trade and
trending downward. Existing global
transportation processes are often manual and complex
to manage. This is a consequence of the growing
number of business partners participating
in
companies’ global supply chains and a lack of
standardized business processes.
Additionally, global sourcing, logistics outsourcing
and changes in day-to-day requirements are adding to
the overall complexities that companies face in
planning and executing
their supply chains.
Whether a shipment gets delayed at the border, a
customer changes an order or a breakdown occurs on
the road, there are more and more issues that can
significantly impact the status of fulfillment schedules
and associated costs.
in
These challenges are heightened for suppliers that
have end customers frequently demanding narrower
order-to-fulfillment time frames, lower prices and
greater flexibility in scheduling and rescheduling
deliveries. End customers also want real-time updates
on delivery status, adding considerable burden to
supply chain management as process efficiency is
balanced with affordable service.
In this market, manual, fragmented and distributed
logistics solutions are often proving inadequate to
the needs of operators. Connecting
address
manufacturers and suppliers
to carriers on an
individual, one-off basis is too costly, complex and
risky for organizations dealing with many trading
partners. Further, many of these solutions don’t
provide
to efficiently
accommodate varied processes for organizations to
remain competitive. We believe this presents an
opportunity for logistics technology providers to unite
the highly fragmented community and help customers
improve efficiencies in their operations.
flexibility
required
the
As the market continues to change, we have been
evolving to meet our customers’ needs. The rate of
adoption of newer RiMMS-like logistics technology is
evolving, but
a disproportionate number of
organizations still have manual business processes. We
have been educating our prospects and customers on
the value of connecting to trading partners through our
federated global logistics network and automating, as
well as standardizing, multi-party business processes.
We believe that our customers are increasingly looking
for a single source, network-based solution provider
who can help them manage the end-to-end shipment
process – from the booking of the move of a shipment,
to the tracking of that shipment as it moves, to the
regulatory compliance filings to be made during the
move and, finally, the settlement and audit of the
invoice relating to that move.
regulatory
to automate
Additionally,
initiatives mandating
electronic filing of shipment information with customs
authorities require companies
their
processes to remain compliant and competitive. Our
customs compliance
technology helps shippers,
transportation providers, freight forwarders and other
logistics intermediaries securely and electronically file
shipment information with customs authorities and
self-audit their own efforts. Our technology also helps
carriers and freight forwarders efficiently coordinate
with customs brokers and agencies to expedite cross-
border shipments. While many compliance initiatives
started in the US, compliance is quickly becoming a
global issue with international shipments crossing
several borders on the way to their final destinations.
Solutions
Our RiMMS are primarily offered to two identified
customer groups: transportation providers and logistics
service providers (LSPs), and manufacturers, retailers,
distributors and mobile-service providers (MRDMs).
Our RiMMS are designed to enable our customers to
purchase and use either one module at a time or
combine several modules as a part of their end-to-end,
real-time supply chain solution. This gives our
customers an opportunity to add supply chain services
and capabilities as their business needs grow and
change.
The anchor of our solution is Descartes’ federated
Global Logistics Network (GLN) which brings
together LSPs and MRDMs in a shared services
environment using standardized business processes.
Our federated platform also unites hardware, software,
network providers and communities of partner
organizations,
‘United by Design’
program, to help manage resources in motion. By
providing a platform to unite the logistics industry and
its partners, the GLN enables participants, in both the
LSP and MRDM customer groups, to work together to
automate multi-party business processes and share
accelerate productivity
information
critical
improvements and cost savings.
through our
to
The applications that work in conjunction with the
GLN help transportation companies and LSPs better
control their shipment management process, comply
with regulatory requirements, expedite cross-border
shipments and connect and communicate with their
trading partners. LSPs are increasingly looking for
technology to help them manage the end-to-end
shipment lifecycle – from the booking of the shipment
with the transportation provider to the settlement and
audit of the invoice relating to the shipment.
Our solutions are designed to also help MRDM
enterprises reduce logistics costs, efficiently use
logistics assets and decrease lead-time variability for
their global shipments and regional operations. In
addition, these solutions arm the customer service
departments of private fleets and contract carriers with
information about
location, availability and
scheduling of vehicles so they can provide better
information to their own clients.
the
Our value-added applications and solutions are
designed to support:
filing of
• GT&C – which encompasses the preparation
and
the necessary electronic
documentation relating to a shipment, such as
cross-border customs documentation, freight
waybills or manifests;
• SCE – which entails the processes related to
managing shipments from their point of origin
to their point of destination, as well as the
documents related to those shipments (e.g.
booking data, orders, contracts and rates,
shipment status, proof of delivery, invoices,
payments, etc.); and
• MRM – which involves tracking, information
gathering, measuring,
and
optimizing the use of mobile assets and people
that are involved in the movement of goods.
delegating
The GLN is a community of over 35,000 trading
partners sending over 1 billion messages annually in
over 165 countries. Designed specifically for logistics
processes and
the GLN enables
organizations to centrally manage information, deliver
messages and transform data so they can efficiently
and effectively gain better control of global inbound
and outbound shipments and improve profitability.
their users,
7
By uniting the reach of the GLN with the power of
these value-added applications, our federated network
creates an ecosystem that supports and streamlines the
key functional areas facing today’s logistics managers.
(a)
customer markets:
Sales and Distribution
Our sales efforts are primarily directed toward two
specific
transportation
companies and LSPs; and (b) MRDMs. Our sales staff
is regionally based and trained to sell across our
solutions to specific customer markets. In North
America and Europe, we promote our products
primarily through direct sales efforts aimed at existing
and potential users of our products. In the Asia Pacific,
Indian subcontinent,
Ibero-America and African
regions, we focus on making our channel partners
successful. Channel partners for our other international
operations include distributors, alliance partners and
value-added resellers.
is
intended
United by Design
Descartes’ ‘United By Design’ strategic alliance
program
to ensure complementary
hardware, software and network offerings are
interoperable with Descartes’ solutions and work
together seamlessly to solve multi-party business
problems.
‘United By Design’ is intended to create a global
ecosystem of logistics-intensive organizations working
together
to standardize and automate business
processes and manage resources in motion. The
program centers on Descartes’ Open Standard
Collaborative Interfaces (Open SCIs), which provide a
wide variety of connectivity mechanisms to integrate a
broad spectrum of applications and services.
Marketing
Marketing materials are delivered through targeted
programs designed to reach our core customer groups.
These programs include trade shows and user group
conferences, partner-focused marketing programs, and
direct corporate marketing efforts.
Recent Updates
On March 19, 2010, we acquired 96.17% of the shares
of Zemblaz NV (NYSE Alternext Brussels: ALPTH,
“Porthus”), a provider of global trade management
solutions, at EUR 12.50 per share. On April 16, 2010,
we purchased the remaining 3.83% of the Porthus
shares at EUR 12.50 per share, and all outstanding
8
warrants at a price of EUR 12.33 per warrant issued
pursuant to Porthus’ 2000 warrant plan and a price of
EUR 20.76 per warrant issued pursuant to its 2001
warrant plan. In total, we paid EUR 30.0 million
(equivalent to $40.9 million at the time of the
transaction) to acquire all outstanding securities of
Porthus.
and
forwarders,
On April 19, 2010, we purchased all of the shares of
privately-held 882976 Ontario Inc., doing business as
Imanet (“Imanet”), a provider of enterprise and on-
demand technology solutions to customs brokers,
self-clearing
exporters
freight
importers. Imanet’s solutions focus on enabling
members of the international trade community to
communicate with Canada Border Services Agency
freight
(“CBSA”). Leading
forwarders and Canadian importers manage their
shipments and interactions with CBSA using Imanet’s
solutions. To complete the acquisition, net of working
received, we paid CDN $5.9 million
capital
(equivalent to $5.8 million at the time of the
transaction).
customs
brokers,
route
International NV
On June 16, 2010, we acquired privately-held Belgian-
based Routing
(“Routing
International”), a leading developer and distributor of
optimized
solutions. Routing
planning
International’s flagship solution suite, WinRoute, and
dedicated consultants help enterprises of all sizes and
across industries to optimize distribution planning to
improve the productivity and performance of their
the acquisition, net of
operations. To complete
working capital received, we paid approximately EUR
3.1 million (equivalent to $3.9 million at the time of
the transaction).
On December 21, 2010, we announced that the
Toronto Stock Exchange (“TSX”) had approved the
purchase by us of up to an aggregate of 4,997,322
common shares of Descartes pursuant to a normal
course issuer bid. The purchases can occur from time
to time until December 22, 2011, through the facilities
of the TSX and/or the NASDAQ Stock Market
(“NASDAQ”), if and when we consider advisable. As
of March 11, 2011 there have been no purchases made
pursuant to this normal course issuer bid.
CONSOLIDATED OPERATIONS
The following table shows, for the years indicated, our results of operations in millions of dollars (except per
share and weighted average share amounts):
Year ended
Total revenues
Cost of revenues
Gross margin
Operating expenses
Other charges
Amortization of intangible assets
Contingent acquisition consideration
Income from operations
Investment income
Income before income taxes
Income tax recovery
Net income
EARNINGS PER SHARE
Basic
Diluted
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)
Basic
Diluted
OTHER PERTINENT INFORMATION
Total assets
January 31, January 31, January 31,
2009
66.0
22.3
43.7
29.4
0.6
5.2
0.8
7.7
1.0
8.7
(11.5)
20.2
2011
99.2
33.9
65.3
42.1
4.0
11.5
-
7.7
0.2
7.9
(3.6)
11.5
2010
73.8
23.0
50.8
35.8
1.7
6.9
-
6.4
0.3
6.7
(7.6)
14.3
0.19
0.18
0.26
0.25
0.38
0.38
61,523
62,888
55,389
56,437
52,961
53,659
241.3
208.2
145.9
Total revenues consist of services revenues and license revenues. Services revenues are principally comprised of
the following: (i) ongoing transactional fees for use of our services and products by our customers, which are
recognized as the transactions occur; (ii) professional services revenues from consulting, implementation and
training services related to our services and products, which are recognized as the services are performed; and (iii)
maintenance, subscription and other related revenues, which include revenues associated with maintenance and
support of our services and products, which are recognized ratably over the subscription period. License revenues
are derived from perpetual licenses granted to our customers to use our software products.
9
The following table provides additional analysis of our services and license revenues (in millions of dollars and as
a proportion of total revenues) generated over each of the years indicated:
Year ended
Services revenues
Percentage of total revenues
License revenues
Percentage of total revenues
Total revenues
January 31,
2011
93.7
94%
January 31,
2010
69.6
94%
January 31,
2009
61.0
92%
5.5
6%
99.2
4.2
6%
73.8
5.0
8%
66.0
Our services revenues were $93.7 million, $69.6 million and $61.0 million in 2011, 2010 and 2009, respectively.
The increase in services revenues in 2011 was primarily due to the inclusion of a full year of services revenues
from our March 10, 2009 acquisition of Scancode Systems Inc. (“Scancode”), as well as the inclusion of services
revenues from our acquisitions of Porthus, Imanet and Routing International during 2011.
The increase in services revenues in 2010 from 2009 is primarily due to the inclusion in 2010 of services revenues
from our acquisitions of Oceanwide Inc. (“Oceanwide”) and Scancode in 2010. Additionally, services revenues
increased in 2010 as compared to 2009 from a full year’s contribution from our acquisition of Dexx bvba
(“Dexx”) in October 2008. This increase was partially offset by lower transactional revenues from the GLN in
2010, in part due to lower global shipping volumes, and also by lower revenues in 2010 due to the impact of the
translation of foreign currency revenues in 2010.
Our license revenues were $5.5 million, $4.2 million and $5.0 million in 2011, 2010 and 2009, respectively.
While our sales focus has been on generating services revenues in our on-demand, SaaS business model, we have
continued to see a market for licensing the products in our Delivery Management suite to MRDM enterprises. The
amount of license revenue in a period is dependent on our customers’ preference to license our solutions instead
of purchasing our solutions as a service and we anticipate variances from period to period.
As a percentage of total revenues, our services revenues were 94%, 94% and 92% in 2011, 2010 and 2009,
respectively. Our high percentage of services revenues reflects our continued success in selling to new customers
under our services-based business model rather than our former model that emphasized perpetual license sales.
10
We operate in one business segment providing logistics technology solutions. The following table provides
additional analysis of our segmented revenues by geographic location of customer (in millions of dollars):
Year Ended
United States
Percentage of total revenues
Canada
Percentage of total revenues
Americas, excluding Canada and United States
Percentage of total revenues
Belgium
Percentage of total revenues
Europe, Middle-East and Africa (“EMEA”), excluding Belgium
Percentage of total revenues
Asia Pacific
Percentage of total revenues
Total revenues
January 31,
2011
44.9
45%
January 31,
2010
44.5
60%
January 31,
2009
38.8
59%
13.0
13%
1.0
1%
17.7
18%
19.1
19%
3.5
4%
99.2
9.2
13%
0.8
1%
1.5
2%
14.2
19%
3.6
5%
73.8
6.3
9%
0.7
1%
0.5
1%
16.3
25%
3.4
5%
66.0
Revenues from the United States were $44.9 million, $44.5 million and $38.8 million in 2011, 2010 and 2009,
respectively. The increase in 2011 was primarily attributable to the inclusion of a full year of revenue from the
United States from our acquisition of Scancode as well as increased license revenues in the United States. These
increases were partially offset by the recent departure of certain customers for our legacy ocean services.
The increase in 2010 as compared to 2009 was primarily due to the acquisition of Oceanwide, and to a lesser
extent Scancode, partially offset by lower transactional revenues from the GLN in part due to lower shipping
volumes.
Revenues from Canada were $13.0 million, $9.2 million and $6.3 million in 2011, 2010 and 2009, respectively.
The increase in 2011 was principally due to the inclusion of a full year of Canadian-based revenues from our
acquisitions of Scancode and Imanet. Revenues from Canada in 2011 were also impacted by favourable foreign
exchange rates for the translation of Canadian dollar revenues as compared to 2010.
The increase in 2010 as compared to 2009 was principally due to the inclusion of Canadian-based revenues from
our acquisitions of Oceanwide and Scancode. This increase was partially offset by lower transactional revenues
from the GLN in part due to lower shipping volumes. Revenues from Canada in 2010 were also impacted by less
favourable foreign exchange rates for the translation of Canadian dollar revenues as compared to 2009.
Revenues from the Americas region, excluding Canada and the United States, were $1.0 million, $0.8 million
and $0.7 million in 2011, 2010 and 2009, respectively. The increase in 2011 compared to 2010 was principally
due to increased license revenues.
The increase in 2010 as compared to 2009 was primarily due to the acquisition of Oceanwide.
Revenues from Belgium were $17.7 million, $1.5 million and $0.5 million in 2011, 2010 and 2009, respectively.
The increase in 2011 was principally due to the acquisitions of Belgian-based Porthus and Routing International.
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These increases were partially offset by the unfavourable impact of foreign exchange rates for the translation of
revenues earned in euros as compared to 2010.
The increase in 2010 as compared to 2009 was primarily due to the acquisition of Belgian-based Dexx in October
2008. This increase was partially offset by the unfavourable impact of foreign exchange rates for the translation of
revenues earned in euros as compared to 2009.
Revenues from the EMEA region, excluding Belgium, were $19.1 million, $14.2 million and $16.3 million in
2011, 2010 and 2009, respectively. The increase in 2011 was primarily due to the acquisitions of Porthus and
Routing International. These increases were partially offset by the unfavourable impact of foreign exchange rates
for the translation of revenues earned in euros as compared to 2010.
The decrease in 2010 as compared to 2009 was due to lower transactional revenues from the GLN in part due to
lower shipping volumes and also lower revenues in 2010 due to the translation of foreign currency revenues at
less favourable foreign exchange rates. This decrease was partially offset by the inclusion of revenues from Dexx.
Revenues from the Asia Pacific region were $3.5 million, $3.6 million and $3.4 million in 2011, 2010 and 2009,
respectively. The decrease in 2011 as compared to 2010 was principally due to lower license revenues.
The increase in 2010 as compared to 2009 was primarily due to the inclusion of a full year of revenue from Dexx
in 2010. This increase was partially offset by lower professional services revenues in 2010 related to the licensing
of our routing solution as well as lower transactional revenues from the GLN in part due to lower global shipping
volumes.
The following table provides analysis of cost of revenues (in millions of dollars) and the related gross margins
for the years indicated:
Year ended
Services
Services revenues
Cost of services revenues
Gross margin
Gross margin percentage
License
License revenues
Cost of license revenues
Gross margin
Gross margin percentage
Total
Revenues
Cost of revenues
Gross margin
Gross margin percentage
January 31,
2011
January 31,
2010
January 31,
2009
93.7
32.7
61.0
65%
5.5
1.2
4.3
78%
99.2
33.9
65.3
66%
69.6
22.0
47.6
68%
4.2
1.0
3.2
76%
73.8
23.0
50.8
69%
61.0
21.3
39.7
65%
5.0
1.0
4.0
80%
66.0
22.3
43.7
66%
Cost of services revenues consists of internal costs of running our systems and applications, as well as salaries
and other personnel-related expenses incurred in providing professional service and maintenance work, including
consulting and customer support.
12
Gross margin percentage for services revenues was 65%, 68% and 65% in 2011, 2010 and 2009, respectively.
The decrease in 2011 compared to 2010 was primarily due to the acquisition of Porthus which currently operates
at lower margins than our other service revenue streams.
The increase in 2010 compared to 2009 was primarily attributed to the addition of higher-margin services-based
business from the Global Freight Exchange Limited (“GF-X”), Dexx, Oceanwide and Scancode acquisitions.
Cost of license revenues consists of costs related to our sale of third-party technology, such as third-party map
license fees, referral fees and/or royalties.
Gross margin percentage for license revenues was 78%, 76%, and 80% in 2011, 2010 and 2009, respectively.
Our gross margin on license revenues is dependent on the proportion of our license revenues that involve third-
party technology. Consequently, our gross margin percentage for license revenues is higher when a lower
proportion of our license revenues attracts third-party technology costs, and vice versa. This was the primary
contributor to the changes in license margins in 2011, 2010 and 2009.
Operating expenses (consisting of sales and marketing, research and development and general and administrative
expenses) were $42.1 million, $35.8 million and $29.4 million for 2011, 2010 and 2009, respectively. The
increase in operating expenses over those three years primarily arose from the addition of businesses that we
acquired during that period.
Our operating expenses in 2010 were also impacted by a $2.9 million increase in stock-based compensation
expense which increased from $0.5 million in 2009 to $3.4 million in 2010 and subsequently decreased to $1.1
million in 2011. As described in Note 2 to the consolidated financial statements, the increased stock-based
compensation expense in 2010 and 2011 compared to 2009 is due to a change of forfeiture rate estimates used in
the calculation of stock-based compensation expense. This change of estimate resulted in $1.8 million in
additional stock-based compensation expense in 2010, and the correction of an immaterial error of $1.1 million,
of which $0.5 million pertained to 2009 and $0.6 million to 2008.
The following table provides additional analysis of operating expenses (in millions of dollars) for the years
indicated:
Year ended
Total revenues
Sales and marketing expenses
Percentage of total revenues
Research and development expenses
Percentage of total revenues
General and administrative expenses
Percentage of total revenues
Total operating expenses
January 31,
2011
99.2
January 31,
2010
73.8
January 31,
2009
66.0
11.5
12%
17.0
17%
13.6
14%
42.1
10.6
14%
14.5
20%
10.7
14%
35.8
9.0
14%
11.4
17%
9.0
14%
29.4
Sales and marketing expenses include salaries, commissions, stock-based compensation and other personnel-
related costs, bad debt expenses, travel expenses, advertising programs and services, and other promotional
activities associated with selling and marketing our services and products. Sales and marketing expenses were
$11.5 million, $10.6 million and $9.0 million in 2011, 2010 and 2009, respectively, representing as a percentage
of total revenues 12%, 14% and 14% in 2011, 2010 and 2009, respectively. The increase in sales and marketing
expenses in 2011 as compared to 2010 is primarily due to the acquisition of Porthus and to a lesser extent the
13
acquisitions of Imanet and Routing International. The increase in 2011 as compared to 2010 is also a result of an
unfavourable foreign exchange impact from our Canadian dollar sales and marketing expenses while a favourable
foreign exchange impact from our euro denominated sales and marketing expenses partially offset this increase in
2011.
Sales and marketing expenses increased in 2010 as compared to 2009 from the acquired businesses of Oceanwide
and Scancode in 2010 and Dexx in 2009 as well from an increase in stock-based compensation expense, bad debt
expense and an unfavourable foreign exchange impact from our non-US dollar sales and marketing expenses. As
described in Note 2 to the consolidated financial statements, the $0.7 million increase in stock-based
compensation expense in sales and marketing expenses in 2010 includes a change of forfeiture rate estimates used
in the calculation of stock-based compensation expense of $0.4 million additional stock-based compensation
expense in 2010 and the correction of an immaterial error of $0.3 million.
Research and development expenses consist primarily of salaries, stock-based compensation and other personnel-
related costs of technical and engineering personnel associated with our research and product development
activities, as well as costs for third-party outsourced development providers. We expensed all costs related to
research and development in 2011, 2010 and 2009. Research and development expense was $17.0 million, $14.5
million and $11.4 million in 2011, 2010 and 2009, respectively, representing as a percentage of total revenues
17%, 20% and 17% in 2011, 2010 and 2009, respectively. The increase in research and development expenses in
2011 as compared to 2010 is primarily attributable to increased payroll and related costs from the addition of
Porthus and to a lesser extent Imanet and Routing International. The increase in 2011 as compared to 2010 is also
a result of an unfavourable foreign exchange impact from our Canadian dollar research and development expenses
while a favourable exchange impact from our euro denominated research and development expenses partially
offset this increase in 2011.
The increase in research and development expenses in 2010 as compared to 2009 was primarily attributable to
increased payroll and related costs from the addition of Oceanwide and Scancode in 2010 and Dexx in 2009 as
well as an increase in stock-based compensation expense and an unfavourable foreign exchange impact from our
non-US dollar research and development expenses. As described in Note 2 to the consolidated financial
statements, the $0.3 million increase in stock-based compensation expense in research and development expenses
in 2010 includes a change of forfeiture rate estimates used in the calculation of stock-based compensation expense
of $0.1 million additional stock-based compensation expense in 2010 and the correction of an immaterial error of
$0.2 million.
General and administrative expenses consist primarily of salaries, stock-based compensation and other
personnel-related costs of administrative personnel, as well as professional fees, acquisition-related expenses and
other administrative expenses. General and administrative costs were $13.6 million, $10.7 million and $9.0
million in 2011, 2010 and 2009, respectively, representing as a percentage of total revenues 14% for each of
2011, 2010 and 2009. The increase in general and administrative expenses in 2011 as compared to 2010 is
primarily attributable to additional general and administrative expenses associated to Porthus. The increase in
2011 as compared to 2010 is also a result of an unfavourable foreign exchange impact from our Canadian dollar
general and administrative expenses while a favourable exchange impact from our euro denominated general and
administrative expenses partially offset this increase in 2011.
Included in general and administrative expense in 2010 is $2.0 million of stock-based compensation expense,
compared to $0.3 million in 2009. As described in Note 2 to the consolidated financial statements, the $1.7
million increase in stock-based compensation expense in general and administrative costs in 2010 includes a
change of forfeiture rate estimates used in the calculation of stock-based compensation expense of $1.1 million
additional stock-based compensation expense in 2010 and the correction of an immaterial error of $0.6 million.
The increase in general and administrative expenses in 2010 as compared to 2009 was also a result of increased
payroll and related costs for additional personnel related to our 2010 acquisitions and unfavourable foreign
exchange impact from our non-US dollar denominated general and administrative expenses.
14
Other charges consist primarily of acquisition-related costs and restructuring charges. Other charges were $4.0
million, $1.7 million and $0.6 million in 2011, 2010 and 2009, respectively. The increase in 2011 as compared to
2010 was primarily due to $2.1 million, compared to $0.8 million in 2010, of restructuring charges related to
integration of previously completed acquisitions and other cost-reduction activities. This increase was also
attributable to the inclusion of $1.5 million of acquisition-related costs in 2011, compared to $0.9 million of such
costs in 2010. The 2011 acquisition-related costs were primarily professional fees related to our acquisitions of
Porthus, Imanet and Routing International. In 2011, other charges also included $0.4 million related to the write-
off of certain computer software assets acquired as part of the Porthus acquisition. These assets were made
redundant during the year ended January 31, 2011, as we continued to integrate Porthus into our operations.
The increase in other charges in 2010 as compared to 2009 was primarily due to the inclusion of $0.9 million of
acquisition-related costs in 2010, compared to $0.3 million of such costs in 2009. The 2010 acquisition-related
costs were primarily professional fees related to our acquisitions of Oceanwide, Scancode and Porthus. This
increase is also attributable to $0.8 million of restructuring charges in 2010 compared to $0.3 million in 2009.
Amortization of intangible assets is amortization of the value attributable to intangible assets, including
customer agreements and relationships, non-compete covenants, existing technologies and trade names,
associated with acquisitions completed by us as of January 31, 2011. Intangible assets with a finite life are
amortized to income over their useful life. The amount of amortization expense in a fiscal period is dependent on
our acquisition activities, as well as our asset impairment tests. Amortization of intangible assets was $11.5
million, $6.9 million and $5.2 million in 2011, 2010 and 2009, respectively. The increase in amortization expense
over those three years primarily arose from the addition of businesses that we acquired during that period. As at
January 31, 2011, the unamortized portion of all intangible assets amounted to $40.7 million.
We test the fair value of our finite life intangible assets for recoverability when events or changes in
circumstances indicate that there may be evidence of impairment. We write down intangible assets with a finite
life to fair value when the related undiscounted cash flows are not expected to allow for recovery of the carrying
value. Fair value of intangible assets is determined by discounting the expected related cash flows. No finite life
intangible asset impairment has been identified or recorded for any of the fiscal periods reported.
Contingent acquisition consideration of $0.8 million in 2009 relates to our 2007 acquisition of Flagship
Customs Services, Inc. (“FCS”). It represents acquisition consideration that was placed in escrow for the benefit
of the former shareholders, to be released over time contingent on the continued employment of those
shareholders. No contingent acquisition consideration related to FCS remains to be expensed.
Investment income was $0.2 million, $0.3 million and $1.0 million in 2011, 2010 and 2009, respectively. The
decrease in investment income over those three years is principally a result of lower interest rates in the 2011 and
2010 periods.
Income tax recovery is comprised of current and deferred income tax recovery. Income tax recovery for 2011,
2010 and 2009 was 46%, 113% and 131% of income before income taxes, respectively, with current income tax
expense being approximately 4%, 13% and 3% of income before income taxes, respectively.
Income tax expense – current was $0.3 million, $0.9 million and $0.2 million in 2011, 2010 and 2009,
respectively. Current income taxes arise primarily from US income that is subject to federal alternative minimum
tax and that is not fully sheltered by loss carryforwards in certain US states, income earned from the Imanet
acquisition, and income earned by the French operations of the Routing International acquisition.
Income tax recovery – deferred was $3.9 million, $8.5 million and $11.7 million in 2011, 2010 and 2009,
respectively. The deferred income tax recovery decreased in 2011 relative to 2010, primarily as a result of
recognizing less deferred tax assets through the release of a valuation allowance. Following the release of the
valuation allowance, there is no longer any valuation allowance in respect of deferred tax assets of our US and
15
Swedish operations, and only a partial valuation allowance against the deferred tax assets of our Canadian,
Netherlands and United Kingdom operations.
A net deferred tax asset of $37.9 million is recorded on our 2011 consolidated balance sheet for tax benefits that
we currently expect to realize in future years. We have provided a valuation allowance of $32.6 million in 2011
for the amount of tax benefits that are not currently expected to be realized. In determining the valuation
allowance, we considered various factors by taxing jurisdiction, including our currently estimated taxable income
over future periods, our history of losses for tax purposes, our tax planning strategies and the likelihood of success
of our tax filing positions, among others. A change to any of these factors could impact the estimated valuation
allowance and, as a consequence, result in an increase (recovery) or decrease (expense) to the deferred tax assets
recorded on our consolidated balance sheets.
Overall, we generated net income of $11.5 million, $14.3 million and $20.2 million in 2011, 2010 and 2009,
respectively. The $2.8 million decrease in 2011 from 2010 was primarily a result of a $6.3 million increase in
operating expenses, a $4.6 million increase in amortization of intangible assets, a $4.0 million decrease in income
tax recovery, a $2.3 million increase in other charges and a $0.1 million decrease in investment income. Partially
offsetting these decreases was a $14.5 million increase in gross margin.
The $5.9 million decrease in 2010 from 2009 was primarily a result of a $6.4 million increase in operating
expenses, a $3.9 million decrease in income tax recovery, a $1.7 million increase in amortization of intangible
assets, a $1.1 million increase in other charges and a $0.7 million decrease in investment income. Partially
offsetting these decreases was a $7.1 million increase in gross margin and a $0.8 million reduction in contingent
acquisition consideration expensed in 2010 from 2009.
QUARTERLY OPERATING RESULTS
The following table provides an analysis of our unaudited operating results (in thousands of dollars, except per
share and weighted average number of share amounts) for each of the quarters ended on the date indicated.
April 30, July 31, October 31, January 31,
2011
2010
2010
2010
Total
99,175
65,300
42,096
11,539
0.19
0.18
26,853
17,497
10,760
7,708
0.13
0.12
61,651
63,181
61,523
62,888
2011
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding (thousands):
Basic
Diluted
21,286
13,899
9,417
192
-
-
25,249
16,696
10,951
2,023
0.03
0.03
61,432
62,681
61,481
62,718
25,787
17,208
10,968
1,616
0.03
0.03
61,526
62,849
16
April 30, July 31, October 31, January 31,
2010
2009
2009
2009
2010
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding (thousands):
Basic
Diluted
17,419
12,421
8,204
2,208
0.04
0.04
18,610
12,633
8,036
812
0.02
0.02
53,017
53,737
53,051
54,086
18,865
12,980
8,478
988
0.02
0.02
54,084
55,475
Total
73,768
50,785
35,858
14,350
0.26
0.25
18,874
12,751
11,140
10,342
0.17
0.17
61,326
62,519
55,389
56,437
Our services revenues continue to have seasonal trends. In our first fiscal quarter, we historically have seen lower
shipment volumes by air and truck which impact the aggregate number of transactions flowing through our GLN
business document exchange. In our second fiscal quarter, we historically have seen an increase in ocean services
revenues as ocean carriers are in the midst of their customer contract negotiation period, but, going forward with
the recent loss of ocean customers, our trends will follow general industry shipment and transactional volumes. In
the third quarter, we have historically seen shipment and transactional volumes at their highest. In the fourth
quarter, the various international holidays impact the aggregate number of shipping days in the quarter, and
historically we have seen this adversely impact the number of transactions our network processes and,
consequently, the amount of services revenues we receive.
Revenues have been positively impacted by the five acquisitions that we have completed since the beginning of
2010. In addition, over the past two fiscal years we have seen increased transactions processed over our GLN
business document exchange as we help our customers comply with electronic filing requirements of new US and
Canadian customs regulations, including the US Customs and Border Protection (“CBP”) Automated Commercial
Environment (“ACE”) e-manifest filing initiative described in more detail in the “Trends / Business Outlook”
section later in this MD&A. These increases have been tempered by the general economic downturn that started
impacting our business and global shipping volumes in 2009.
In 2010, our revenues and expenses increased as a result of our acquisitions of Oceanwide and Scancode. Our net
income was also impacted by $0.3 million, $0.2 million and $0.4 million of acquisition-related costs incurred in
the first, second and fourth quarters of fiscal 2010, respectively. As well, $0.4 million, $0.1 million and $0.3
million of restructuring charges related to integration of previously completed acquisitions and other cost-
reduction activities were expensed in the first, third and fourth quarters of 2010, respectively. In the first quarter
of 2010, we recorded a deferred income tax recovery of $1.6 million as a result of merging Oceanwide's US
operations with our major US operating subsidiary. This deferred income tax recovery was partially offset by a
$1.0 million deferred income tax expense as we used some of our deferred tax assets to offset our taxable income
in certain jurisdictions in the first quarter of 2010. Our net income in the second quarter of 2010 was adversely
impacted by $1.9 million in income tax expense. The current portion of the income tax expense arose primarily
from taxable income estimates for the acquisitions of Dexx and Scancode entities that did not have loss
carryforwards to shelter taxable income. The deferred portion of the income tax expense was primarily due to the
use of some of our deferred tax assets to offset taxable income in certain jurisdictions. In addition, we recorded a
deferred income tax expense of $0.2 million as a result of merging Scancode’s US operations with our major US
operating subsidiary and re-evaluating the appropriate level of deferred tax assets for the combined entity. In the
fourth quarter of 2010, our net income was significantly impacted by a deferred income tax recovery of $10.9
million resulting from a reduction in the valuation allowance for our deferred tax assets. This recovery in the
fourth quarter of 2010 was partially offset by $2.9 million in stock-based compensation charges resulting from a
change of estimate in the calculation of stock based compensation expense, including the correction of an
immaterial error of $1.1 million of additional stock-based compensation expense of which $0.6 million pertained
to 2008 and $0.5 million to 2009.
17
In the first quarter of 2011, our net income was impacted by $0.9 million of acquisition-related costs related to our
acquisitions of Porthus and Imanet. The first quarter of 2011 also included $0.6 million in restructuring charges
related to integration of previously completed acquisitions and other cost reduction activities. As well, income tax
expense of $0.7 million was recorded in the first quarter of 2011 resulting primarily from $1.2 million of deferred
income tax expense and $0.3 million of current income tax expense related to amendments to be made to prior-
period US tax returns and $0.5 million of deferred income tax expense due to an adjustment to the calculation of
the US tax loss carryforward amounts. These income tax expenses were partially offset by the release of $1.7
million of the deferred tax asset valuation allowance related to our Netherlands operations.
In the second quarter of 2011, our revenues and expenses increased as a result of including a full quarter of
revenues and expenses from our acquisitions of Porthus and Imanet, as well as a partial quarter of revenues and
expenses from our acquisition of Routing International. The increased revenues were partially offset by $0.5
million of acquisition-related costs and $0.3 million of restructuring charges. As well, an overall income tax
recovery of $0.1 million was recorded resulting primarily from a recovery of $0.7 million relating to the taxation
of unrealized foreign exchange losses in Sweden, partially offset by deferred income tax expense related to the
treatment of non-deductible acquisition-related costs and income that is sheltered by loss carryforwards.
In the third quarter of 2011, our revenues and expenses increased as a result of including a full quarter of revenues
and expenses from our acquisition of Routing International. Net income was negatively impacted by $0.2 million
of restructuring charges as we continued to integrate previously completed acquisitions and $0.4 million related to
the write-off of certain computer software assets acquired as part of the Porthus acquisition. These assets were
made redundant during the period as we continued to integrate Porthus into our operations.
In the fourth quarter of 2011, our revenues increased primarily as a result of increased license revenues. Operating
expenses were positively impacted in the fourth quarter of 2011 as we continued to re-calibrate our business
through the implementation of cost reduction initiatives and to further accelerate integration activity for acquired
companies. Net income was positively impacted by an income tax recovery of $5.2 million resulting primarily
from a $6.9 million reduction in the valuation allowance for deferred tax assets in our Netherlands and United
Kingdom operations, partially offset by the recognition of additional valuation allowance for deferred tax assets in
our Dexx and Australia operations. This recovery was partially offset by $1.1 million of other charges, including
$0.9 million of restructuring charges and $0.2 million of acquisition-related costs.
Our weighted average shares outstanding has increased since the first quarter of 2010, principally as a result of the
issuance of 7.9 million common shares pursuant to our October 2009 bought deal share offering, and periodic
employee stock option exercises.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital expenditure requirements primarily through
cash flows provided from operations and sales of debt and equity securities. As at January 31, 2011, we had $69.6
million in cash and cash equivalents and short-term investments and $3.0 million in unused available lines of
credit. As at January 31, 2010, prior to our acquisitions of Porthus, Imanet and Routing International, we had
$94.6 million in cash, cash equivalents and short-term investments and $2.8 million in available lines of credit.
On October 20, 2009, we completed a bought-deal public share offering in Canada which raised gross proceeds of
CAD 40,002,300 (equivalent to approximately $38.4 million at the time of the transaction) from a sale of
6,838,000 common shares at a price of CAD 5.85 per share. The underwriters also exercised an over-allotment
option on October 20, 2009 to purchase an additional 1,025,700 common shares (in aggregate, 15% of the
offering) at CAD 5.85 per share comprised of 332,404 common shares from Descartes and 693,296 common
18
shares from certain executive officers and directors of Descartes. Gross proceeds to us from the exercise of the
over-allotment option were CAD 1,944,563 (equivalent to approximately $1.9 million at the time of the
transaction). In addition, we received an aggregate of CAD 1,277,648 (equivalent to approximately $1.2 million
at the time of the transaction) in proceeds from certain executive officers and directors of Descartes from their
exercise of employee stock options to satisfy their respective obligations under the over-allotment option. We
anticipate that the net proceeds of the offering will be used for general corporate purposes, potential acquisitions
and general working capital.
We believe that, considering the above, we have sufficient liquidity to fund our current operating and working
capital requirements, including the payment of current operating leases, and additional purchase price that may
become payable pursuant to the terms of previously completed acquisitions. We also believe that we have the
ability to generate sufficient amounts of cash and cash equivalents in the long term to meet planned growth targets
and fund strategic transactions. Should additional future financing be undertaken, the proceeds from any such
transaction could be utilized to fund strategic transactions or for general corporate purposes. We expect, from time
to time, to consider select strategic transactions to create value and improve performance, which may include
acquisitions, dispositions, restructurings, joint ventures and partnerships, and we may undertake a financing
transaction in connection with any such potential strategic transaction.
If any of our non-Canadian subsidiaries have earnings, our intention is that these earnings be re-invested in the
subsidiary indefinitely. Accordingly, to date we have not encountered legal or practical restrictions on the abilities
of our subsidiaries to repatriate money to Canada, even if such restrictions may exist in respect of certain foreign
jurisdictions where we have subsidiaries. To the extent there are restrictions, they have not had a material effect
on the ability of our Canadian parent to meet its financial obligations.
The table set forth below provides a summary of cash flows for the years indicated in millions of dollars:
Year ended
Cash provided by operating activities
Additions to capital assets
Proceeds from the sale of investment in affiliate
Business acquisitions and acquisition-related costs, net of cash acquired
Issuance of common shares, net of issue costs
Repayment of financial liabilities
Effect of foreign exchange rate on cash, cash equivalents and short-term
investments
Net change in cash, cash equivalents and short-term investments
Cash, cash equivalents and short-term investments, beginning of period
Cash, cash equivalents and short-term investments, end of period
January 31, January 31, January 31,
2009
18.7
(1.4)
-
(3.2)
0.2
-
2011
19.9
(1.6)
0.5
(45.0)
1.1
(0.4)
2010
16.5
(1.6)
-
(15.0)
40.3
-
0.5
(25.0)
94.6
69.6
(3.2)
37.0
57.6
94.6
(0.8)
13.5
44.1
57.6
Cash provided by operating activities was $19.9 million, $16.5 million and $18.7 million for 2011, 2010 and
2009, respectively. For 2011, the $19.9 million of cash provided by operating activities resulted from $11.5
million of net income, plus adjustments for $11.7 million of non-cash items included in net income and less $3.3
million of cash used in changes in our operating assets and liabilities. For 2010, the $16.5 million of cash
provided by operating activities resulted from $14.3 million of net income, plus adjustments for $3.9 million of
non-cash items included in net income and less $1.7 million of cash used in changes in our operating assets and
liabilities. For 2009, the $18.7 million of cash provided by operating activities resulted from $20.2 million of net
income, less adjustments for $4.0 million of non-cash items included in net income and plus $2.5 million of cash
used in changes in our operating assets and liabilities. Cash provided by operating activities increased in 2011
compared to 2010, primarily due to net income adjusted for non-cash expenses which increased $5.0 million in
2011 compared to 2010. This increase was partially offset by cash used in changes in our operating assets and
liabilities which decreased $1.6 million in 2011 compared to 2010. Cash provided by operating activities
19
decreased in 2010 compared to 2009, primarily due to cash used in changes in our operating assets and liabilities
which increased $4.2 million in 2010 compared to 2009. This increase was partially offset by net income adjusted
for non-cash expenses which increased $2.0 million in 2010 compared to 2009.
Additions to capital assets of $1.6 million, $1.6 million and $1.4 million in 2011, 2010 and 2009, respectively,
were primarily composed of investments in computing equipment and software to support our network and build
out infrastructure.
Proceeds from the sale of investment in affiliate of $0.5 million in 2011 were related to the sale of the
investment in Desk Solutions NV, which was acquired as part of the Porthus acquisition.
Business acquisitions and acquisition-related costs, net of cash acquired of $45.0 million in 2011 was primarily
comprised of $34.6 million of cash, net of cash acquired, for the acquisition of Porthus, $5.8 million of cash, net
of cash acquired, for the acquisition of Imanet and $4.1 million of cash, net of cash acquired, for the acquisition of
Routing International. The balance of this amount consists of additional purchase price paid for business
acquisitions we completed prior to 2011.
Business acquisitions and acquisition-related costs of $15.0 million in 2010 were primarily comprised of $8.9
million of cash for the acquisition of Oceanwide and $5.9 million of cash for the acquisition of Scancode. The
balance of this amount consists of additional purchase price and acquisition-related costs paid in 2010 for
business acquisitions that we completed prior to 2010.
Business acquisitions and acquisition-related costs of $3.2 million in 2009 included $1.5 million related to the
acquisition of Dexx, $0.7 million related to the acquisition of GF-X as well as additional purchase price related to
the acquisitions of Ocean Tariff Bureau, Inc. and Blue Pacific Services, Inc. for $0.3 million and RouteView for
$0.3 million, and $0.1 million of cash that was previously held back in connection with a past acquisition, as well
as $0.2 million of cash paid related to acquisitions that we made in 2008 and 2007.
Issuance of common shares of $1.1 million in 2011 was a result of the exercise of employee stock options.
The $40.3 million of cash provided by issuance of common shares in 2010 was comprised of $39.0 million net
cash proceeds received from the issuance of 7,170,404 common shares pursuant to our October 2009 bought-deal
share offering, including the over-allotment option exercised by the underwriters and $1.3 million from the
exercise of employee stock options.
Issuance of common shares of $0.2 million in 2009 was a result of the exercise of employee stock options.
Repayment of financial liabilities of $0.4 million in 2011 was primarily due to repayment of debt obligations
acquired as part of the Porthus, Imanet and Routing International acquisitions.
Working capital. As at January 31, 2011, our working capital (current assets less current liabilities) was $78.5
million. Current assets include $69.6 million of cash and cash equivalents, $14.4 million in current trade
receivables and an $11.5 million deferred tax asset. Our working capital has decreased since January 31, 2010 by
$17.4 million, primarily due to $45.0 million of cash used in 2011 for business acquisitions and, to a lesser extent,
capital asset additions. These decreases were partially offset by positive cash provided by operating activities in
2011.
Cash and cash equivalents and short-term investments. As at January 31, 2011, all funds were held in interest-
bearing bank accounts or certificates of deposit, primarily with major Canadian, US and European banks. Cash
and cash equivalents include short-term deposits and debt securities with original maturities of three months or
less.
20
COMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments
To facilitate a better understanding of our commitments, the following information is provided (in millions of
dollars) in respect of our operating and capital lease obligations:
Less than
1 year
1-3 years
4-5 years More than
5 years
Operating lease obligations
Capital lease obligations
Total
3.4
0.1
3.5
4.8
0.1
4.9
3.2
-
3.2
1.7
-
1.7
Total
13.1
0.2
13.3
Lease Obligations
We are committed under non-cancelable operating leases for business premises, computer equipment and vehicles
with terms expiring at various dates through 2020. We are also committed under non-cancelable capital leases for
computer equipment expiring at various dates through 2015. The future minimum amounts payable under these
lease agreements are described in the chart above.
Other Obligations
Income taxes
We have a commitment for income taxes incurred to various taxing authorities related to unrecognized tax
benefits in the amount of $4.2 million. At this time, we are unable to make reasonably reliable estimates of the
period of settlement with the respective taxing authorities due to the possibility of the respective statutes of
limitations expiring without examination by the applicable taxing authorities.
Deferred Share Unit and Restricted Share Unit Plans
As discussed in the “Trends / Business Outlook” section later in this MD&A and in Note 15 to the consolidated
financial statements, we maintain deferred share unit (“DSU”) and restricted share unit (“RSU”) plans for our
directors and employees. Any payments made pursuant to these plans are settled in cash. As DSUs are fully
vested upon issuance, the DSU liability recorded on our consolidated balance sheets is calculated as the total
number of DSUs outstanding at the consolidated balance sheet date multiplied by the closing price of our
common shares on the TSX at the consolidated balance sheet date. For RSUs, the units vest over time and the
liability recognized at any given consolidated balance sheet date reflects only those units vested at that date that
have not yet been settled in cash. As such, we had an unrecognized aggregate liability for the unvested RSUs of
$1.7 million for which no liability was recorded on our consolidated balance sheet at January 31, 2011, in
accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”)
Topic 718 “Compensation – Stock Compensation” (“ASC Topic 718”). The ultimate liability for any payment of
DSUs and RSUs is dependent on the trading price of our common shares.
Contingencies
We are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our
business. The consequences of these matters are not presently determinable but, in the opinion of management
after consulting with legal counsel, the ultimate aggregate liability is not currently expected to have a material
effect on our annual results of operations or financial position.
Business combination agreements
In respect of our August 17, 2007 acquisition of 100% of the outstanding shares of GF-X, up to $5.2 million in
cash was potentially payable if certain performance targets, primarily relating to revenues, were met by GF-X
over the four years subsequent to the date of acquisition. No amount was payable in respect of the three year post-
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acquisition period. Up to $1.3 million in cash remains eligible to be paid to the former owners in respect of
performance targets to be achieved over the period ending August 17, 2011.
Product Warranties
In the normal course of operations, we provide our customers with product warranties relating to the performance
of our software and network services. To date, we have not encountered material costs as a result of such
obligations and have not accrued any liabilities related to such obligations on our financial statements.
Guarantees
In the normal course of business we enter into a variety of agreements that may contain features that meet the
definition of a guarantee under FASB ASC Topic 460, “Guarantees” (“ASC Topic 460”). The following lists our
significant guarantees:
Intellectual property indemnification obligations
We provide indemnifications of varying scope to our customers against claims of intellectual property
infringement made by third parties arising from the use of our products. In the event of such a claim, we are
generally obligated to defend our customers against the claim and we are liable to pay damages and costs assessed
against our customers that are payable as part of a final judgment or settlement. These intellectual property
infringement indemnification clauses are not generally subject to any dollar limits and remain in force for the term
of our license and services agreement with our customers, where license terms are typically perpetual. To date, we
have not encountered material costs as a result of such indemnifications.
Other indemnification agreements
In the normal course of operations, we enter into various agreements that provide general indemnifications. These
indemnifications typically occur in connection with purchases and sales of assets, securities offerings or buy-
backs, service contracts, administration of employee benefit plans, retention of officers and directors, membership
agreements, customer financing transactions, and leasing transactions. In addition, our corporate by-laws provide
for the indemnification of our directors and officers. Each of these indemnifications requires us, in certain
circumstances, to compensate the counterparties for various costs resulting from breaches of representations or
obligations under such arrangements, or as a result of third party claims that may be suffered by the counterparties
as a consequence of the transaction. We believe that the likelihood that we could incur significant liability under
these obligations is remote. Historically, we have not made any significant payments under such indemnifications.
In evaluating estimated losses for the guarantees or indemnities described above, we consider such factors as the
degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of
loss. We are unable to make a reasonable estimate of the maximum potential amount payable under such
guarantees or indemnities as many of these arrangements do not specify a maximum potential dollar exposure or
time limitation. The amount also depends on the outcome of future events and conditions, which cannot be
predicted. Given the foregoing, to date, we have not accrued any liability on our financial statements for the
guarantees or indemnities described above.
OUTSTANDING SHARE DATA
We have an unlimited number of common shares authorized for issuance. As of March 10, 2011, we had
61,762,527 common shares issued and outstanding.
As of March 10, 2011, there were 3,535,312 options issued and outstanding, and 304,357 remaining available for
grant under all stock option plans.
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On December 21, 2010, we announced that the TSX had approved the purchase by us of up to an aggregate of
4,997,322 common shares of Descartes pursuant to a normal course issuer bid. The purchases can occur from time
to time until December 22, 2011, through the facilities of the TSX and/or the NASDAQ, if and when we consider
advisable. As of March 11, 2011 there were no purchases made pursuant to this normal course issuer bid.
On December 18, 2009, Descartes announced that it was making a normal course issuer bid to purchase up to
5,458,773 common shares of Descartes through the facilities of the TSX and/or NASDAQ (the "2009 Normal
Course Issuer Bid"). Descartes did not purchase any shares under the bid, which commenced on December 23,
2009 and expired on December 22, 2010.
On October 20, 2009, we closed a bought-deal public share offering in Canada which raised gross proceeds of
CAD 40,002,300 (equivalent to approximately $38.4 million at the time of the transaction) from a sale of
6,838,000 common shares at a price of CAD 5.85 per share. The underwriters also exercised an over-allotment
option on October 20, 2009 to purchase an additional 1,025,700 common shares (in aggregate, 15% of the
offering) at CAD 5.85 per share comprised of 332,404 common shares from Descartes and 693,296 common
shares from certain executive officers and directors of Descartes. Gross proceeds to us from the exercise of the
over-allotment option were CAD 1,944,563 (equivalent to approximately $1.9 million at the time of the
transaction). In addition, we received an aggregate of approximately CAD 1,277,648 (equivalent to approximately
$1.2 million at the time of the transaction) in proceeds from certain executive officers and directors of Descartes
from their exercise of employee stock options to satisfy their respective obligations under the over-allotment
option.
On November 30, 2004, we announced that our board of directors had adopted a shareholder rights plan (the
“Rights Plan”) to ensure the fair treatment of shareholders in connection with any take-over offer, and to provide
our board of directors and shareholders with additional time to fully consider any unsolicited take-over bid. We
did not adopt the Rights Plan in response to any specific proposal to acquire control of the company. The Rights
Plan was approved by the TSX and was originally approved by our shareholders on May 18, 2005. The Rights
Plan took effect as of November 29, 2004. On May 29, 2008, our shareholders approved certain amendments to
the Rights Plan and approved the Rights Plan continuing in effect. The Rights Plan will expire at the termination
of our annual shareholders’ meeting in calendar year 2011 unless its continued existence is ratified by the
shareholders before such expiration. We understand that the Rights Plan is similar to plans adopted by other
Canadian companies and approved by their shareholders.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements included herein and accompanying notes are prepared in accordance with
GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by
management’s application of accounting policies. Estimates are deemed critical when a different estimate could
have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period
and would materially impact our financial condition or results of operations. Our significant accounting policies
are discussed in Note 2 to the fiscal 2011 consolidated financial statements.
Our management has discussed the development, selection and application of our critical accounting policies with
the audit committee of the board of directors. In addition, the board of directors has reviewed the accounting
policy disclosures in this MD&A.
The following discusses the critical accounting estimates and assumptions that management has made under these
policies and how they affect the amounts reported in the fiscal 2011 consolidated financial statements:
23
Revenue recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and
earned when there exists persuasive evidence of an arrangement, the product has been delivered or the services
have been provided to the customer, the sales price is fixed or determinable and collectibility is reasonably
assured.
In recognizing revenue, we make estimates and assumptions on factors such as the probability of collection of the
revenue from the customer, the amount of revenue to allocate to individual elements in a multiple element
arrangement and other matters. We make these estimates and assumptions using our past experience, taking into
account any other current information that may be relevant. These estimates and assumptions may differ from the
actual outcome for a given customer which could impact operating results in a future period.
Government Grants
Government grants relating to costs are deferred and recognized in the income statement as a reduction of expense
over the period necessary to match them with the costs that they are intended to compensate.
Long-Lived Assets
We test long-lived assets for recoverability when events or changes in circumstances indicate evidence of
impairment.
Intangible assets are amortized on a straight-line basis over their estimated useful lives. An impairment loss is
recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying
amount. Measurement of the impairment loss is based on the present value of the expected future cash flows. Our
impairment analysis contains estimates due to the inherently speculative nature of forecasting long-term estimated
cash flows and determining the ultimate useful lives of assets. Actual results will differ, which could materially
impact our impairment assessment.
In the case of goodwill, we test for impairment at least annually at October 31st of each year and at any other time
if any event occurs or circumstances change that would more likely than not reduce our enterprise value below
our carrying amount. Application of the goodwill impairment test requires judgment, including the identification
of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and
determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of
reporting units include estimating future cash flows, determining appropriate discount rates and other
assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value
and/or goodwill impairment for each reporting unit.
Stock-based compensation
We adopted ASC Topic 718, effective February 1, 2006 using the modified prospective application method.
Accordingly, the fair value of that portion of employee stock options that is ultimately expected to vest has been
amortized to expense in our consolidated statement of operations since February 1, 2006 based on the straight-line
attribution method.
The fair value of stock option grants is calculated using the Black-Scholes option-pricing model. Expected
volatility is based on historical volatility of our common stock and other factors. The risk-free interest rates are
based on the Government of Canada average bond yields for a period consistent with the expected life of the
option in effect at the time of the grant. The expected option life is based on the historical life of our granted
options and other factors.
Income Taxes
We have provided for income taxes based on information that is currently available to us. Tax filings are subject
to audits, which could materially change the amount of current and deferred income tax assets and liabilities. As
at January 31, 2011, we had recorded net deferred tax assets of $37.9 million on our consolidated balance sheet
24
for tax benefits that we currently expect to realize in future periods. During 2011, we determined that there was
sufficient positive evidence such that it was more likely than not that we would utilize all deferred tax assets in
the United States and Sweden, and a portion of the deferred tax assets in Canada, the United Kingdom and the
Netherlands, to offset taxable income in future periods. This positive evidence included that we have earned
cumulative income, after permanent differences, in each of these jurisdictions in at least the current and three
preceding tax years. As such we have drawn down our valuation allowance by an aggregate of $6.1 million in the
current year. In 2010 and 2009, we reduced our valuation allowance by $10.1 million and $14.5 million
respectively, representing the amount of tax loss carryforwards that we projected would be used to offset taxable
income in these jurisdictions as well as Australia over the ensuing six-year period. In making the projection for
the six-year period, we made certain assumptions, including the following: (i) that there will be continued
customer migration from technology platforms owned by our US entity and our Swedish entity to a technology
platform owned by another entity in our corporate group, further reducing taxable income in the US and Sweden;
and (ii) that tax rates in these jurisdictions will be consistent over the six-year period of projection, except in
Canada where rates are expected to decrease through 2015 and then remain consistent thereafter. Any further
change to increase or decrease the valuation allowance for the deferred tax assets would result in an income tax
expense or income tax recovery, respectively, on the consolidated statements of operations.
Business Combinations
In connection with business acquisitions that we have completed, we identify and estimate the fair value of net
assets acquired, including certain identifiable intangible assets (other than goodwill) and liabilities assumed in the
acquisitions. Any excess of the purchase price over the estimated fair value of the net assets acquired is assigned
to goodwill. Intangible assets include customer agreements and relationships, non-compete covenants, existing
technologies and trade names. Our initial allocation of the purchase price is generally preliminary in nature and
may not be final for up to one year from the date of acquisition. Changes to the estimate and assumptions used in
determining our purchase price allocation may result in material differences depending on the size of the
acquisition completed.
CHANGE IN / INITIAL ADOPTION OF ACCOUNTING POLICIES
Recently adopted accounting pronouncements
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures
about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 amends ASC Topic 820, “Fair Value
Measurements and Disclosures” (“ASC Topic 820”) to add new requirements for disclosures about transfers into
and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to
Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for the first
reporting period beginning after December 15, 2009, which was our reporting period ended April 30, 2010,
except for the requirement to provide the Level 3 activity of purchases, sales issuances, and settlements on a gross
basis, which is effective for fiscal years beginning after December 15, 2010, which is our fiscal year beginning
February 1, 2011. The adoption of ASU 2010-06 has not had a material impact on our results of operation or
financial condition to date and we do not anticipate the requirement to provide the Level 3 activity on a gross
basis to materially impact the consolidated financial statements as we have not historically held any instruments
requiring Level 3 measurements.
Recently issued accounting pronouncements not yet adopted
In October 2009, the FASB issued ASU 2009-13, “Multiple Deliverable Revenue Arrangements - a consensus of
the FASB Emerging Issues Task Force” (“ASU 2009-13”). ASU 2009-13 amends ASC Subtopic 605-25
“Revenue Recognition: Multiple-Element Arrangements”. Specifically ASU 2009-13 amends the criteria for
separating consideration in multiple-deliverable arrangements and establishes a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-
25
specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available,
or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The
guidance eliminates the use of the residual method, requires entities to allocate revenue using the relative-selling-
price method, and significantly expands the disclosure requirements for multiple-deliverable revenue
arrangements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010, which is our fiscal
year beginning February 1, 2011 and will be adopted prospectively. The adoption of this amendment is not
expected to have a material impact on our results of operations.
In October 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include Software
Elements” (“ASU 2009-14”). ASU 2009-14 changes the accounting model for revenue arrangements that include
both tangible products and software elements. Tangible products containing both software and non-software
components that function together to deliver the product’s essential functionality will no longer be within the
scope of ASC Subtopic 985-605, “Software Revenue Recognition”. The entire product, including the software
and non-software deliverables, will therefore be accounted for under ASC Topic 605, “Revenue Recognition”.
ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010, which is our fiscal year beginning
February 1, 2011 and will be adopted prospectively. The adoption of this amendment is not expected to have a
material impact on our results of operations.
In April 2010, the FASB issued ASU 2010-17, “Revenue Recognition – Milestone Method” (“ASU 2010-17”).
ASU 2010-17 establishes a revenue recognition model for contingent consideration that is payable upon
achievement of an uncertain future milestone. ASU 2010-17 applies to research and development arrangements
and requires a milestone payment be recorded in the period received if the milestone meets all the necessary
criteria to be considered substantive. However, entities will not be precluded from making an accounting policy
decision to apply another appropriate accounting policy that results in the deferral of some portion of the
milestone payment. ASU 2010-17 is effective for fiscal years beginning on or after June 15, 2010, which is our
fiscal year beginning February 1, 2011. The adoption of this amendment is not expected to have a material impact
on our results of operations.
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for
Business Combinations” (“ASU 2010-29”). ASU 2010-29 clarifies that a public entity presenting comparative
financial statements, should disclose revenue and earnings of the combined entity as though any business
combinations that occurred during the current fiscal year had occurred as of the beginning of the comparative
period. In addition ASU 2010-29 expands the supplemental pro forma disclosures under ASC Topic 805,
“Business Combinations” (“ASC Topic 805”) to include a description of the nature and amount of material, non-
recurring pro forma adjustments directly attributable to the business combination included in the reported pro
forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations taking place in
fiscal periods beginning on or after December 15, 2010, which is our fiscal year beginning February 1, 2011. The
adoption of ASU 2010-29 will impact the pro forma disclosure of any future acquisitions.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, management evaluated our disclosure controls and procedures (as defined in National
Instrument 52-109) as of January 31, 2011. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of our disclosure controls and procedures were
effective.
Under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, management assessed the effectiveness of our internal control over financial reporting (as
defined in National Instrument 52-109) as of January 31, 2011, based on criteria established in “Internal Control –
26
Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission”.
Based on the assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of January
31, 2011, our internal control over financial reporting was effective.
TRENDS / BUSINESS OUTLOOK
This section discusses our outlook for fiscal 2012 and in general as of the date of this MD&A, and contains
forward-looking statements.
Our business may be impacted from time to time by the general cyclical and seasonal nature of particular modes
of transportation and the freight market in general, as well as the industries that such markets serve. Factors which
may create cyclical fluctuations in such modes of transportation, or the freight market in general, include: legal
and regulatory requirements; timing of contract renewals between our customers and their own customers;
seasonal-based tariffs; vacation periods applicable to particular shipping or receiving nations; weather-related
events or natural disasters that impact shipping in particular geographies, such as the recent earthquakes and
tsunamis in Japan; availability of credit to support shipping operations; economic downturns; and amendments to
international trade agreements. As many of our services are sold on a “per shipment” basis, we anticipate that our
business will continue to reflect the general cyclical and seasonal nature of shipment volumes with our third
quarter being the strongest quarter for shipment volumes (compared to our first quarter being the weakest quarter
for shipment volumes). Historically, in our second fiscal quarter, we have seen an increase in ocean services
revenues as ocean carriers are in the midst of their customer contract negotiation period. In our second quarter
ended July 31, 2010 we did not see, and going forward, we do not expect to see, as significant an increase in our
second fiscal quarter revenues as we have seen historically in the second fiscal quarter, primarily due to recent
departures of customers for our legacy ocean services.
In 2006, CBP launched its e-manifest initiative requiring vehicles entering the US, including planes, trucks and
ocean liners, to file an electronic manifest, providing CBP with an advance electronic notice of the contents of the
vehicle. A similar e-manifest advanced notification initiative, called Advanced Commercial Information (“ACI”),
has been developed for Canadian land ports by CBSA with a phased implementation beginning in the fourth
quarter of calendar 2010. Similar advanced notification manifest security filing requirements have been
introduced in the European Union (“EU”), with import controls systems being phased in at the different EU
member states beginning in January 2011 and export control systems to follow at a later date. We have various
customs compliance services specifically designed to help with these advance notification filing requirements.
The implementations in Canada and the EU are expected to span at least 18 months, and we anticipate that our
revenues will be positively impacted in fiscal 2012.
In fiscal 2011, our services revenues comprised 94% of our total revenues, with the balance being license
revenues. We expect that our focus in fiscal 2012 will remain on generating services revenues, primarily by
promoting use of our GLN (including customs compliance services) and the migration of customers using our
legacy license-based products to our services-based architecture. Also, for acquired businesses we will look to
minimize the number of perpetual licenses sold, in favour of our services-based business model which generates a
recurring revenue stream. We call this “de-licensing” the business. We do, however, anticipate maintaining the
flexibility to license our products to those customers who prefer to buy the products in that fashion and the
composition of our revenues in any one quarter between services revenues and license revenues will be impacted
by the buying preferences of our customers.
In the latter half of fiscal 2009 and in fiscals 2010 and 2011, we saw a global economic downturn that impacted
all areas of the economy, including employment, the availability of credit, manufacturing and retail sales. With
economic conditions impacting what is being built and sold, there has been and we anticipate that there will
continue to be an impact on volumes that are shipped in fiscal 2012. Portions of our revenues are dependent on
27
the amount of goods being shipped, the types of goods being shipped, the modes by which they are being shipped
and/or the number of aggregate shipments. Accordingly, we expect our transaction revenues to continue to be
adversely impacted until such time as the global economic environment returns to pre-fiscal 2009 levels.
We have significant contracts with our license customers for ongoing support and maintenance, as well as
significant service contracts which provide us with recurring services revenues. In addition, our installed customer
base has historically generated additional new license and services revenues for us. Service contracts are generally
renewable at a customer’s option, and there are generally no mandatory payment obligations or obligations to
license additional software or subscribe for additional services. For fiscal 2012, our plans include us losing $3.0
million of our recurring revenues that relate to customers using legacy services. In addition, based on our
historical experience, we anticipate that over a one-year period we may lose approximately 3% to 5% of our
aggregate revenues in the ordinary course. Also, we anticipate that we will continue to “de-license” certain
aspects of our business where there are perpetual licenses sold, in favour of recurring revenues. There can be no
assurance that we will be able to replace such lost revenue with new revenue from new customer relationships or
from existing customers.
We internally measure and manage our “baseline operating expenses,” a non-GAAP financial measure, which we
define as our total expenses less interest, taxes, depreciation and amortization (for which we include amortization
of intangible assets, contingent acquisition consideration and deferred compensation), stock-based compensation,
acquisition-related costs and restructuring charges. Baseline expenses are not a projection of anticipated total
expenses for a period as they exclude any expenses associated to anticipated or expected new sales for a period
beyond the date that the baseline expenses are measured. We currently intend to manage our business with the
goal of having our baseline operating expenses for a period between 80% and 90% of our total anticipated
revenues for that period. We also internally measure and monitor our visible, recurring and contracted revenues,
which we refer to as our “baseline revenues,” a non-GAAP financial measure. Baseline revenues are not a
projection of anticipated total revenues for a period as they exclude any anticipated or expected new sales for a
period beyond the date that the baseline revenues are measured. In fiscal 2012, we intend to continue to manage
our business with our baseline operating expenses at a level below our baseline revenues. We refer to the
difference between our baseline revenues and baseline operating expenses as our “baseline calibration,” a non-
GAAP financial measure. Our baseline calibration is not a projection of net income for a period as determined in
accordance with GAAP, or adjusted earnings before interest, taxes, depreciation and amortization for a period as
it excludes anticipated or expected new sales for a period beyond the date that the baseline calibration is
measured, excludes any expenses associated with such new sales, and excludes the expenses identified as
excluded in the definition of “baseline operating expenses,” above. We calculate and disclose “baseline
revenues,” “baseline operating expenses” and “baseline calibration” because management uses these metrics in
determining its planned levels of expenditures for a period. These metrics are estimates and not projections, nor
actual financial results, and are not indicative of current or future performance. These metrics do not have a
standardized meaning prescribed by GAAP and are unlikely to be comparable to similarly-titled metrics used by
other companies and are not a replacement or proxy for any GAAP measure. At February 1, 2011, using foreign
exchange rates of CAD 1.00 to $1.00 and EUR 1.34 to $1.00, we estimate that our baseline revenues for the first
quarter of 2012 were approximately $25.0 million and our baseline operating expenses were approximately $19.1
million. We consider this to be our baseline calibration of approximately $5.9 million for the first quarter of 2012,
or approximately 24% of our baseline revenues as at February 1, 2011.
In fiscal 2011 we incurred $2.1 million in restructuring charges as we continue to re-calibrate our business
through the implementation of cost reduction initiatives and further accelerate integration activity for acquired
companies. We expect to incur up to $0.7 million of additional charges pursuant to established restructuring and
integration plans with these plans expected to be completed in fiscal 2012.
We anticipate that in fiscal 2012, the significant majority of our business will continue to be in the Americas
regions, while our presence in the EMEA regions will continue to increase. We anticipate that revenues from the
Asia Pacific region will continue to represent approximately 3% to 5% of our total revenues in fiscal 2012.
28
We estimate that amortization expense for existing intangible assets will be $10.8 million for 2012, $8.7 million
for 2013, $8.1 million for 2014, $6.1 million for 2015, $3.4 million for 2016 and $3.6 million thereafter, assuming
that no impairment of existing intangible assets occurs in the interim and subject to fluctuations in foreign
exchange rates.
We anticipate that stock-based compensation expense in fiscal 2012 will be approximately $0.7 million to $0.8
million, subject to any necessary quarterly adjustments resulting from reconciling estimated stock option
forfeitures to actual stock option forfeitures.
We performed our annual goodwill impairment tests in accordance with ASC Topic 350-20 “Intangibles –
Goodwill and Other: Goodwill” on October 31, 2010 and determined that there was no evidence of impairment as
of October 31, 2010. We are currently scheduled to perform our next annual impairment test on October 31, 2011.
We will continue to perform quarterly analyses of whether any event has occurred that would more likely than not
reduce our enterprise value below our carrying amounts and, if so, we will perform a goodwill impairment test
between the annual dates. The likelihood of any future impairment increases if our public market capitalization is
adversely impacted by global economic, capital market or other conditions for a sustained period of time. Any
future impairment adjustment will be recognized as an expense in the period that the adjustment is identified.
In 2011, capital expenditures were $1.6 million, or 2% of revenues, as we continue to invest in our network and
build out our administrative infrastructure. While we are still advancing on these initiatives we anticipate that we
will incur up to $4.0 million in capital expenditures in fiscal 2012.
We conduct business in a variety of foreign currencies and, as a result, our foreign operations are subject to
foreign exchange fluctuations. Our operations operate in their local currency environment and generally use their
local currency as their functional currency. Assets and liabilities of foreign operations are translated into US
dollars at the exchange rate in effect at the balance sheet date. Revenues and expenses of foreign operations are
translated using monthly average exchange rates. Translation adjustments resulting from this process are
accumulated in other comprehensive income (loss) as a separate component of shareholders’ equity. Transactions
incurred in currencies other than the functional currency are converted to the functional currency at the transaction
date. All foreign currency transaction gains and losses are included in net income. Some of our cash is held in
foreign currencies. We currently have no specific hedging strategy in place to address fluctuations in international
currency exchange rates. We can make no accurate prediction of what will happen with international currency
exchange rates in fiscal 2012. However, if the US dollar is weak in comparison to foreign currencies, then we
anticipate this will increase the expenses of our business and have a negative impact on our results of operations.
In such cases we may need to undertake cost-reduction activities to maintain our calibration of baseline operating
expenses. By way of illustration, 54% of our revenues in fiscal 2011 were in US dollars, 27% in euro, 15% in
Canadian dollars, and the balance in mixed currencies, while 34% of our operating expenses are in US dollars,
33% in Canadian dollars, 26% in euros, and the balance in mixed currencies.
As at March 10, 2011, we had 106,383 outstanding deferred share units and 364,836 outstanding restricted share
units. DSUs and RSUs are notional share units granted to directors, officers and employees that, when vested, are
settled in cash by Descartes using the fair market value of Descartes’ common shares at the vesting date. DSUs,
which have only been granted to directors, vest upon award but are only paid at the completion of the applicable
director’s service to Descartes. RSUs generally vest and are paid over a period of three- to five-years. Our liability
to pay amounts for DSUs and RSUs is determined using the fair market value of Descartes’ common shares at the
applicable balance sheet date. Increases in the fair market value of Descartes’ common shares between reporting
periods will require us to record additional expense in a reporting period; while decreases in the fair market value
of Descartes’ common shares between reporting periods will require us to record an expense recovery. For DSUs,
the amount of any expense or recovery is based on the entire number of DSUs outstanding as DSUs are fully
vested upon award. For RSUs, the amount of any expense or recovery is based on the number of RSUs that were
expensed in the applicable reporting period as employees performed services, but that have not yet vested or been
paid pursuant to the terms of the RSU grant. Because the expense is subject to fluctuations in our stock price, we
are not able to predict these expenses or expense recoveries and, accordingly, they are outside our calibration.
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As of January 31, 2011, our gross amount of unrecognized tax benefits was $4.2 million. We expect that the
unrecognized tax benefits could increase within the next 12 months due to uncertain tax positions that may be
taken, although at this time a reasonable estimate of the possible increase cannot be made.
In fiscal 2011, we recorded a deferred income tax recovery of $3.9 million resulting primarily from the
recognition of additional deferred tax assets in the Netherlands and United Kingdom. The amount of any tax
expense or recovery in a period will depend on the amount of taxable income, if any, we generate in a jurisdiction,
our then current effective tax rate in that jurisdiction, and estimations of our ability to utilize deferred tax asset
balances in the future. We can provide no assurance as to the timing or amounts of any income tax expense or
recovery, nor can we provide any assurance that our current valuation allowance for deferred tax assets will not
need to be adjusted further.
Our tax expense for a period is difficult to predict as it depends on many factors, including the actual jurisdictions
in which income is earned, the tax rates in those jurisdictions, the amount of deferred tax assets relating to the
jurisdictions and the valuation allowances relating to those tax assets. At this time, we anticipate that our income
tax expense (current and deferred) for fiscal 2012 will be 35% - 40% of income before income taxes, exclusive of
any potential further changes to the valuation allowance for our deferred tax assets or other company events. We
also anticipate the current income tax expense portion for fiscal 2012 will be approximately 18% - 22% of income
before income taxes.
We intend to actively explore business combinations during fiscal 2012 to add complementary services, products
and customers to our existing businesses. We intend to focus our acquisition activities on companies that are
targeting the same customers as us and processing similar data and, to that end, will listen to our customers’
suggestions as they relate to consolidation opportunities. Depending on the size and scope of any business
combination, or series of business combinations, we may need to raise additional debt or equity capital. However,
with rapid changes in the global economic environment and the corresponding impact on credit and capital
markets, there can be no assurance that we will be able to undertake such a financing transaction.
Certain future commitments are set out above in the section of this MD&A called “Commitments, Contingencies
and Guarantees”. We believe that we have sufficient liquidity to fund our current operating and working capital
requirements, including the payment of these commitments.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Any investment in us will be subject to risks inherent to our business. Before making an investment decision, you
should carefully consider the risks described below together with all other information included in this report.
The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties
that we are not aware of or have not focused on, or that we currently deem immaterial, may also impair our
business operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, they could materially adversely affect our business, financial
condition, liquidity or results of operations. In that case, the trading price of our securities could decline and you
may lose all or part of your investment.
General economic conditions may affect our business, results of operations and financial condition.
Demand for our products depends in large part upon the level of capital and operating expenditures by many of
our customers. Decreased capital and operational spending could have a material adverse effect on the demand for
our products and our business, results of operations, cash flow and overall financial condition. Disruptions in the
financial markets may adversely impact the availability of credit already arranged and the availability and cost of
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credit in the future, which could result in the delay or cancellation of projects or capital programs on which our
business depends. In addition, the disruptions in the financial markets may also have an adverse impact on
regional economies or the world economy, which could negatively impact the capital and operating expenditures
of our customers. These conditions may reduce the willingness or ability of our customers and prospective
customers to commit funds to purchase our products and services, or their ability to pay for our products and
services after purchase. We are unable to predict the likely duration and severity of the current disruptions in the
financial markets and adverse economic conditions in the US and other countries.
Making and integrating acquisitions involves a number of risks that could harm our business.
We have in the past acquired, and in the future expect to seek to acquire, additional products, services, customers,
technologies or businesses that we believe are complementary to ours. For example, in 2011, we acquired
Porthus, one of our largest acquisitions in the past several years, as well as Imanet and Routing International. In
addition, in 2010 we acquired two businesses (Oceanwide and Scancode), in 2009 we acquired one business
(Dexx), in 2008 we acquired six businesses and in 2007 we acquired three businesses. However, we may not be
able to identify appropriate products, technologies or businesses for acquisition or, if identified, conclude such
acquisitions on terms acceptable to us. Acquisitions involve a number of risks, including: diversion of
management’s attention from current operations; disruption of our ongoing business; difficulties in integrating
and retaining all or part of the acquired business, its customers and its personnel; assumption of disclosed and
undisclosed liabilities; dealing with unfamiliar laws, customs and practices in foreign jurisdictions; and the
effectiveness of the acquired company’s internal controls and procedures. In particular, with our acquisition of
Porthus, we are in the process of integrating a large foreign employee base and operating structure into our
corporate group. In addition, we may not identify all risks or fully assess risks identified in connection with an
acquisition. The individual or combined effect of these risks could have a material adverse effect on our business.
As well, in paying for an acquisition, we may deplete our cash resources or dilute our shareholder base by issuing
additional shares. Furthermore, there is a risk that our valuation assumptions, customer retention expectations and
our models for an acquired product or business may be erroneous or inappropriate due to foreseen or unforeseen
circumstances and thereby cause us to overvalue an acquisition target. There is also a risk that the contemplated
benefits of an acquisition may not materialize as planned or may not materialize within the time period or to the
extent anticipated.
We may have difficulties maintaining or growing our acquired businesses.
Businesses that we acquire may sell products or operate services that we have limited experience operating or
managing. For example, Porthus offers media and technology services and Imanet provides technology solutions
to customs brokers. We may experience unanticipated challenges or difficulties maintaining these businesses at
their current levels or growing these businesses. Factors that may impair our ability to maintain or grow acquired
businesses may include, but are not limited to:
• Challenges in integrating acquired businesses with our business;
• Loss of customers of the acquired business;
• Loss of key personnel from the acquired business, such as former executive officers or key technical
personnel;
• For regulatory compliance businesses, changes in government regulations impacting electronic regulatory
filings or import/export compliance, including changes in which government agencies are responsible for
gathering import and export information;
• Difficulties in gaining necessary approvals in international markets to expand acquired businesses as
contemplated;
• Our inability to obtain or maintain necessary security clearances to provide international shipment
management services; and
• Other risk factors identified in this report.
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Our existing customers might cancel contracts with us, fail to renew contracts on their renewal dates, and/or
fail to purchase additional services and products, or consolidate contracts with acquired companies.
We depend on our installed customer base for a significant portion of our revenues. We have significant contracts
with our license customers for ongoing support and maintenance, as well as significant service contracts that
provide recurring services revenues to us. An example would be our contract to operate the US Census Bureau’s
Automated Export System (AESDirect). In addition, our installed customer base has historically generated
additional new license and services revenues for us. Service contracts are generally renewable at a customer’s
option, and there are generally no mandatory payment obligations or obligations to license additional software or
subscribe for additional services. In 2010, for example, we lost $3.0 million in annual recurring revenues
compared to 2009 from departing services customers in addition to the normal 3% - 5% annual revenue attrition
we plan for. We experienced similar revenue losses from customers using legacy services in fiscal 2011, and we
are planning to lose $3.0 million of such recurring revenues in fiscal 2012. There can be no assurance that we will
be able to replace such lost revenue with new revenue from new customer relationships or from existing
customers.
If our customers fail to renew their service contracts, fail to purchase additional services or products, or
consolidate contracts with acquired companies, then our revenues could decrease and our operating results could
be adversely affected. Factors influencing such contract terminations could include changes in the financial
circumstances of our customers, dissatisfaction with our products or services, our retirement or lack of support for
our legacy products and services, our customers selecting or building alternate technologies to replace us, and
changes in our customers’ business or in regulation impacting our customers’ business that may no longer
necessitate the use of our products or services, general economic or market conditions, or other reasons. Further,
our customers could delay or terminate implementations or use of our services and products or be reluctant to
migrate to new products. Such customers will not generate the revenues we may have anticipated within the
timelines anticipated, if at all, and may be less likely to invest in additional services or products from us in the
future. We may not be able to adjust our expense levels quickly enough to account for any such revenues losses.
Our business may also be unfavorably affected by market trends impacting our customer base, such as
consolidation activity.
Changes in government filing requirements for global trade may adversely impact our business.
Our regulatory compliance services help our customers comply with government filing requirements relating to
global trade. The services that we offer may be impacted, from time to time, by changes in these requirements.
Changes in requirements that impact electronic regulatory filings or import/export compliance, including changes
adding or reducing filing requirements or changing the government agency responsible for the requirement could
impact our business, perhaps adversely. For example, on February 25, 2011, the Federal Maritime Commission
finalized rules that grant licensed non-vessel operating common carriers (“NVOCCs”) in the United States an
exemption from the current requirements for publishing in tariffs the rates they charge for shipments. This change
in regulation will reduce the revenues that we receive from NVOCC customers, perhaps materially.
Disruptions in the movement of freight could negatively affect our revenues.
Our business is highly dependent on the movement of freight from one point to another since we generate
transaction revenues as freight is moved by, to or from our customers. If there are disruptions in the movement of
freight, whether as a result of labour disputes, weather or natural disaster, or caused by terrorists, political
instability, or security activities, contagious illness outbreaks, or otherwise, then our revenues will be adversely
affected. As these types of freight disruptions are generally unpredictable, there can be no assurance that our
revenues will not be adversely affected by such events.
Changes in the value of the US dollar, as compared to the currencies of other countries where we transact
business, could harm our operating results and financial condition.
To date, our revenues have been denominated primarily in US dollars. However, the majority of our international
expenses, including the wages of our non-US employees and certain key supply agreements, have been
denominated in Canadian dollars and euros. Therefore, changes in the value of the US dollar as compared to the
Canadian dollar and the euro may materially affect our operating results. We generally have not implemented
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hedging strategies to mitigate our exposure to currency fluctuations affecting international accounts receivable,
cash balances and inter-company accounts. We also have not hedged our exposure to currency fluctuations
affecting future international revenues and expenses and other commitments. Accordingly, currency exchange rate
fluctuations have caused, and may continue to cause, variability in our foreign currency denominated revenue
streams, expenses, and our cost to settle foreign currency denominated liabilities. In particular, we incur a
significant portion of our expenses in Canadian dollars and euros relative to the amount of revenue we receive in
Canadian dollars and euros, so fluctuations in the Canadian-US dollar and euro-US dollar exchange rates, and in
particular, the weakening of the US dollar, could have a material adverse effect on our business, results of
operations and financial condition.
We may have exposure to greater than anticipated tax liabilities or expenses.
We are subject to income and non-income taxes in various jurisdictions and our tax structure is subject to review
by both domestic and foreign taxation authorities. The determination of our worldwide provision for income taxes
and other tax liabilities requires significant judgment. In the ordinary course of a global business, there are many
transactions and calculations where the ultimate tax outcome is uncertain. Tax filings are subject to audits, which
could materially change the amount of current and deferred income tax assets and liabilities. We have recorded a
valuation allowance for all but $37.9 million of our net deferred tax assets. If we achieve a consistent level of
profitability, the likelihood of further reducing our deferred tax valuation allowance for some portion of the losses
incurred in prior periods in one of our jurisdictions will increase. We calculate our current and deferred tax
provision based on estimates and assumptions that could differ from the actual results reflected in income tax
returns filed during subsequent years. Adjustments based on filed returns are generally recorded in the period
when the tax returns are filed and the global tax implications are known. Our estimate of the potential outcome for
any uncertain tax issue is highly judgmental. Any further changes to the valuation allowance for our deferred tax
assets would also result in an income tax recovery or income tax expense, as applicable, on the consolidated
statements of operations in the period in which the valuation allowance is changed. In addition, when we reduce
our deferred tax valuation allowance, we will record income tax expense in any subsequent period where we use
that deferred tax asset to offset any income tax payable in that period, reducing net income reported for that
period, perhaps materially.
If we need additional capital in the future and are unable to obtain it as needed or can only obtain it on
unfavorable terms, our operations may be adversely affected, and the market price for our securities could
decline.
Historically, we have financed our operations primarily through cash flows from our operations and the sale of
our equity securities. As at January 31, 2011, we had cash and cash equivalents and short-term investments of
$69.6 million and $3.0 million in unutilized operating lines of credit.
We may need to raise additional debt or equity capital to fund expansion of our operations, to enhance our
services and products, or to acquire or invest in complementary products, services, businesses or technologies.
However, with the recent global economic downturn and its impact on credit and capital markets, there can be no
assurance that we will be able to undertake such a financing transaction. If we raise additional funds through
further issuances of convertible debt or equity securities, our existing shareholders could suffer significant
dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those
attaching to our common shares. Any debt financing secured by us in the future could involve restrictive
covenants relating to our capital-raising activities and other financial and operational matters, which may make it
more difficult for us to obtain additional capital and to pursue business opportunities, including potential
acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If
adequate funds are not available on terms favorable to us, our operations and growth strategy may be adversely
affected and the market price for our common shares could decline.
We have a substantial accumulated deficit and a history of losses and may incur losses in the future.
As at January 31, 2011, our accumulated deficit was $336.8 million. We had losses in 2005 and prior fiscal
periods. Our profits in 2006 benefited from one-time gains on the disposition of an asset and a significant portion
of our net income and earnings per share in the fourth quarter of each of 2011, 2010 and 2009 benefited from non-
33
cash, net deferred income tax recoveries of $4.4 million, $10.9 million and $13.1 million, respectively. There can
be no assurance that we will not incur losses again in the future. We believe that the success of our business and
our ability to remain profitable depends on our ability to keep our baseline operating expenses to a level at or
below our baseline revenues. However, non-cash, non-operational charges, such as income tax expenses or
impairment charges, may adversely impact our ability to be profitable in any particular period. There can be no
assurance that we can generate further expense reductions or achieve revenue growth, or that any expense
reductions or revenue growth achieved can be sustained, to enable us to do so. If we fail to maintain profitability,
this would increase the possibility that the value of your investment will decline.
If we fail to attract and retain key personnel, it would adversely affect our ability to develop and effectively
manage our business.
Our performance is substantially dependent on the performance of our key technical, sales and marketing, and
senior management personnel. We do not maintain life insurance policies on any of our employees that list the
company as a loss payee. Our success is highly dependent on our ability to identify, hire, train, motivate, promote,
and retain highly qualified management, directors, technical, and sales and marketing personnel, including key
technical and senior management personnel. Competition for such personnel is always strong. Our inability to
attract or retain the necessary management, directors, technical, and sales and marketing personnel, or to attract
such personnel on a timely basis, could have a material adverse effect on our business, results of operations,
financial condition and the price of our securities.
We have in the past, and may in the future, make changes to our executive management team or board of
directors. There can be no assurance that these changes and the resulting transition will not have a material
adverse effect on our business, results of operations, financial condition and the price of our securities.
Increases in fuel prices and other transportation costs may have an adverse effect on the businesses of our
customers resulting in them spending less money with us.
Our customers are all involved, directly or indirectly, in the delivery of goods from one point to another,
particularly transportation providers and freight forwarders. As the costs of these deliveries become more
expensive, whether as a result of increases in fuel costs or otherwise, our customers may have fewer funds
available to spend on our products and services. While it is possible that the demand for our products and services
will increase as companies look for ways to reduce fleet size and fuel use and recognize that our products and
services are designed to make their deliveries more cost-efficient, there can be no assurance that these companies
will be able to allocate sufficient funds to use our products and services. In addition, rising fuel costs may cause
global or geographic-specific reductions in the number of shipments being made, thereby impacting the number
of transactions being processed by our GLN and our corresponding network revenues.
We may not be able to compensate for downward pricing pressure on certain products and services by
increased volumes of transactions or increased prices elsewhere in our business, ultimately resulting in lower
revenues.
Some of our products and services are sold to industries where there is downward pricing pressure on the
particular product or service due to competition, general industry conditions or other causes. We may attempt to
deal with this pricing pressure by committing these customers to volumes of activity so that we may better control
our costs. In addition, we may attempt to offset this pricing pressure by securing better margins on other products
or services sold to these customers, or to customers of our other products and services. If we cannot offset any
such downward pricing pressure, then the particular customer may generate less revenue for our business or we
may have less aggregate revenue. This could have an adverse impact on our operating results.
Concerns about the environmental impacts of greenhouse gas emissions and global climate change may result
in environmental taxes, charges, regulatory schemes, assessments or penalties, which could restrict or
negatively impact our operations or reduce our profitability.
The impacts of human activity on global climate change have attracted considerable public and scientific
attention, as well as the attention of the United States and other governments. Efforts are being made to reduce
greenhouse gas emissions and energy consumption, including those from automobiles and other modes of
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transportation. The added cost of any environmental regulation, taxes, charges, assessments or penalties levied or
imposed on our customers in light of these efforts could result in additional costs for our customers, which could
lead them to reduce use of our services. There are also a number of legislative and environmental regulatory
initiatives internationally that could restrict or negatively impact our operations or increase our costs.
Additionally, environmental regulation, taxes, charges, assessments or penalties could be levied or imposed
directly on us. Any enactment of laws or passage of regulations regarding greenhouse gas emissions by Canada,
the United States, or any other jurisdiction we conduct our business in, could adversely affect our operations and
financial results.
The general cyclical and seasonal nature of our business may have a material adverse effect on our business,
results of operations and financial condition.
Our business may be impacted from time to time by the general cyclical and seasonal nature of particular modes
of transportation and the freight market in general, as well as the cyclical and seasonal nature of the industries that
such markets serve. Factors which may create cyclical fluctuations in such modes of transportation or the freight
market in general include legal and regulatory requirements, timing of contract renewals between our customers
and their own customers, seasonal-based tariffs, vacation periods applicable to particular shipping or receiving
nations, weather-related events that impact shipping in particular geographies and amendments to international
trade agreements. Since some of our revenues from particular products and services are tied to the volume of
shipments being processed, adverse fluctuations in the volume of global shipments or shipments in any particular
mode of transportation may adversely affect our revenues. Declines in shipment volumes in the US or
internationally likely would have a material adverse effect on our business.
Changes to earnings resulting from past acquisitions may adversely affect our operating results.
Under ASC Topic 805, the accounting standard for business combinations, we allocate the total purchase price to
an acquired company’s net tangible assets, intangible assets and in-process research and development based on
their values as of the date of the acquisition (including certain assets and liabilities that are recorded at fair value)
and record the excess of the purchase price over those values as goodwill. Management’s estimates of fair value
are based upon assumptions believed to be reasonable but which are inherently uncertain. After we complete an
acquisition, the following factors could result in material charges that would adversely affect our operating results
and may adversely affect our cash flows:
Impairment of goodwill or intangible assets;
•
• A reduction in the useful lives of intangible assets acquired;
•
Identification of assumed contingent liabilities after we finalize the purchase price allocation period;
• Charges to our operating results to eliminate certain pre-merger activities that duplicate those of the
acquired company or to reduce our cost structure; or
• Charges to our operating results resulting from revised estimates to restructure an acquired company’s
operations after we finalize the purchase price allocation period.
Routine charges to our operating results associated with acquisitions include amortization of intangible assets, in-
process research and development as well as other acquisition related charges, restructuring and stock-based
compensation associated with assumed stock awards. Charges to our operating results in any given period could
differ substantially from other periods based on the timing and size of our future acquisitions and the extent of
integration activities.
We expect to continue to incur additional costs associated with combining the operations of our acquired
companies, which may be substantial. Additional costs may include costs of employee redeployment, relocation
and retention, including salary increases or bonuses, accelerated stock-based compensation expenses and
severance payments, reorganization or closure of facilities, taxes, and termination of contracts that provide
redundant or conflicting services. These costs would be accounted for as expenses and would decrease our net
income and earnings per share for the periods in which those adjustments are made.
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Pursuant to ASC Topic 805, we expensed $0.3 million, $0.9 million and $1.5 million of acquisition-related costs
in fiscal 2009, 2010 and 2011, respectively. We did not expense similar costs in prior periods. Depending on the
size and scope of any future business combination that we undertake, we believe that ASC Topic 805 may have a
material impact on our results of operations and financial condition.
If our common share price decreases to a level such that the fair value of our net assets is less than the
carrying value of our net assets, we may be required to record additional significant non-cash charges
associated with goodwill impairment.
We account for goodwill in accordance with ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC Topic
350”). ASC Topic 350, among other things, requires that goodwill be tested for impairment at least annually. We
have designated October 31st as the date for our annual impairment test. Although the results of our testing on
October 31, 2010 indicated no evidence of impairment, should the fair value of our net assets, determined by our
market capitalization, be less than the carrying value of our net assets at future annual impairment test dates, we
may have to recognize goodwill impairment losses in our future results of operations. This could impair our
ability to achieve or maintain profitability in the future.
System or network failures or breaches in connection with our services and products could reduce our sales,
impair our reputation, increase costs or result in liability claims, and seriously harm our business.
Any disruption to our services and products, our own information systems or communications networks or those
of third-party providers upon whom we rely as part of our own product offerings, including the Internet, could
result in the inability of our customers to receive our products for an indeterminate period of time. Our services
and products may not function properly for reasons, which may include, but are not limited to, the following:
Interruption in the supply of power;
• System or network failure;
•
• Virus proliferation;
• Security breaches;
• Earthquake, fire, flood or other natural disaster; or
• An act of war or terrorism.
Back-up and redundant systems may be insufficient or may fail and result in a disruption of availability of our
products or services to our customers. Any disruption to our services could impair our reputation and cause us to
lose customers or revenue, or face litigation, necessitate customer service or repair work that would involve
substantial costs and distract management from operating our business.
Fair value assessments of our intangible assets required by GAAP may require us to record significant non-
cash charges associated with intangible asset impairment.
Significant portions of our assets, which include customer agreements and relationships, non-compete covenants,
existing technologies and trade names, are intangible. We amortize intangible assets on a straight-line basis over
their estimated useful lives, which are generally three to five years. We review the carrying value of these assets
at least annually for evidence of impairment. In accordance with ASC Topic 360-10-35, “Property, Plant, and
Equipment: Overview: Subsequent Measurement” an impairment loss is recognized when the estimate of
undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the
impairment loss is based on the present value of the expected future cash flows. Future fair value assessments of
intangible assets may require impairment charges to be recorded in the results of operations for future periods.
This could impair our ability to achieve or maintain profitability in the future.
From time to time, we may be subject to litigation or dispute resolution that could result in significant costs to
us and damage to our reputation.
From time to time, we may be subject to litigation or dispute resolution relating to any number or type of claims,
including claims for damages related to undetected errors or malfunctions of our services and products or their
deployment, claims related to previously-completed acquisition transactions or claims relating to applicable
securities laws. A product liability, patent infringement, acquisition-related or securities class action claim could
36
seriously harm our business because of the costs of defending the lawsuit, diversion of employees’ time and
attention, and potential damage to our reputation.
Further, our services and products are complex and often implemented by our customers to interact with third-
party technology or networks. Claims may be made against us for damages properly attributable to those third-
party technologies or networks, regardless of our lack of responsibility for any failure resulting in a loss - even if
our services and products perform in accordance with their functional specifications. We may also have disputes
with key suppliers for damages incurred which, depending on resolution of the disputes, could impact the ongoing
quality, price or availability of the services or products we procure from the supplier. Limitation of liability
provisions in certain third-party contracts may not be enforceable under the laws of some jurisdictions. As a
result, we could be required to pay substantial amounts of damages in settlement or upon the determination of any
of these types of claims, and incur damage to the reputation of Descartes and our products. The likelihood of such
claims and the amount of damages we may be required to pay may increase as our customers increasingly use our
services and products for critical business functions, or rely on our services and products as the systems of record
to store data for use by other customer applications. Our insurance may not cover potential claims, or may not be
adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be
imposed.
We could be exposed to business risks in our international operations that could cause our operating results to
suffer.
While our headquarters are in North America, we currently have direct operations in both Europe and the Asia
Pacific region. We anticipate that these international operations will continue to require significant management
attention and financial resources to localize our services and products for delivery in these markets, to develop
compliance expertise relating to international regulatory agencies, and to develop direct and indirect sales and
support channels in those markets. We face a number of risks associated with conducting our business
internationally that could negatively impact our operating results. These risks include, but are not limited to:
• Longer collection time from foreign clients, particularly in the EMEA and Asia Pacific regions;
• Difficulty in repatriating cash from certain foreign jurisdictions;
• Language barriers, conflicting international business practices, and other difficulties related to the
management and administration of a global business;
• Difficulties and costs of staffing and managing geographically disparate direct and indirect operations;
• Volatility or fluctuations in foreign currency and tariff rates;
• Multiple, and possibly overlapping, tax structures;
• Complying with complicated and widely differing global laws and regulations;
• Trade restrictions;
• The need to consider characteristics unique to technology systems used internationally;
• Economic or political instability in some markets; and
• Other risk factors set out in this report.
We may not remain competitive. Increased competition could seriously harm our business.
The market for supply chain technology is highly competitive and subject to rapid technological change. We
expect that competition will increase in the future. To maintain and improve our competitive position, we must
continue to develop and introduce in a timely and cost effective manner new products, product features and
network services to keep pace with our competitors. We currently face competition from a large number of
specific entrants, some of which are focused on specific industries, geographic regions or other components of
markets we operate in.
Current and potential competitors include supply chain application software vendors, customers that undertake
internal software development efforts, value-added networks and business document exchanges, enterprise
resource planning software vendors, regulatory filing companies, and general business application software
vendors. Many of our current and potential competitors may have one or more of the following relative
advantages:
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• Longer operating history;
• Greater financial, technical, marketing, sales, distribution and other resources;
• Lower cost structure and more profitable operations;
• Superior product functionality and industry-specific expertise;
• Greater name recognition;
• Broader range of products to offer;
• Better performance;
• Larger installed base of customers;
• Established relationships with existing customers or prospects that we are targeting; and/or
• Greater worldwide presence.
Further, current and potential competitors have established, or may establish, cooperative relationships and
business combinations among themselves or with third parties to enhance their products, which may result in
increased competition. In addition, we expect to experience increasing price competition and competition
surrounding other commercial terms as we compete for market share. In particular, larger competitors or
competitors with a broader range of services and products may bundle their products, rendering our products more
expensive and/or less functional. As a result of these and other factors, we may be unable to compete successfully
with our existing or new competitors.
If we are unable to generate broad market acceptance of our services, products and pricing, serious harm
could result to our business.
We currently derive substantially all of our revenues from our federated network and global logistics technology
solutions and expect to do so in the future. Broad market acceptance of these types of services and products, and
their related pricing, is therefore critical to our future success. The demand for, and market acceptance of, our
services and products is subject to a high level of uncertainty. Some of our services and products are often
considered complex and may involve a new approach to the conduct of business by our customers. The market for
our services and products may weaken, competitors may develop superior services and products, or we may fail to
develop acceptable services and products to address new market conditions. Any one of these events could have a
material adverse effect on our business, results of operations and financial condition.
Our success and ability to compete depends upon our ability to secure and protect patents, trademarks and
other proprietary rights.
We consider certain aspects of our internal operations, our products, services and related documentation to be
proprietary, and we primarily rely on a combination of patent, copyright, trademark and trade secret laws and
other measures to protect our proprietary rights. Patent applications or issued patents, as well as trademark,
copyright, and trade secret rights, may not provide adequate protection or competitive advantage and may require
significant resources to obtain and defend. We also rely on contractual restrictions in our agreements with
customers, employees, outsourced developers and others to protect our intellectual property rights. There can be
no assurance that these agreements will not be breached, that we have adequate remedies for any breach, or that
our patents, copyrights, trademarks or trade secrets will not otherwise become known. Moreover, the laws of
some countries do not protect proprietary intellectual property rights as effectively as do the laws of the US and
Canada. Protecting and defending our intellectual property rights could be costly regardless of venue. Through an
escrow arrangement, we have granted some of our customers a contingent future right to use our source code for
software products solely for their internal maintenance services. If our source code is accessed through an escrow,
the likelihood of misappropriation or other misuse of our intellectual property may increase.
Claims that we infringe third-party proprietary rights could trigger indemnification obligations and result in
significant expenses or restrictions on our ability to provide our products or services.
Competitors and other third-parties have claimed, and in the future may claim, that our current or future services
or products infringe their proprietary rights or assert other claims against us. Many of our competitors have
obtained patents covering products and services generally related to our products and services, and they may
38
assert these patents against us. Such claims, whether with or without merit, could be time consuming and
expensive to litigate or settle and could divert management attention from focusing on our core business.
As a result of such a dispute, we may have to pay damages, incur substantial legal fees, suspend the sale or
deployment of our services and products, develop costly non-infringing technology, if possible, or enter into
license agreements, which may not be available on terms acceptable to us, if at all. Any of these results would
increase our expenses and could decrease the functionality of our services and products, which would make our
services and products less attractive to our current and/or potential customers. We have agreed in some of our
agreements, and may agree in the future, to indemnify other parties for any expenses or liabilities resulting from
claimed infringements of the proprietary rights of third parties. If we are required to make payments pursuant to
these indemnification agreements, it could have a material adverse effect on our business, results of operations
and financial condition.
Our results of operations may vary significantly from quarter to quarter and therefore may be difficult to
predict or may fail to meet investment community expectations.
Our results of operations may vary from quarter to quarter in the future due to a variety of factors, many of which
are outside of our control. Such factors include, but are not limited to:
• Volatility or fluctuations in foreign currency exchange rates;
• Timing of acquisitions and related costs;
• Timing of restructuring activities;
• The termination of any key customer contracts, whether by the customer or by us;
• Recognition and expensing of deferred tax assets;
• Legal costs incurred in bringing or defending any litigation with customers or third-party providers, and
any corresponding judgments or awards;
• Legal and compliance costs incurred to comply with regulatory requirements;
• Fluctuations in the demand for our services and products;
• The impact of stock-based compensation expense;
• Price and functionality competition in our industry;
• Changes in legislation and accounting standards;
• Our ability to satisfy contractual obligations in customer contracts and deliver services and products to the
satisfaction of our customers; and
• Other risk factors discussed in this report.
Although our revenues may fluctuate from quarter to quarter, significant portions of our expenses are not variable
in the short term, and we may not be able to reduce them quickly to respond to decreases in revenues. If revenues
are below expectations, this shortfall is likely to adversely and/or disproportionately affect our operating results.
Our common share price has in the past been volatile and may also be volatile in the future.
The trading price of our common shares has in the past been subject to wide fluctuations and may also be subject
to fluctuation in the future. This may make it more difficult for you to resell your common shares when you want
at prices that you find attractive. Increases in our common share price may also increase our compensation
expense pursuant to our existing director, officer and employee compensation arrangements. Fluctuations in our
common share price may be caused by events unrelated to our operating performance and beyond our control.
Factors that may contribute to fluctuations include, but are not limited to:
• Revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of
the investment community;
• Changes in recommendations or financial estimates by industry or investment analysts;
• Changes in management or the composition of our board of directors;
• Outcomes of litigation or arbitration proceedings;
• Announcements of technological innovations or acquisitions by us or by our competitors;
•
Introduction of new products or significant customer wins or losses by us or by our competitors;
39
• Developments with respect to our intellectual property rights or those of our competitors;
• Fluctuations in the share prices of other companies in the technology and emerging growth sectors;
• General market conditions; and
• Other risk factors set out in this report.
If the market price of our common shares drops significantly, shareholders could institute securities class action
lawsuits against us, regardless of the merits of such claims. Such a lawsuit could cause us to incur substantial
costs and could divert the time and attention of our management and other resources from our business.
40
MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS AND
INTERNAL CONTROL OVER FINANCIAL REPORTING
Financial Statements
Management is responsible for the accompanying consolidated financial statements and all other information in this Annual
Report. These consolidated financial statements have been prepared in accordance with US GAAP and necessarily include
amounts that reflect management’s judgment and best estimates. Financial information contained elsewhere in this Annual
Report is prepared on a basis consistent with the consolidated financial statements.
The Board of Directors carries out its responsibilities for the consolidated financial statements through its Audit Committee,
consisting solely of independent directors. The Audit Committee meets with management and independent auditors to review
the consolidated financial statements and the internal controls as they relate to financial reporting. The Audit Committee
reports its findings to the Board of Directors for its consideration in approving the consolidated financial statements for
issuance to shareholders.
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 by, or under the supervision of, the Chief Executive Officer and Chief
Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely
basis.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, management assessed the effectiveness of our internal control over financial reporting as of January 31,
2011, based on criteria established in “Internal Control – Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission”. Based on the assessment, management concluded that, as of January 31, 2011,
our internal control over financial reporting was effective.
Management’s internal control over financial reporting as of January 31, 2011, has been audited by Deloitte & Touche LLP,
Independent Registered Chartered Accountants, who also audited our Consolidated Financial Statements for the year ended
January 31, 2011, as stated in the Report of Independent Chartered Accountants, which expressed an unqualified opinion on
the effectiveness of our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
During the fiscal year ended January 31, 2011, no changes were made to the Company’s internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Arthur Mesher
Chief Executive Officer
Waterloo, Ontario
Stephanie Ratza
Chief Financial Officer
Waterloo, Ontario
41
Report of Independent Registered Chartered Accountants
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
and subsidiaries (the “Company”) as of
We have audited the internal control over financial reporting of The Descartes Systems Group Inc. and subsidiarie
We have audited the internal control over financial reporting of The Descartes Systems Group Inc.
issued by the Committee of Sponsoring
, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
January 31, 2011, based on the criteria established in
Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over
The Company's management is responsible for maintaining effective internal control over
The Company's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included
. Our responsibility is to express an opinion
ial Statements and Internal Control over Financial Reporting. Our responsibility is to express an opinion
Management’s Report on Financial Statements and Internal Control over Financial Reporting
on the Company's internal control over financial reporting based on our audit.
on the Company's internal control over financial reporting based on our audit.
Company Accounting Oversight Board (United States). Those
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
We conducted our audit in accordance with the standards of the Public
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
audit to obtain reasonable assurance about whether effective internal control over financial
audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
rforming such other procedures as we considered necessary in the circumstances. We believe that our
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our
rforming such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the
supervision of, the company's principal
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of d
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of d
iability of financial reporting and the preparation of
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
management, and other personnel to provide reasonable assurance regarding the rel
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
financial reporting includes those policies and procedures tha
t (1) pertain to the maintenance of records that, in reasonable detail, accurately
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that tran
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that tran
paration of financial statements in accordance with generally accepted accounting principles, and that
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
paration 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
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of
e reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
e 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.
the company's assets that could have a material effect on the financial statements.
over financial reporting, including the possibility of collusion or improper
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
Because of the inherent limitations of internal control
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely ba
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely ba
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that
ctiveness of the internal control over financial reporting to future periods are subject to the risk that
ctiveness of the internal control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or pr
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or pr
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2011
reporting as of January 31, 2011,
In our opinion, the Company maintained, in all material respects, effective internal control over financial
issued by the Committee of Sponsoring Organizations of the
based on the criteria established in Internal Control
Treadway Commission.
Internal Control — Integrated Framework issued by the Committee of Sponsor
have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
as of and for the year ended January 31, 2011 of the
Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 31, 2011 of the
Accounting Oversight Board (United States), the consolidated financial statements
1 expressed an unqualified opinion on those financial statements.
Company and our report dated March 11, 2011 expressed an unqualified opinion on those financial statements.
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
March 11, 2011
42
Report of Independent Registered Chartered Accountants
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
have audited the accompanying consolidated financial statements of The Descartes Systems Group
We have audited the accompanying consolidated
subsidiaries, which comprise the consolidated balance sheets
of operations, shareholders' equity and comprehensive income
31, 2011, and a summary of significant accounting policies and
balance sheets as at January 31, 2011 and January 31, 2010, and the consolidated
and comprehensive income, and cash flows for each of the years in the three
Inc. (the “Company”) and
2010, and the consolidated statements
three-year period ended January
, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management's Responsibility for the Consolidated Financial Statements
consolidated financial statements in accordance with
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
Management is responsible for the preparation
accounting principles generally accepted in the United States of America, and for such internal control as management determines is
accounting principles generally accepted in the United States of America, and for such internal control as management determi
accounting principles generally accepted in the United States of America, and for such internal control as management determi
financial statements that are free from material misstatement, whether due to fraud or
y to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or
necessary to enable the preparation of consolidated
error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated
tatements based on our audits. We conducted our audits in
to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight B
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight B
l requirements and plan and perform the audit to obtain reasonable
(United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
(United States). Those standards require that we comply with ethica
financial statements are free from material misstatement.
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and d
sclosures in the consolidated financial
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material miss
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material miss
those risk assessments, the auditor considers internal control
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
consolidated financial statements, whether due to fraud or error. In making
financial statements in order to design audit procedures that are
n and fair presentation of the consolidated financial statements in order to design audit procedures that are
relevant to the entity's preparation and fair presentation of the consolidated
o includes evaluating the appropriateness of accounting policies used and the reasonableness
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
o includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
of accounting estimates made by management, as well as evaluating the overall pr
financial statements.
dence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
dence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
financial statements present fairly, in all material respects, the financial position of The Descartes Systems
financial statements present fairly, in all material respects, the financial position of
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
and cash flows for each of the
January 31, 2011 and January 31, 2010, and the results of their operations and cash flows for each of
Group Inc. and subsidiaries as at January 31, 2011 and
in accordance with accounting principles generally accepted in the United States of
years in the three-year period ended January 31, 2011
America.
d ended January 31, 2011 in accordance with accounting principles generally accepted in the Un
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Internal Control—Integrated
Company's internal control over financial reporting as of January 31, 2011, based on the criteria established in
trol over financial reporting as of January 31, 2011, based on the criteria established in Internal Control
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2011
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
unqualified opinion on the Company’s internal control over financial reporting.
expressed an unqualified opinion on the Company’s internal control over financial reporting.
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
March 11, 2011
43
NC.
THE DESCARTES SYSTEMS GROUP INC
CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS; US GAAP)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 4)
Short-term investments (Note 4)
Accounts receivable (net)
Trade (Note 5)
Other
Prepaid expenses and other
Deferred income taxes (Note 17)
Deferred tax charge
CAPITAL ASSETS (Note 8)
GOODWILL (Note 9)
INTANGIBLE ASSETS (Note 10)
DEFERRED INCOME TAXES (Note 17)
DEFERRED TAX CHARGE
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued liabilities (Note 11)
Income taxes payable (Note 17)
Deferred revenue
Other liabilities
DEFERRED REVENUE
INCOME TAX LIABILITY (Note 17)
DEFERRED INCOME TAXES (Note 17)
OTHER LIABILITIES
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 12)
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 1
unlimited shares authorized; Shares issued and outstanding totaled 61,741,702 at
SHAREHOLDERS’ EQUITY
Common shares – unlimited shares authorized; Shares issued and outstanding totaled 61,
January 31, 2011 ( January 31, 2010 – 61,410,877
Additional paid-in capital
(loss)
Accumulated other comprehensive income (loss)
Accumulated deficit
410,877) (Note 13)
January 31,
January 31,
2011
January 31,
2010
69,644
-
14,417
3,967
1,968
11,457
197
101,650
7,309
56,742
40,703
34,667
198
241,269
4,992
11,342
471
6,310
67
23,182
1,665
2,468
8,267
172
35,754
89,554
5,071
9,840
2,231
1,146
4,414
197
112,453
5,482
34,456
21,058
34,346
395
208,190
2,603
7,509
975
5,454
-
16,541
1,172
2,605
-
-
20,318
88,148
452,300
1,822
(336,755)
205,515
241,269
86,609
451,591
(2,034)
(348,294)
187,872
208,190
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated
Approved by the Board:
J. Ian Giffen
J. Ian Giffen
Director
Director
Stephen Watt
Stephen Watt
Director
44
January 31,
2011
January 31,
2010
January 31,
2009
99,175
33,875
65,300
11,492
16,971
13,633
3,995
11,471
-
57,562
7,738
(14)
209
7,933
277
(3,883)
(3,606)
11,539
0.19
0.18
61,523
62,888
73,768
22,983
50,785
10,695
14,435
10,728
1,615
6,929
-
44,402
6,383
-
342
6,725
855
(8,480)
(7,625)
14,350
0.26
0.25
66,044
22,353
43,691
8,992
11,458
9,008
538
5,133
833
35,962
7,729
-
1,002
8,731
256
(11,735)
(11,479)
20,210
0.38
0.38
55,389
56,437
52,961
53,659
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; US GAAP)
Year Ended
REVENUES
COST OF REVENUES
GROSS MARGIN
EXPENSES
Sales and marketing
Research and development
General and administrative
Other charges (Note 18)
Amortization of intangible assets
Contingent acquisition consideration (Note 7)
INCOME FROM OPERATIONS
INTEREST EXPENSE
INVESTMENT INCOME
INCOME BEFORE INCOME TAXES
INCOME TAX (RECOVERY) EXPENSE (Note 17)
Current
Deferred
NET INCOME
EARNINGS PER SHARE (Note 14)
Basic
Diluted
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
45
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(US DOLLARS IN THOUSANDS; US GAAP)
Common shares
Balance, beginning of year
Shares issued:
Stock options exercised
Issue of common shares net of issuance costs
Balance, end of year
Additional paid-in capital
Balance, beginning of year
Unearned compensation related to issuance of stock options
Stock-based compensation expense
Stock options exercised
Stock option income tax benefits
Purchase of non-controlling interest (Note 3)
Balance, end of year
Accumulated other comprehensive income (loss)
Balance, beginning of year
Foreign currency translation adjustments
Balance, end of year
Accumulated deficit
Balance, beginning of year
Net income
Balance, end of year
Total Shareholders’ Equity
Comprehensive income
Net income
Other comprehensive income (loss):
January 31,
2011
January 31,
2010
January 31,
2009
86,609
44,986
44,653
1,539
-
88,148
3,874
37,749
86,609
211
122
44,986
451,591
8
1,076
(404)
-
29
452,300
449,462
38
3,371
(1,335)
55
-
451,591
448,918
7
527
(34)
44
-
449,462
(2,034)
3,856
1,822
363
(2,397)
(2,034)
2,006
(1,643)
363
(348,294)
11,539
(336,755)
(362,644)
14,350
(348,294)
(382,854)
20,210
(362,644)
205,515
187,872
132,167
11,539
14,350
20,210
Foreign currency translation adjustment, net of income tax recovery of $534 for the year
3,856
(2,397)
(1,643)
ended January 31, 2011
Total other comprehensive income (loss)
Comprehensive income
3,856
15,395
(2,397)
11,953
(1,643)
18,567
The accompanying notes are an integral part of these consolidated financial statements.
46
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS; US GAAP)
Year Ended
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation
Amortization of intangible assets
Write-off of redundant assets (Note 8)
Amortization of deferred compensation
Stock-based compensation expense
Gain on sale of investment in affiliate (Note 6)
Loss from investment in affiliate (Note 6)
Deferred income taxes
Deferred tax charge
Changes in operating assets and liabilities:
Accounts receivable
Trade
Other
Prepaid expenses and other
Deferred contingent acquisition consideration
Accounts payable
Accrued liabilities
Income taxes payable
Deferred revenue
Cash provided by operating activities
INVESTING ACTIVITIES
Maturities of short-term investments
Purchase of short-term investments
Additions to capital assets
Proceeds from the sale of investment in affiliate (Note 6)
Acquisition of subsidiaries, net of cash acquired and bank indebtedness assumed
Acquisition-related costs
Cash used in investing activities
FINANCING ACTIVITIES
Issuance of common shares for cash, net of issue costs
Repayment of other liabilities
Cash provided by financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
Cash paid during the year for income taxes
January 31,
2011
January 31,
2010
January 31,
2009
11,539
14,350
20,210
2,420
11,471
417
8
1,076
(20)
19
(3,883)
196
2,748
106
51
-
(275)
(3,088)
(1,733)
(1,163)
19,889
5,071
-
(1,656)
487
(44,989)
-
(41,087)
1,133
(358)
775
513
(19,910)
89,554
69,644
21
1,319
1,870
6,929
-
38
3,371
-
-
(8,480)
197
788
219
364
-
478
(3,253)
1,665
(2,001)
16,535
40,501
(35,362)
(1,626)
-
(14,964)
(58)
(11,509)
40,293
-
40,293
(3,187)
42,132
47,422
89,554
-
709
2,231
5,133
-
7
527
-
-
(11,735)
(216)
772
234
81
833
(617)
1,379
(285)
131
18,685
-
(10,210)
(1,343)
-
(2,231)
(928)
(14,712)
177
-
177
(819)
3,331
44,091
47,422
-
1,194
The accompanying notes are an integral part of these consolidated financial statements.
47
THE DESCARTES SYSTEMS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of US dollars, except per share
amounts; US GAAP)
Note 1 - Description of the Business
The Descartes Systems Group Inc. (“Descartes”, “Company”, “our” or “we”) is a global provider of federated
network and global logistics technology solutions that help our customers make and receive shipments and
manage related resources. Our network-based solutions, which primarily consist of services and software, connect
people to their trading partners and enable business document exchange (bookings, bills of lading, status
messages); regulatory compliance and customs filing; route and resource planning, execution and monitoring;
inventory and asset visibility; rate and transportation management; and warehouse operations.
Note 2 - Significant Accounting Policies
Basis of presentation
We prepare our consolidated financial statements in US dollars and in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
Our fiscal year commences on February 1st of each year and ends on January 31st of the following year. Our fiscal
year, which ended January 31, 2011, is referred to as the “current fiscal year,” “fiscal 2011,” “2011” or using
similar words. Our fiscal year, which ended January 31, 2010, is referred to as the “previous fiscal year,” “fiscal
2010,” “2010” or using similar words. Other fiscal years are referenced by the applicable year during which the
fiscal year ends. For example, “2012” refers to the annual period ending January 31, 2012 and the “fourth quarter
of 2012” refers to the quarter ending January 31, 2012.
Certain immaterial reclassifications have been made to the prior year consolidated financial statements and notes
to the consolidated financial statements to conform to the current year presentation. Specifically, for the year
ended January 31, 2010, we reclassified $0.2 million from cost of revenues, $0.1 million from sales and
marketing expenses, $0.1 million from research and development expenses and $1.2 million from general and
administrative expenses to other charges. For the year ended January 31, 2009, we reclassified $0.5 million from
general and administrative expenses to other charges. These immaterial reclassifications were made in order to
conform to the current fiscal year presentation of other charges. We also reclassified our segmented long-lived
assets information disclosed in Note 19 to represent capital assets, goodwill and intangibles that are attributed to
individual geographic segments instead of only capital assets.
Change of Forfeiture Rate Estimate
Descartes accounts for stock-based compensation in accordance with the guidance of Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Compensation - Stock
Compensation” (“ASC Topic 718”). ASC Topic 718 requires us to estimate a forfeiture rate for option grants
designed to facilitate the expensing of that portion of the fair value of stock options grants that we ultimately
expect to vest.
In 2010, we reviewed our forfeiture rate assumptions. We considered various factors, including evidence of the
decline in the attrition rate of employees, executive officers, and directors who had been granted stock options and
evidence that, with recent increases in the price of our common shares, our outstanding unvested stock options
were on average significantly more ‘in-the-money’. After considering these various factors, we determined to
change our forfeiture rate estimates and stock-based compensation accounting as follows:
• A 0% percent forfeiture rate estimate for grants of stock options to executive officers and directors; and
• A 10% annualized forfeiture rate estimate for other grants of stock options.
48
We also determined to perform a quarterly reconciliation of actual forfeiture experience to the estimated forfeiture
experience.
We followed the guidance in ASC Topic 250 “Accounting Changes and Error Corrections” (“ASC Topic 250”)
and accounted for this change of estimate and the corresponding reconciliation to actual forfeitures in 2010. As a
result of the above changes, we expensed $1.8 million in additional stock-based compensation in 2010.
Correction of Immaterial Error
In connection with our review of our forfeiture estimates in 2010, and in light of actual forfeiture experience that
varied from the original forfeiture estimate used, we determined that there was insufficient evidence to support the
forfeiture estimate used beginning November 1, 2007 in fiscal 2008 and fiscal 2009. We determined that the
difference between the original forfeiture estimate used and the actual forfeiture experience should be accounted
for as an error. As stock-based compensation expense is a non-cash item, this error did not impact net cash
provided by operations in any period.
This error resulted in the understatement of stock-based compensation expense, with a corresponding
understatement of additional paid in capital, as follows (in millions of dollars):
Years Ended January 31,
2008
2009
0.6
0.5
1.1
We considered the guidance in ASC Topic 250, in assessing the materiality of the error. In accordance with ASC
Topic 250 and other GAAP guidance, we considered the total mix of information applicable to the error,
including an evaluation from quantitative and qualitative perspectives. We concluded that the correction of this
non-cash error is not material to the previously issued historical consolidated financial statements as well as the
fiscal 2010 consolidated financial statements. Accordingly, we corrected the error in 2010 by expensing $1.1
million of additional stock-based compensation expense.
Basis of consolidation
The consolidated financial statements include the financial statements of Descartes and our wholly-owned
subsidiaries. We do not have any variable interests in variable interest entities. All intercompany accounts and
transactions have been eliminated during consolidation.
Financial instruments
Fair value of financial instruments
Financial instruments are comprised of cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and accrued liabilities. The estimated fair values of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities are approximate to book values because of
their short-term maturities.
Foreign exchange risk
We are exposed to foreign exchange risk because a higher proportion of our revenues are denominated in US dollars
relative to expenditures. Accordingly, our results are affected, and may be affected in the future, by exchange rate
fluctuations of the US dollar relative to the Canadian dollar, euro and various other foreign currencies.
Interest rate risk
We are exposed to reductions in interest rates, which could adversely impact expected returns from our investment of
corporate funds in interest bearing bank accounts and short-term investments.
49
Credit risk
We are exposed to credit risk through our invested cash, cash equivalents, short-term investments and accounts
receivable. We hold our cash, cash equivalents and short-term investments with reputable financial institutions and in
highly liquid financial instruments. The lack of concentration of accounts receivable from a single customer and the
dispersion of customers among industries and geographical locations mitigate this risk.
We do not use any type of speculative financial instruments, including but not limited to foreign exchange contracts,
futures, swaps and option agreements, to manage our foreign exchange or interest rate risks. In addition, we do not
hold or issue financial instruments for trading purposes.
Foreign currency translation
We conduct business in a variety of foreign currencies and, as a result, all of our foreign operations are subject to
foreign exchange fluctuations. All operations operate in their local currency environment and use their local
currency as their functional currency. The functional currency of the parent company is Canadian dollars. Assets
and liabilities of foreign operations are translated into US dollars at the exchange rate in effect at the balance sheet
date. Revenues and expenses of foreign operations are translated using monthly average exchange rates.
Translation adjustments resulting from this process are accumulated in other comprehensive income (loss) as a
separate component of shareholders’ equity.
Transactions incurred in currencies other than the functional currency are converted to the functional currency at
the transaction date. All foreign currency transaction gains and losses are included in net income. For the year
ended January 31, 2011, foreign currency transaction losses (gains) of $0.3 million were included in net income
(January 31, 2010 - $0.1 million; January 31, 2009 - ($0.9) million).
Use of estimates
Preparing financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying
note disclosures. Although these estimates and assumptions are based on management’s best knowledge of
current events, actual results may be different from the estimates. Estimates and assumptions are used when
accounting for items such as allowance for doubtful accounts, allocations of the purchase price and the fair value
of net assets acquired in business combination transactions, depreciation of capital assets, amortization of
intangible assets, assumptions embodied in the valuation of assets for impairment assessment, stock-based
compensation, restructuring costs, valuation allowances against deferred tax assets, tax positions and recognition
of contingencies.
Cash, cash equivalents and short-term investments
Cash and cash equivalents include short-term deposits with original maturities of three months or less. Short-term
investments are composed of short-term deposits and debt securities maturing between three and 12 months from
the balance sheet date.
Our investment portfolio consists of certificates of deposit which are classified as held-to-maturity for accounting
purposes. Our investments are subject to market risk due to changes in interest rates. We place our investments
with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer. As stated in
our investment policy, we are averse to principal loss and seek to preserve our invested funds by limiting default
risk, market risk and reinvestment risk.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from customers who do not make
their required payments. Specifically, we consider the age of the receivables, historical write-offs, the
creditworthiness of the customer, and current economic trends among other factors. Accounts receivable are
written off, and the associated allowance is eliminated, if it is determined that the specific balance is no longer
collectible.
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Impairment of long-lived assets
We account for the impairment and disposition of long-lived assets in accordance with ASC Section 360-10-35
“Property, Plant, and Equipment: Overall: Subsequent Measurement” (“ASC Section 360-10-35”). We test long-
lived assets, such as capital assets and finite life intangible assets, for recoverability when events or changes in
circumstances indicate that there may be an impairment. An impairment loss is recognized when the estimate of
undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the
impairment loss is based on the present value of the expected future cash flows.
Goodwill and intangible assets
We account for goodwill in accordance with ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC Topic
350”). When we acquire a business, we determine the fair value of the net tangible and intangible (other than
goodwill) assets acquired and compare the total amount to the amount that we paid for the assets. Any excess of
the amount paid over the fair value of those net assets is considered to be goodwill. Goodwill is tested annually on
October 31st for impairment to ensure that the fair value is greater than or equal to the carrying value. Any excess
of carrying value over fair value is charged to income in the period in which impairment is determined. Our
annual goodwill impairment testing on October 31, 2010 indicated no evidence that goodwill impairment had
occurred as of that date. We will perform further quarterly analysis of whether any event has occurred that would
more likely than not reduce our enterprise value below our carrying amounts and, if so, we will perform a
goodwill impairment test between the annual dates. Any future impairment adjustment will be recognized as an
expense in the period that the adjustment is identified.
Intangible assets related to our acquisitions are recorded at their fair value at the acquisition date. Intangible assets
include customer agreements and relationships, non-compete covenants, existing technologies and trade names.
Intangible assets are amortized on a straight-line basis over their estimated useful lives. We write down intangible
assets with a finite life to fair value when the related undiscounted cash flows are not expected to allow for
recovery of the carrying value. Fair value of intangibles is determined by discounting the expected related future
cash flows.
Amortization of our intangible assets is generally recorded at the following rates:
Customer agreements and relationships
Non-compete covenants
Existing technology
Trade names
Straight-line over one-and-a-half to twenty years
Straight-line over two to five years
Straight-line over one to five years
Straight-line over one-and-a half to fifteen years
Capital assets
Capital assets are recorded at cost. Depreciation of our capital assets is generally recorded at the following rates:
Computer equipment and software
Furniture and fixtures
Leasehold improvements
30% declining balance
20% declining balance
Straight-line over lesser of useful life or term of lease
Revenue recognition
We follow the accounting guidelines and recommendations contained in ASC Subtopic 985-605, “Software:
Revenue Recognition” (“ASC Subtopic 985-605”) and ASC Topic 605, “Revenue Recognition” (“ASC Topic
605”).
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and
earned when there exists persuasive evidence of an arrangement, the product has been delivered or the services
have been provided to the customer, the sales price is fixed or determinable and collectibility is reasonably
assured. In addition to this general policy, the specific revenue recognition policies for each major category of
revenue are included below.
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Services Revenues - Services revenues are principally composed of the following: (i) ongoing transactional fees
for use of our services and products by our customers, which are recognized as the transactions occur; (ii)
professional services revenues from consulting, implementation and training services related to our services and
products, which are recognized as the services are performed; and (iii) maintenance, subscription and other related
revenues, which include revenues associated with maintenance and support of our services and products, which
are recognized ratably over the subscription period.
License Revenues - License revenues derive from licenses granted to our customers to use our software products,
and are recognized in accordance with ASC Subtopic 985-605.
We sometimes enter into transactions that represent multiple-element arrangements, which may include any
combination of services and software licenses. These multiple element arrangements are assessed to determine
whether they can be separated into more than one unit of accounting or element for the purpose of revenue
recognition. Fees are allocated to the various elements using the residual method as outlined in ASC Subtopic
605-25, “Revenue Recognition: Multiple-Element Arrangements” (“ASC Subtopic 605-25”). Pursuant to the
residual method, we defer recognition of the fair value of any undelivered elements and determine such fair value
using vendor-specific objective evidence. This vendor-specific objective evidence of fair value is established
through prices charged for each revenue element when that element is sold separately. We then allocate any
residual portion of the arrangement fee to the delivered elements. The revenue recognition policies described in
this section are then applied to each element.
We evaluate the collectibility of our trade receivables based upon a combination of factors on a periodic basis.
When we become aware of a specific customer’s inability to meet its financial obligations to us (such as in the
case of bankruptcy filings or material deterioration in the customer’s operating results or financial position,
payment experiences and existence of credit risk insurance for certain customers), we record a specific bad debt
provision to reduce the customer’s related trade receivable to its estimated net realizable value. If circumstances
related to specific customers change, the estimate of the recoverability of trade receivables could be further
adjusted.
Government Grants
Government grants relating to costs are deferred and recognized in the income statement as a reduction of expense
over the period necessary to match them with the costs that they are intended to compensate.
Research and development costs
We incur costs related to research and development of our software products. To date, we have not capitalized any
development costs under ASC Subtopic 985-20, “Software: Costs of Software to Be Sold, Leased, or Marketed”
(“ASC Subtopic 985-20”). Costs incurred between the time of establishment of a working model and the point
where products are marketed are expensed as they are insignificant.
Stock-based compensation
We adopted ASC Topic 718, “Compensation – Stock Compensation” (“ASC Topic 718”) effective February 1,
2006 using the modified prospective application method. Accordingly, the fair value of that portion of employee
stock options that is ultimately expected to vest has been amortized to expense in our consolidated statement of
operations since February 1, 2006 based on the straight-line attribution method. The accounting for our various
stock-based employee compensation plans is described more fully in Note 15 below.
Income taxes
We account for income taxes in accordance with ASC Topic 740, “Income Taxes” (“ASC Topic 740”). ASC 740
requires the determination of deferred tax assets and liabilities based on the differences between the financial
statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of a deferred tax asset is adjusted by a valuation allowance,
if necessary, to recognize tax benefits only to the extent that, based on available evidence, it is more likely than
not that they will be realized. In determining the valuation allowance, we consider factors by taxing jurisdiction,
52
including our estimated taxable income, our history of losses for tax purposes, our tax planning strategies and the
likelihood of success of our tax filing positions, among others. A change to any of these factors could impact the
estimated valuation allowance and income tax expense.
Effective February 1, 2007, we adopted ASC Subtopic 740-10 “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109” (“ASC Subtopic 740”) which prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. ASC Subtopic 740 also provides accounting guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. The accounting for ASC Subtopic
740 is described more fully in Note 17 below.
Earnings per share
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share is calculated by dividing net income by the
sum of the weighted average number of common shares outstanding and all additional common shares that would
have been outstanding if potentially dilutive common shares had been issued during the period. The treasury stock
method is used to compute the dilutive effect of stock options.
Recently adopted accounting pronouncements
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures
about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 amends ASC Topic 820, “Fair Value
Measurements and Disclosures” (“ASC Topic 820”) to add new requirements for disclosures about transfers into
and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to
Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for the first
reporting period beginning after December 15, 2009, which was our reporting period ended April 30, 2010,
except for the requirement to provide the Level 3 activity of purchases, sales issuances, and settlements on a gross
basis, which is effective for fiscal years beginning after December 15, 2010, which is our fiscal year beginning
February 1, 2011. The adoption of ASU 2010-06 has not had a material impact on our results of operation or
financial condition to date and we do not anticipate the requirement to provide the Level 3 activity on a gross
basis to materially impact the consolidated financial statements as we have not historically held any instruments
requiring Level 3 measurements.
Recently issued accounting pronouncements not yet adopted
In October 2009, the FASB issued ASU 2009-13, “Multiple Deliverable Revenue Arrangements a consensus of
the FASB Emerging Issues Task Force” (“ASU 2009-13”). ASU 2009-13 amends ASC Subtopic 605-25
“Revenue Recognition: Multiple-Element Arrangements”. Specifically ASU 2009-13 amends the criteria for
separating consideration in multiple-deliverable arrangements and establishes a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-
specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available,
or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The
guidance eliminates the use of the residual method, requires entities to allocate revenue using the relative-selling-
price method, and significantly expands the disclosure requirements for multiple-deliverable revenue
arrangements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010, which is our fiscal
year beginning February 1, 2011 and will be adopted prospectively. The adoption of this amendment is not
expected to have a material impact on our results of operations.
In October 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include Software
Elements” (“ASU 2009-14”). ASU 2009-14 changes the accounting model for revenue arrangements that include
both tangible products and software elements. Tangible products containing both software and non-software
components that function together to deliver the product’s essential functionality will no longer be within the
scope of ASC Subtopic 985-605, “Software Revenue Recognition”. The entire product, including the software
and non-software deliverables, will therefore be accounted for under ASC Topic 605, “Revenue Recognition”.
53
ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010, which is our fiscal year beginning
February 1, 2011 and will be adopted prospectively. The adoption of this amendment is not expected to have a
material impact on our results of operations.
In April 2010, the FASB issued ASU 2010-17, “Revenue Recognition – Milestone Method” (“ASU 2010-17”).
ASU 2010-17 establishes a revenue recognition model for contingent consideration that is payable upon
achievement of an uncertain future milestone. ASU 2010-17 applies to research and development arrangements
and requires a milestone payment be recorded in the period received if the milestone meets all the necessary
criteria to be considered substantive. However, entities will not be precluded from making an accounting policy
decision to apply another appropriate accounting policy that results in the deferral of some portion of the
milestone payment. ASU 2010-17 is effective for fiscal years beginning on or after June 15, 2010, which is our
fiscal year beginning February 1, 2011. The adoption of this amendment is not expected to have a material impact
on our results of operations.
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for
Business Combinations” (“ASU 2010-29”). ASU 2010-29 clarifies that a public entity presenting comparative
financial statements, should disclose revenue and earnings of the combined entity as though any business
combinations that occurred during the current fiscal year had occurred as of the beginning of the comparative
period. In addition ASU 2010-29 also expands the supplemental pro forma disclosures under ASC Topic 805 to
include a description of the nature and amount of material, non-recurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is
effective prospectively for business combinations for acquisitions taking place in fiscal periods beginning on or
after December 15, 2010, which is our fiscal year beginning February 1, 2011.The adoption of ASU 2010-29 will
impact the pro forma disclosure of any future acquisitions.
Note 3 - Acquisitions
On March 19, 2010, we acquired 96.17% of the outstanding shares of Zemblaz NV (NYSE Alternext Brussels:
ALPTH) (formerly denominated Porthus NV, “Porthus”), a provider of global trade management solutions, at
EUR 12.50 per share. Porthus’ solutions complement those of Descartes and grow our presence in the Europe,
Middle East and Africa regions. The purchase price for the acquisition was $39.1 million in cash. We also
incurred acquisition-related costs, primarily for brokerage and advisory services, of $1.1 million included in other
charges in 2011. The gross contractual amount of trade accounts receivable acquired was $6.9 million with a fair
value of $6.6 million at the date of acquisition. Our acquisition date estimate of the contractual cash flows not
expected to be collected is $0.3 million. We have recognized $19.1 million of revenues and $3.9 million of net
income before amortization expense of $3.9 million from Porthus since the date of acquisition in our consolidated
statements of operations for 2011.
On April 16, 2010, we purchased the remaining 3.83% of the Porthus shares at EUR 12.50 per share, and all
outstanding warrants at a price of EUR 12.33 per warrant issued pursuant to Porthus’ 2000 warrant plan and a
price of EUR 20.76 per warrant issued pursuant to its 2001 warrant plan. The purchase price for the remaining
shares and warrants was $1.8 million in cash.
The fair value of the non-controlling interest in Porthus was determined based on active market prices for the
3.83% shares not acquired as part of the March 19, 2010 acquisition. The excess of the $1.8 million purchase-
price consideration when this non-controlling interest was acquired on April 16, 2010 and the fair value of the
non-controlling interest in Porthus was recorded to additional paid-in capital.
During 2011, the purchase price allocation for Porthus was adjusted due to changes made to opening working
capital estimates. The purchase price allocation adjustments were as follows: (i) current assets increased by $0.1
million from $14.0 million to $14.1 million; (ii) current liabilities increased by $0.6 million from $7.0 million to
$7.6 million; (iii) deferred revenue increased by $0.6 million from $1.2 million to $1.8 million; (iv) deferred
54
income tax liability decreased by $0.4 million from $6.9 million to $6.5 million; and (v) goodwill increased $0.7
million from $15.2 million to $15.9 million.
On April 19, 2010, we purchased all of the shares of privately-held 882976 Ontario Inc., doing business as Imanet
(“Imanet”), a provider of enterprise and on-demand technology solutions to customs brokers, freight forwarders,
exporters and self-clearing importers. Imanet’s solutions focus on enabling members of the international trade
community to communicate with Canada Border Services Agency (“CBSA”). Leading customs brokers, freight
forwarders and Canadian importers manage their shipments and interactions with CBSA using Imanet’s solutions.
Imanet’s solutions complement Descartes’ Global Trade and Compliance solutions. The purchase price for the
acquisition was $5.8 million in cash. We also incurred acquisition-related costs, primarily for advisory services, of
$0.1 million included in other charges in 2011. The gross contractual amount of trade accounts receivable
acquired was $0.6 million with a fair value of $0.4 million at the date of acquisition. Our acquisition date estimate
of contractual cash flows not expected to be collected is $0.2 million. We have recognized $2.5 million of
revenues and $0.5 million of net income before amortization expense of $0.7 million from Imanet since the date
of acquisition in our consolidated statements of operations for 2011.
During 2011, the purchase price allocation for Imanet was adjusted due to changes made to opening working
capital estimates and the purchase price consideration related to these net working capital adjustments. The
purchase price allocation adjustments were as follows: (i) purchase price consideration was reduced by $0.1
million from $5.9 million to $5.8 million; (ii) current assets decreased by $0.1 million from $0.9 million to $0.8
million; (iii) current liabilities decreased by $0.1 million from $0.6 million to $0.5 million; and (iv) goodwill
decreased $0.1 million from $2.3 million to $2.2 million.
On June 16, 2010, we acquired privately-held Belgian-based Routing International NV (“Routing International”),
a developer and distributor of optimized route planning solutions. Routing International’s solutions join
Descartes’ MRM 2.0 solution suite, which combines optimized real-time planning with wireless mobile
technology to manage resources in motion. The purchase price for the acquisition was $3.9 million in cash. We
also incurred acquisition-related costs, primarily for advisory services included in other charges in 2011, of $0.2
million. The gross contractual amount of trade accounts receivable acquired was $1.4 million with a fair value of
$1.0 million at the date of acquisition. Our acquisition date estimate of contractual cash flows not expected to be
collected is $0.4 million. We have recognized $1.8 million of revenues and $0.2 million of net income before
amortization expense of $0.3 million from Routing International NV since the date of acquisition in our
consolidated statements of operations for 2011.
During 2011, the purchase price allocation for Routing International was adjusted due to changes made to opening
working capital estimates and the purchase price consideration related to these net working capital adjustments.
The purchase price allocation adjustments were as follows: (i) purchase price consideration was reduced by $0.3
million from $4.2 million to $3.9 million; (ii) current assets decreased by $0.2 million from $1.9 million to $1.7
million; and (iii) goodwill decreased by $0.1 million from $2.6 million to $2.5 million.
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The preliminary purchase price allocations for businesses we acquired during fiscal 2011, which have not been
finalized, are as follows:
Routing
International
Imanet
Porthus
Total
Purchase price consideration:
Cash, excluding cash acquired related to Porthus
($6,282), Imanet ($146) and Routing International
($567)
Net working capital adjustments
Allocated to:
Current assets
Current deferred tax asset
Investment in affiliate
Capital assets
Current liabilities
Deferred revenue
Deferred income tax liability
Other long term liabilities
Net tangible assets (liabilities) assumed
Finite life intangible assets acquired:
Customer agreements and relationships
Existing technology
Non-compete covenants
Trade names
Goodwill
Non-controlling interest
4,339
(491)
3,848
1,686
136
-
62
(719)
(956)
(536)
(137)
(464)
592
1,168
-
-
2,552
-
3,848
5,973
(216)
5,757
797
-
-
161
(471)
(245)
(1,115)
(70)
(943)
2,198
1,984
196
109
2,213
-
5,757
39,137
-
39,137
14,108
755
544
1,813
(7,582)
(1,838)
(6,496)
(241)
1,063
10,838
12,053
281
822
15,878
(1,798)
39,137
49,449
(707)
48,742
16,591
891
544
2,036
(8,772)
(3,039)
(8,147)
(448)
(344)
13,628
15,205
477
931
20,643
(1,798)
48,742
The Porthus, Imanet and Routing International transactions were accounted for using the acquisition method in
accordance with ASC Topic 805, “Business Combinations”. The purchase price allocations in the table above
represent our estimates of the allocations of the purchase price and the fair value of net assets acquired. As part of
our process for determining the fair value of the net assets acquired, we engage third-party valuation specialists.
The valuation of the acquired assets is preliminary, may differ from the final purchase price allocation, and these
differences may be material. Revisions to the valuation will occur as additional information about the fair value of
assets and liabilities becomes available. The final purchase price allocations will be completed within one year
from the respective acquisition dates.
No in-process research and development was acquired in the Porthus, Imanet or Routing International
transactions.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Customer agreements and relationships
Non-compete covenants
Existing technology
Trade names
Routing
International
5 years
n/a
3.5 years
n/a
Imanet
8 years
5 years
4 years
3 years
Porthus
6.5 years
4.5 years
5 years
1.5 years
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The goodwill on the Porthus, Imanet and Routing International acquisitions arose as a result of the value of their
respective assembled workforces and the combined strategic value to our growth plan. The goodwill arising from
the Porthus, Imanet and Routing International acquisitions is not deductible for tax purposes.
As required by GAAP, the financial information in the table below summarizes selected results of operations on a
pro forma basis as if we had acquired Porthus as of the beginning of each of the periods presented. The pro forma
results of operations for the Imanet and Routing International transactions have not been included in the table
below as they are not material to our consolidated financial statements. This pro forma information is for
information purposes only and does not purport to represent what our results of operations for the periods
presented would have been had the acquisition of Porthus occurred at the beginning of the period indicated, or to
project our results of operations for any future period.
Pro forma results of operations
Year Ended
Revenues
Net income
Earnings per share
Basic
Diluted
January 31, January 31, January 31,
2009
2010
2011
102,519
12,230
101,979
15,729
96,264
21,585
0.20
0.19
0.28
0.28
0.41
0.40
On February 5, 2009, we acquired the logistics business of privately-held Oceanwide Inc. in an all-cash
transaction. The acquisition added more than 700 members to our Global Logistics Network™ (“GLN”) and
extended our customs compliance solutions. Oceanwide’s logistics business (“Oceanwide”) is focused on a web-
based, hosted software-as-a-service (“SaaS”) model. We acquired 100% of Oceanwide’s US operations and
certain Canadian assets and liabilities related to the logistics business. The purchase price for this acquisition was
approximately $8.9 million in cash. We also incurred acquisition-related costs, primarily for advisory services,
during 2010 in the amount of $0.2 million, which are included in other charges in our consolidated statements of
operations. The gross contractual amount of trade accounts receivable acquired was $1.2 million with a fair value
of $1.0 million at the date of acquisition. Our acquisition date estimate of the contractual cash flows not expected
to be collected is $0.2 million. We have included $6.6 million of revenues from Oceanwide since the date of
acquisition in our consolidated statements of operations for 2010.
During 2010, the purchase price consideration for Oceanwide was reduced by $0.2 million from $9.1 million to
$8.9 million due to changes made to opening working capital estimates. This $0.2 million purchase price
adjustment was allocated as follows: (i) current assets decreased by $0.1 million from $1.8 million to $1.7
million; and (ii) current liabilities increased by $0.1 million from $1.4 million to $1.5 million.
On March 10, 2009, we acquired 100% of the outstanding shares of privately-held Scancode Systems Inc.
(“Scancode”) in an all-cash transaction. Scancode provides its customers with a system that provides up-to-date
rates that allow customers to both make efficient shipment decisions and comply with carrier manifesting and
labeling requirements. The purchase price for this acquisition was approximately $6.3 million in cash. We also
incurred acquisition-related costs, primarily for advisory services, during 2010 in the amount of $0.2 million
which were included in other charges in our consolidated statements of operations. The gross contractual amount
of trade accounts receivable acquired was $0.8 million with a fair value of $0.8 million at the date of acquisition.
Our acquisition date estimate of the contractual cash flows not expected to be collected is $0.1 million. We have
included $5.1 million of revenues from Scancode since the date of acquisition in our consolidated statements of
operations for 2010.
57
During 2010, the purchase price consideration for Scancode was reduced by $0.1 million from $6.4 million to
$6.3 million due to changes made to opening working capital estimates. This $0.1 million purchase price
adjustment was allocated as follows: (i) current assets decreased by $0.5 million from $3.6 million to $3.1
million, primarily resulting from changes to the current portion of deferred income tax asset; (ii) the long-term
portion of deferred revenue increased by $0.1 million from $1.4 million to $1.5 million; (iii) the long-term
deferred income tax liability decreased by $0.4 million from $1.8 million to $1.4 million; and (iv) goodwill
increased by $0.1 million from $3.4 million to $3.5 million.
The final purchase price allocations for the businesses we acquired during the year ended January 31, 2010, are
set out in the following table:
Purchase price consideration:
Cash, excluding cash acquired related to Oceanwide ($225) and
Scancode ($603)
Net working capital adjustments
Allocated to:
Current assets
Capital assets
Current liabilities
Deferred revenue
Income tax liability
Deferred income tax liability
Net tangible liabilities assumed
Finite life intangible assets acquired:
Customer agreements and relationships
Non-compete covenants
Existing technology
Trade names
Goodwill
Oceanwide Scancode
Total
8,990
(88)
8,902
1,706
172
(1,458)
(249)
(47)
(2,058)
(1,934)
4,165
104
2,118
46
4,403
8,902
7,698
(1,420)
6,278
3,142
89
(3,692)
(1,465)
-
(1,363)
(3,289)
4,332
-
1,637
109
3,489
6,278
16,688
(1,508)
15,180
4,848
261
(5,150)
(1,714)
(47)
(3,421)
(5,223)
8,497
104
3,755
155
7,892
15,180
The results of operations for the businesses that we acquired in 2010 are included in our consolidated statement of
operations from the date acquired, as indicated below.
The Oceanwide and Scancode transactions were accounted for using the acquisition method in accordance with
ASC Topic 805. The purchase price allocations in the table above represent our estimates of the allocations of the
purchase price and the fair value of net assets acquired. As part of our process for determining the fair value of the
net assets acquired, we engage third-party valuation specialists. The valuation of the acquired assets is
preliminary, may differ from the final purchase price allocation, and these differences may be material. Revisions
to the valuation will occur as additional information about the fair value of assets and liabilities becomes
available.
No in-process research and development was acquired in the Oceanwide or Scancode transactions.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Customer agreements and relationships
Non-compete covenants
Existing technology
Trade names
58
Oceanwide
5 years
2 years
3 years
2 years
Scancode
8 years
n/a
5 years
2 years
The goodwill on the Oceanwide and Scancode acquisitions arose as a result of the value of their respective
assembled workforces and the combined strategic value to our growth plan. Goodwill of $0.1 million that relates
to our acquisition of certain of Oceanwide’s Canadian assets and liabilities is deductible for tax purposes. The
goodwill arising from the acquisitions of Oceanwide’s US operations and Scancode is not deductible for tax
purposes.
Supplemental pro forma information was impracticable to disclose as the pre-acquisition accounting for deferred
revenues and deferred income taxes is based on estimates and assumptions that would require us to retroactively
apply assumptions about management’s intent in a prior period that cannot be independently substantiated at this
time and to make significant estimates about amounts that can no longer be objectively determined.
On October 1, 2008 we acquired 100% of the outstanding shares of Dexx bvba (“Dexx”) a Belgium-based
European customs filing and logistics messaging provider. Dexx’s customs offerings help shippers, cargo carriers
and freight forwarders manage the movement and submission of customs filings and messages to a number of
customs authorities. In addition to customs services, Dexx manages the Brucargo Community System (BCS), the
cargo community system at Brussels airport. BCS provides a comprehensive range of electronic information
exchange between airlines, integrators, general sales agents, forwarding agents, ground handlers, truckers and
shippers, as well as customs and other governmental bodies. The results of operations for Dexx are included in
our consolidated statements of operations from the date acquired.
The final purchase price allocation for the business we acquired during the year ended January 31, 2009, is set out
in the following table:
Purchase price consideration:
Cash, including cash acquired ($100)
Acquisition-related costs
Allocated to:
Net tangible assets acquired (liabilities assumed)
Finite life intangible assets acquired:
Customer agreements and relationships
Existing technology
Trade names
Goodwill
Dexx
1,748
189
1,937
(207)
676
908
111
449
1,937
The Dexx transaction was accounted for as a purchase in accordance with SFAS 141. The purchase price
allocation in the table above represents our estimate of the allocation of the purchase price and the fair value of
net assets acquired.
No in-process research and development was acquired or written-off relating to the Dexx transaction.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Customer agreements and relationships
Existing technology
Trade names
59
Dexx
10 years
5 years
3 years
The goodwill on the Dexx acquisition arose as a result of their assembled workforce and the combined strategic
value to our growth plan. The goodwill is not deductible for tax purposes.
No pro forma results of operations for the Dexx transaction have been presented as it is not material to our
consolidated financial statements.
Note 4 - Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents
Cash on deposit with banks
Total cash and cash equivalents
Short-term investments
Certificates of deposit
Total short-term investments
Total cash, cash equivalents and short-term investments
January 31,
2011
January 31,
2010
69,644
69,644
-
-
69,644
89,554
89,554
5,071
5,071
94,625
We have operating lines of credit in Canada aggregating $3.0 million (CAD 3.0 million) as at January 31, 2011,
of which none was utilized (nil at January 31, 2010). Borrowings under these facilities bear interest at prime
based on the borrowed currency (3.0% on Canadian dollar borrowings and 3.25% on US dollar borrowings at
January 31, 2011), are due on demand, and are secured by our investment portfolio and a general assignment of
inventory and accounts receivable.
As at January 31, 2011 we have outstanding letters of credit of approximately $0.1 million (EUR 0.1 million)
related to three of our leased premises (nil at January 31, 2010).
Fair Value Measurements
ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”) defines fair value, establishes a
framework for measuring fair value, and addresses disclosure requirements for fair value measurements. Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The following fair value hierarchy prioritizes
the inputs used in the valuation methodologies in measuring fair value into three levels:
Level 1 — Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar
assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that
are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Significant unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.
As at January 31, 2011 and January 31, 2010, no assets were measured at fair value on a recurring basis.
60
Note 5 - Trade Receivables
Trade receivables
Less: Allowance for doubtful accounts
January 31,
2011
15,634
(1,217)
14,417
January 31,
2010
10,525
(685)
9,840
Bad debt expense was $0.5 million for the year ended January 31, 2011 (January 31, 2010 - $0.4 million; January
31, 2009 – nil).
Note 6 - Investment in Affiliate
As part of the acquisition of Porthus, we acquired 44.4% of the outstanding shares of privately-held Desk
Solutions NV (“Desk Solutions”). The investment in Desk Solutions has been accounted for under the equity
method in accordance with ASC Topic 323, “Investments – Equity Method and Joint Ventures” (“ASC Topic
323”). Loss from Desk Solutions of $19,000 for the year ended January 31, 2011 is included in investment
income in the consolidated statements of operations for 2011. This investment was sold in the second quarter of
2011 for proceeds of $487,000. A gain on the sale of this investment of $20,000 is included in investment income
for the year ended January 31, 2011 in the consolidated statements of operations for 2011.
Note 7 - Contingent Acquisition Consideration
On June 30, 2006, we acquired 100% of the outstanding shares of Maryland-based Flagship Customs Services,
Inc. (“FCS”). As part of our acquisition of FCS, we paid $4.0 million to establish a contingent acquisition
consideration escrow that was released to the former shareholders of FCS subject to meeting various criteria,
including their continued employment with Descartes. In accordance with the guidance contained in Emerging
Issues Task Force 95-8 “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination” (“EITF 95-8”), we expensed the entire $4.0 million on a straight-
line basis over the 24 month service and escrow period applicable to the former shareholders, which ended June
30, 2008.
Note 8 - Capital Assets
Cost
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Accumulated amortization
Computer equipment and software
Furniture and fixtures
Leasehold improvements
January 31,
2011
January 31,
2010
24,257
1,895
2,914
29,066
17,822
1,630
2,305
21,757
7,309
19,420
1,780
2,267
23,467
14,573
1,494
1,918
17,985
5,482
Computer equipment and software cost includes $0.3 million of assets recorded under capital leases as of January
31, 2011 (nil as of January 31, 2010). Included within depreciation expense in our consolidated statements of
operations is amortization expense from assets under capital leases of $0.1 million for the year ended January 31,
2011 (January 31, 2010 – nil).
61
As discussed in Note 18, other charges include $0.4 million for write-off of redundant assets for the year ended
January 31, 2011. The redundant assets represent computer software from our Belgian operations, acquired as part
of the Porthus acquisition, which were made redundant as we continue to integrate Porthus into our operations.
Note 9 - Goodwill
Balance, beginning of year
Business acquisition – Porthus
Business acquisition – Imanet
Business acquisition – Routing International
Business acquisition – Oceanwide
Business acquisition – Scancode
Business acquisition – Dexx
Adjustments on account of foreign exchange and prior acquisitions
Balance, end of year
January 31, January 31,
2010
26,381
-
-
-
4,403
3,489
42
141
34,456
2011
34,456
15,878
2,213
2,552
-
-
-
1,643
56,742
The business acquisitions of Porthus, Imanet, Routing International, Oceanwide, Scancode and Dexx are
described in Note 3 to these consolidated financial statements.
Note 10 - Intangible Assets
Cost
Customer agreements and relationships
Non-compete covenants
Existing technology
Trade names
Accumulated amortization
Customer agreements and relationships
Non-compete covenants
Existing technology
Trade names
January 31,
2011
January 31,
2010
38,264
1,349
23,583
3,849
67,045
15,636
951
7,415
2,340
26,342
40,703
24,069
1,029
10,120
4,092
39,310
10,260
808
4,870
2,314
18,252
21,058
Intangible assets related to our acquisitions are recorded at their fair value at the acquisition date. During 2011,
additions to intangible assets primarily consisted of the acquisitions of Porthus, Imanet and Routing International,
described in Note 3 to these consolidated financial statements. The balance of the change in intangible assets is
due to foreign currency translation.
Intangible assets with a finite life are amortized into income over their useful lives. Amortization expense for
existing intangible assets is expected to be $40.7 million over the following periods: $10.8 million for 2012, $8.7
million for 2013, $8.1 million for 2014, $6.1 million for 2015, $3.4 million for 2016 and $3.6 million thereafter.
Expected future amortization expense is subject to fluctuations in foreign exchange rates.
62
We write down intangible assets with a finite life to fair value when the related undiscounted cash flows are not
expected to allow for recovery of the carrying value. Fair value of intangibles is determined by discounting the
expected related future cash flows. No finite life intangible asset impairment has been identified or recorded in
our consolidated statements of operations for any of the fiscal years presented.
Note 11 - Accrued Liabilities
Accrued compensation and benefits
Amounts payable to former Scancode shareholders
Accrued restructuring charges
Other accrued liabilities
January 31,
2011
5,949
391
420
4,582
11,342
January 31,
2010
2,805
942
122
3,640
7,509
Note 12 - Commitments, Contingencies and Guarantees
Commitments
To facilitate a better understanding of our commitments, the following information is provided in respect of our
operating and capital lease obligations:
Years Ended January 31,
2012
2013
2014
2015
2016
Thereafter
Operating
Leases
3,452
2,638
2,097
1,738
1,380
1,720
13,025
Capital
Leases
66
66
66
33
-
-
231
Total
3,518
2,704
2,163
1,771
1,380
1,720
13,256
Lease Obligations
We are committed under non-cancelable operating leases for business premises, computer equipment and vehicles
with terms expiring at various dates through 2020. We are also committed under non-cancelable capital leases for
computer equipment expiring at various dates through 2015. The future minimum amounts payable under these
lease agreements are described in the chart above. Rental expense from operating leases was $3.1 million for the
year ended January 31, 2011 (January 31, 2010 - $1.5 million; January 31, 2009 - $1.6 million).
Other Obligations
Income Taxes
We have a commitment for income taxes incurred to various taxing authorities related to unrecognized tax
benefits in the amount of $4.2 million. At this time, we are unable to make reasonably reliable estimates of the
period of settlement with the respective taxing authority due to the possibility of the respective statutes of
limitations expiring without examination by the applicable taxing authority.
Deferred Share Unit and Restricted Share Unit Plans
As described in Note 15 to these consolidated financial statements, we maintain deferred share unit (“DSU”) and
restricted share unit (“RSU”) plans for our directors and employees. Any payments made pursuant to these plans
are settled in cash. As DSUs are fully vested upon issuance, the DSU liability recorded on our consolidated
balance sheets is calculated as the total number of DSUs outstanding at the consolidated balance sheet date
multiplied by the closing price of our common shares on the TSX at the consolidated balance sheet date. For
63
RSUs, the units vest over time and the liability recognized at any given consolidated balance sheet date reflects
only those units vested at that date that have not yet been settled in cash. As such, we had an unrecognized
aggregate liability for the unvested RSUs of $1.7 million for which no liability was recorded on our consolidated
balance sheet at January 31, 2011, in accordance with ASC Topic 718 “Compensation – Stock Compensation”.
The ultimate liability for any payment of DSUs and RSUs is dependent on the trading price of our common
shares.
Contingencies
We are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our
business. The consequences of these matters are not presently determinable but, in the opinion of management
after consulting with legal counsel, the ultimate aggregate liability is not currently expected to have a material
effect on our annual results of operations or financial position.
Business combination agreements
In respect of our August 17, 2007 acquisition of 100% of the outstanding shares of Global Freight Exchange
Limited, up to $5.2 million in cash was potentially payable if certain performance targets, primarily relating to
revenues, were met by GF-X over the four years subsequent to the date of acquisition. No amount was payable in
respect of the three year post-acquisition period. Up to $1.3 million in cash remains eligible to be paid to the
former owners in respect of performance targets to be achieved over the period ending August 17, 2011.
Product Warranties
In the normal course of operations, we provide our customers with product warranties relating to the performance
of our software and network services. To date, we have not encountered material costs as a result of such
obligations and have not accrued any liabilities related to such obligations on our financial statements.
Guarantees
In the normal course of business we enter into a variety of agreements that may contain features that meet the
definition of a guarantee under ASC Topic 460, “Guarantees” (“ASC Topic 460”). The following lists our
significant guarantees:
Intellectual property indemnification obligations
We provide indemnifications of varying scope to our customers against claims of intellectual property
infringement made by third parties arising from the use of our products. In the event of such a claim, we are
generally obligated to defend our customers against the claim and we are liable to pay damages and costs assessed
against our customers that are payable as part of a final judgment or settlement. These intellectual property
infringement indemnification clauses are not generally subject to any dollar limits and remain in force for the term
of our license agreement with our customer, which license terms are typically perpetual. To date, we have not
encountered material costs as a result of such indemnifications.
Other indemnification agreements
In the normal course of operations, we enter into various agreements that provide general indemnifications. These
indemnifications typically occur in connection with purchases and sales of assets, securities offerings or buy-
backs, service contracts, administration of employee benefit plans, retention of officers and directors, membership
agreements and leasing transactions. These indemnifications that we provide require us, in certain circumstances,
to compensate the counterparties for various costs resulting from breaches of representations or obligations under
such arrangements, or as a result of third party claims that may be suffered by the counterparty as a consequence
of the transaction. We believe that the likelihood that we could incur significant liability under these obligations is
remote. Historically, we have not made any significant payments under such indemnifications.
In evaluating estimated losses for the guarantees or indemnities described above, we consider such factors as the
degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of
loss. We are unable to make a reasonable estimate of the maximum potential amount payable under such
guarantees or indemnities as many of these arrangements do not specify a maximum potential dollar exposure or
64
time limitation. The amount also depends on the outcome of future events and conditions, which cannot be
predicted. Given the foregoing, to date, we have not accrued any liability in our financial statements for the
guarantees or indemnities described above.
Note 13 - Share Capital
Common Shares Outstanding
We are authorized to issue an unlimited number of our common shares, without par value, for unlimited
consideration. Our common shares are not redeemable or convertible.
(thousands of shares)
Balance, beginning of year
Shares issued:
Stock options exercised
Issue of common shares
Acquisitions
Balance, end of year
January 31, January 31, January 31,
2009
52,930
2010
53,013
2011
61,411
331
-
-
61,742
1,227
7,171
-
61,411
83
-
-
53,013
On December 21, 2010, we announced that the TSX had approved the purchase by us of up to an aggregate of
4,997,322 common shares of Descartes pursuant to a normal course issuer bid. The purchases can occur from time
to time until December 22, 2011, through the facilities of the TSX and/or the NASDAQ, if and when we consider
advisable. As of January 31, 2011 there were no purchases made pursuant to this normal course issuer bid.
On December 18, 2009, Descartes announced that it was making a normal course issuer bid to purchase up to
5,458,773 common shares of Descartes through the facilities of the TSX and/or NASDAQ. Descartes did not
purchase any shares under the bid, which commenced on December 23, 2009 and expired on December 22, 2010.
On October 20, 2009, we closed a bought-deal public share offering in Canada which raised gross proceeds of
CAD 40,002,300 (equivalent to approximately $38.4 million at the time of the transaction) from a sale of
6,838,000 common shares at a price of CAD 5.85 per share. The underwriters also exercised an over-allotment
option on October 20, 2009 to purchase an additional 1,025,700 common shares (in aggregate, 15% of the
offering) at CAD 5.85 per share comprised of 332,404 common shares from Descartes and 693,296 common
shares from certain executive officers and directors of Descartes. Gross proceeds to us from the exercise of the
over-allotment option were CAD 1,944,563 (equivalent to approximately $1.9 million at the time of the
transaction). In addition, we received an aggregate of approximately CAD 1,277,648 (equivalent to approximately
$1.2 million at the time of the transaction) in proceeds from certain executive officers and directors of Descartes
from their exercise of employee stock options to satisfy their respective obligations under the over-allotment
option.
On December 3, 2008, we announced that we were making a normal course issuer bid to purchase up to 5,244,556
common shares of Descartes through the facilities of the TSX and/or NASDAQ. We did not purchase any shares
under this bid, which commenced on December 5, 2008 and expired on December 4, 2009.
On November 30, 2004, we announced that our board of directors had adopted a shareholder rights plan (the
“Rights Plan”) to ensure the fair treatment of shareholders in connection with any take-over offer, and to provide
our board of directors and shareholders with additional time to fully consider any unsolicited take-over bid. We
did not adopt the Rights Plan in response to any specific proposal to acquire control of the company. The Rights
Plan was approved by the TSX and was originally approved by our shareholders on May 18, 2005. The Rights
Plan took effect as of November 29, 2004. On May 29, 2008, our shareholders approved certain amendments to
the Rights Plan and approved the Rights Plan continuing in effect. The Rights Plan will expire at the termination
65
of our annual shareholders’ meeting in calendar year 2011 unless its continued existence is ratified by the
shareholders before such expiration.
Note 14 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):
Year Ended
January 31,
2011
January 31,
2010
January 31,
2009
Net income for purposes of calculating basic and diluted
earnings per share
(number of shares in thousands)
Weighted average shares outstanding
Dilutive effect of employee stock options
Weighted average common and common equivalent shares
outstanding
Earnings per share
Basic
Diluted
11,539
14,350
20,210
61,523
1,365
55,389
1,048
52,961
698
62,888
56,437
53,659
0.19
0.18
0.26
0.25
0.38
0.38
For the years ended January 31, 2011, 2010 and 2009, respectively, 219,607, 348,219 and 2,004,328 options were
excluded from the calculation of diluted EPS as those options had an exercise price greater than or equal to the
average market value of our common shares during the applicable periods and their inclusion would have been
anti-dilutive. Additionally, for 2011, 2010 and 2009, respectively, the application of the treasury stock method
excluded 222,500, 1,322,109 and 1,157,231 options from the calculation of diluted EPS as the assumed proceeds
from the unrecognized stock-based compensation expense of such options that are attributed to future service
periods made such options anti-dilutive.
Note 15 - Stock-Based Compensation Plans
We maintain stock option plans for directors, officers, employees and other service providers. Options to purchase
our common shares are granted at an exercise price equal to the fair market value of our common shares on the
day of the grant. This fair market value is determined using the closing price of our common shares on the TSX
on the day immediately preceding the date of the grant.
Employee stock options generally vest over a five-year period starting from their grant date and expire seven
years from the grant date. Directors’ and officers’ stock options generally have quarterly vesting over a three- to
five-year period. We issue new shares from treasury upon the exercise of a stock option.
As of January 31, 2011, we had 3,560,637 stock options granted and outstanding under our shareholder-approved
stock option plan and 299,857 remained available for grant. In addition, we had three outstanding stock option
grants totaling 140,000 stock options not approved by shareholders and 59,516 stock options outstanding in
connection with option plans assumed or adopted pursuant to various previously completed acquisitions.
66
Total estimated stock-based compensation expense recognized under ASC Topic 718 related to all of our stock
options was included in our consolidated statement of operations as follows:
Year Ended
Cost of revenues
Sales and marketing
Research and development
General and administrative
January 31,
2011
73
229
130
644
1,076
January 31,
2010
172
815
374
2,010
3,371
January 31,
2009
25
93
73
336
527
Differences between how GAAP and applicable income tax laws treat the amount and timing of recognition of
stock-based compensation expense may result in a deferred tax asset. We have recorded a valuation allowance
against any such deferred tax asset except for $0.3 million recognized in the United States. We realized a nominal
tax benefit in connection with stock options exercised during 2011.
As of January 31, 2011, $1.5 million of total unrecognized compensation costs, net of forfeitures, related to
unvested awards is expected to be recognized over a weighted average period of 1.3 years. The total fair value of
stock options vested during 2011 was $1.1 million.
The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. Expected
volatility is based on historical volatility of our common stock and other factors. The risk-free interest rates are
based on the Government of Canada average bond yields for a period consistent with the expected life of the
option in effect at the time of the grant. The expected option life is based on the historical life of our granted
options and other factors.
Assumptions used in the Black-Scholes model were as follows:
Year Ended
January 31, 2011
January 31, 2010
January 31, 2009
Expected dividend yield (%)
Expected volatility (%)
Risk-free rate (%)
Expected option life (years)
Weighted-
Average
-
Range
-
37.3 34.6 to 37.9
1.8 to 2.6
2.5
5
5
Weighted-
Average
-
Range
-
43.3 42.7 to 43.5
2.0
1.9 to 2.3
5
5
Weighted-
Average
-
Range
-
41.2 36.0 to 43.8
3.4
2.7 to 3.4
5
5
67
A summary of option activity under all of our plans is presented as follows:
Balance at January 31, 2010
Granted
Exercised
Forfeited
Expired
Balance at January 31, 2011
Number of
Stock Options
Outstanding
3,876,740
287,500
(330,825)
(55,900)
(17,362)
3,760,153
Vested or expected to vest at January 31, 2011
3,513,203
Exercisable at January 31, 2011
2,627,987
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
$3.68
$6.22
$3.38
$4.30
$6.07
$4.06
$4.02
$3.93
3.2
3.1
2.5
11.8
11.3
9.0
The weighted average grant-date fair value of options granted during 2011, 2010 and 2009 was $2.27, $1.26, and
$1.28 per share, respectively. The total intrinsic value of options exercised during 2011, 2010 and 2009 was
approximately $1.0 million, $3.5 million and $0.1 million, respectively.
Options outstanding and options exercisable as at January 31, 2011 by range of exercise price are as follows:
Range of Exercise Prices
$1.34 – $1.34
$2.19 – $2.81
$3.03 – $3.84
$4.15 – $5.02
$6.27 – $16.31
$1.34
$2.50
$3.37
$4.45
$9.10
$4.06
182,825
748,690
1,380,531
1,006,000
442,107
3,760,153
Options Outstanding
Number of
Stock
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (years)
0.7
1.2
4.4
2.9
4.2
3.2
Options Exercisable
Weighted
Average
Exercise
Price
Number of
Stock
Options
182,825
$1.34
748,690
$2.50
770,565
$3.35
771,300
$4.45
$14.20
154,607
$3.93 2,627,987
A summary of the status of our unvested stock options under our shareholder-approved stock option plan and
stock option plans not approved by shareholders as of January 31, 2011 is presented as follows:
Balance at January 31, 2010
Granted
Vested
Forfeited
Balance at January 31, 2011
68
Number of Stock
Options
Outstanding
1,561,989
287,500
(679,123)
(41,000)
1,129,366
Weighted-
Average Grant-
Date Fair Value
per Share
$1.60
$2.27
$1.68
$1.84
$1.81
Deferred Share Unit Plan
Our board of directors adopted a deferred share unit plan effective as of June 28, 2004 pursuant to which non-
employee directors are eligible to receive grants of deferred share units (“DSUs”), each of which has an initial
value equal to the weighted-average closing price of our common shares for the five trading days preceding the
grant date. The plan allows each director to choose to receive, in the form of DSUs, all, none or a percentage of
the eligible director’s fees which would otherwise be payable in cash. If a director has invested less than the
minimum amount of equity in Descartes, as prescribed from time to time by the board of directors (currently
$80,000), then the director must take at least 50% of the base annual fee for serving as a director (currently
$25,000) in the form of DSUs. Each DSU fully vests upon award but is distributed only when the director ceases
to be a member of the board of directors. Vested units are settled in cash based on our common share price when
conversion takes place.
A summary of activity under our DSU plan is as follows:
Balance at January 31, 2010
Granted
Settled in cash
Balance at January 31, 2011
Number of
DSUs
Outstanding
91,987
14,396
-
106,383
As at January 31, 2011, the total number of DSUs held by participating directors was 106,383, representing an
aggregate accrued liability of $0.7 million ($0.5 million at January 31, 2010). The fair value of the DSU liability
is based on the closing price of our common shares at the balance sheet date. The total compensation cost related
to DSUs recognized in our consolidated statements of operations was approximately $0.1 million, $0.3 million
and $0.1 million for 2011, 2010 and 2009, respectively.
Restricted Share Unit Plan
Our board of directors adopted a restricted share unit plan effective as of May 23, 2007 pursuant to which certain
of our employees and outside directors are eligible to receive grants of restricted share units (“RSUs”), each of
which has an initial value equal to the weighted-average closing price of our common shares for the five trading
days preceding the date of the grant. The RSUs generally vest based on continued employment and have annual
vesting over three- to five-year periods. Vested units are settled in cash based on our common share price when
conversion takes place, which is within 30 days following a vesting date and in any event prior to December 31st
of the calendar year of a vesting date.
69
A summary of activity under our RSU plan is as follows:
Balance at January 31, 2010
Granted
Vested and settled in cash
Forfeited
Balance at January 31, 2011
Vested at January 31, 2011
Unvested at January 31, 2011
Number of
RSUs
Outstanding
Weighted-
Average
Remaining
Contractual
Life (years)
536,739
132,349
(254,671)
(1,182)
413,235
29,228
384,007
1.7
-
1.7
We have recognized the compensation cost of the RSUs ratably over the service/vesting period relating to the
grant and have recorded an aggregate accrued liability of $1.1 million at January 31, 2011 ($0.7 million at January
31, 2010). As at January 31, 2011, the unrecognized aggregate liability for the unvested RSUs was $1.7 million
($2.8 million at January 31, 2010). The fair value of the RSU liability is based on the closing price of our
common shares at the balance sheet date. The total compensation cost related to RSUs recognized in our
consolidated statements of operations was approximately $1.5 million, $0.9 million and $0.4 million for 2011,
2010 and 2009, respectively.
Note 16 - Employee Pension Plans
We maintain various defined contribution benefit plans for our Canadian, American and British employees. While
the specifics of each plan are different in each country, we contribute an amount related to the level of employee
contributions. These contributions are subject to maximum limits and vesting provisions, and can be discontinued
at our discretion. The pension costs were $0.5 million in 2011 (January 31, 2010 - $0.3 million; January 31, 2009
- $0.3 million), of which $0.2 million was payable at January 31, 2011 ($0.1 million at January 31, 2010).
Note 17 - Income Taxes
Income before income taxes is earned in the following tax jurisdictions:
Year Ended
Canada
United States
Other countries
January 31, January 31, January 31,
2009
2010
2011
5,045
5,380
(2,492)
7,933
489
6,962
(726)
6,725
2,172
3,606
2,953
8,731
70
Income tax expense (recovery) is incurred in the following jurisdictions:
Year Ended
Current income tax expense
Canada
United States
Other countries
Deferred income tax recovery
Canada
United States
Other countries
January 31, January 31, January 31,
2009
2010
2011
487
311
(521)
277
(3,245)
4,831
(5,469)
(3,883)
(3,606)
(75)
794
136
855
(2,126)
(7,004)
650
(8,480)
(7,625)
(122)
409
(31)
256
(13,495)
3,650
(1,890)
(11,735)
(11,479)
In 2011, our income tax recovery was impacted by the release of valuation allowance in the Netherlands and
United Kingdom. This recovery was partially offset by the net of (i) amendments to the prior-period United States
tax returns which resulted in a reduction of prior year tax loss carryforwards; (ii) taxation of unrealized foreign
exchange losses in Sweden; (iii) an adjustment to the calculation of the United States tax loss carryforwards; (iv)
the revised treatment of non-deductible acquisition-related costs; (v) charging of the tax effect of gains and losses
included in other comprehensive income directly to other comprehensive income; (vi) a change in the uncertain
tax positions; (vii) the revised treatment of certain assets as permanent differences rather than temporary
differences; (viii) the recognition of the Ontario harmonization tax credit and similarly the change in the rate
applied for taxation of future scientific research and experimental development credits; and (ix) the adjustment to
deferred tax assets set up in Canada related to the writedown of assets not currently deductible. In 2011, items (i)
through (ix) have resulted in a $0.9 million, $0.3 million and $0.1 million decrease in deferred income tax
expense in Canada, Sweden and the Netherlands, respectively, and a $2.1 million increase in deferred income tax
expense in the United States. These items also resulted in a $0.4 million and $0.2 million decrease in current
income tax expense in Sweden and the United States, respectively. While the circumstances resulting in these
adjustments occurred in prior periods, the net $0.8 million deferred income tax expense and $0.6 million current
income tax recovery from these adjustments was not material to our prior-period consolidated financial statements
or these consolidated financial statements for the period ended January 31, 2011 and has, therefore, been adjusted
in the year ended January 31, 2011.
71
The components of the deferred income tax assets and liabilities are as follows:
Assets
Accruals not currently deductible
Accumulated net operating losses
Accumulated net capital losses
Corporate minimum taxes
Difference between tax and accounting basis of capital assets
Writedown of assets not currently deductible
Research and development and other tax credits and expenses
Expenses of public offerings
Other timing differences
Total deferred income tax assets
Liabilities
Deferred expenses currently deductible
Difference between tax and accounting basis of intangible assets
Uncertain tax positions incurred in loss years
Total deferred income tax liabilities
Net deferred income taxes
Valuation allowance
Net deferred income taxes, net of valuation allowance
Deferred income tax assets – current
Deferred income tax assets – non-current
Deferred income tax liabilities – non-current
Net deferred income taxes, net of valuation allowance
January 31,
2011
January 31,
2010
2,772
55,769
-
1,276
12,237
1,055
4,472
482
257
78,320
-
(6,529)
(1,372)
(7,901)
70,419
(32,562)
37,857
11,457
34,667
(8,267)
37,857
6,386
56,836
319
1,038
11,932
1,054
3,791
712
1
82,069
(219)
(2,085)
(2,388)
(4,692)
77,377
(38,617)
38,760
4,414
34,346
-
38,760
The measurement of a deferred tax asset is adjusted by a valuation allowance, if necessary, to recognize tax
benefits only to the extent that, based on available evidence, it is more likely than not that they will be realized. In
determining the valuation allowance, we consider factors by taxing jurisdiction, including our estimated taxable
income, our history of losses for tax purposes, our tax planning strategies and the likelihood of success of our tax
filing positions, among others. A change to any of these factors could impact the estimated valuation allowance
and income tax expense. Based on the weight of positive and negative evidence regarding recoverability of our
deferred tax assets, we have recorded a valuation allowance for $32.6 million ($38.6 million at January 31, 2010)
of our net deferred tax assets of $70.4 million ($77.4 million at January 31, 2010), resulting in a total net deferred
tax asset of $37.9 million at January 31, 2011 ($38.8 million at January 31, 2010).
As at January 31, 2011, we had not accrued for Canadian income taxes and foreign withholding taxes applicable
to approximately $16.8 million of unremitted earnings of subsidiaries operating outside of Canada. These
earnings, which we consider to be invested indefinitely, will become subject to these taxes if and when they are
remitted as dividends or if we sell our stock in the subsidiaries. The potential amount of unrecognized deferred
Canadian income tax liabilities and foreign withholding and income tax liabilities on the unremitted earnings and
foreign exchange gains is not currently practicably determinable.
72
The provision (recovery) for income taxes varies from the expected provision at the statutory rates for the reasons
detailed in the table below:
Year Ended
Combined basic Canadian statutory rates
Income tax expense based on the above rates
Increase (decrease) in income taxes resulting from:
Permanent differences including amortization of intangibles
Effect of differences between Canadian and foreign tax rates
Application of loss carryforwards not previously recognized
Application of research and development tax credits
Increases (decreases) in tax reserves
Valuation allowance
Deferral of tax charges
Other
Income tax (recovery)
January 31, January 31, January 31,
2009
33.5%
2011
30.7%
2010
32.9%
2,436
2,214
2,925
(2,198)
1,354
(59)
-
(149)
(5,241)
197
54
(3,606)
3,388
724
(11)
(30)
-
(14,162)
197
55
(7,625)
2,732
150
(4,150)
(27)
-
(13,133)
197
(173)
(11,479)
We have income tax loss carryforwards of approximately $197.9 million, which expire as follows:
Expiry year
2012
2013
2014
2015
2016
Thereafter
Canada
-
-
2,212
-
-
42,153
44,365
United
States
883
-
-
-
-
22,938
23,821
EMEA
5,831
4,421
3,647
1,912
6
91,744
107,561
Asia
Pacific
853
722
556
-
215
19,784
22,130
Total
7,567
5,143
6,415
1,912
221
176,619
197,877
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
Unrecognized tax benefits, beginning of year
Gross (decreases) increases – tax positions in prior periods
Gross increases – tax positions in the current period
Lapsing of statutes of limitations
Unrecognized tax benefits, end of year
January 31, January 31, January 31,
2009
4,438
3
828
(491)
4,778
2011
5,168
(1,368)
874
(428)
4,246
2010
4,778
47
397
(54)
5,168
We expect that the unrecognized tax benefits will increase within the next 12 months due to uncertain tax
positions expected to be taken, although at this time a reasonable estimate of the possible increase cannot be
made. Of the $4.2 million of unrecognized tax benefits at January 31, 2011, approximately $2.8 million would
impact the effective income tax rate if recognized.
Consistent with our historical financial reporting, we recognize accrued interest and penalties related to
unrecognized tax benefits in general and administrative expense. As at January 31, 2011 and January 31, 2010,
the unrecognized tax benefits have resulted in no material liability for estimated interest and penalties.
73
Descartes and our subsidiaries file their tax returns as prescribed by the tax laws of the jurisdictions within which
they operate. We are no longer subject to income tax examinations by tax authorities in our major tax jurisdictions
as follows:
Tax Jurisdiction
United States Federal
Canada
United Kingdom
Sweden
Note 18 - Other Charges
Years No Longer Subject to Audit
2007 and prior
2003 and prior
2007 and prior
2004 and prior
Other charges are primarily comprised of charges related to certain restructuring initiatives which have been
undertaken from time to time under various restructuring plans. Other charges also include acquisition-related
costs with respect to completed and prospective acquisitions. Acquisition-related costs primarily include advisory
services, brokerage services and administrative costs. In 2011, other charges also included $0.4 million related to
the write-off of certain computer software assets, acquired as part of the Porthus acquisition. These assets became
redundant during the year ended January 31, 2011 as we continue to integrate Porthus into our operations.
Other charges included in our consolidated statements of operations are as follows:
Restructuring related to fiscal 2011 acquisitions
Fiscal 2011 restructuring plan
Fiscal 2010 restructuring plan
Other restructuring plans
Acquisition-related costs
Write-off of redundant assets
January 31, January 31, January 31,
2009
-
-
-
280
258
-
538
2010
-
-
754
-
861
-
1,615
2011
1,011
866
156
-
1,545
417
3,995
Restructuring Related to Fiscal 2011 Acquisitions
As described in Note 3 to these consolidated financial statements, we completed three acquisitions during the year
ended January 31, 2011. As these acquisitions were completed, management approved and began to implement
restructuring plans to integrate and streamline operations. The total costs to be incurred in conjunction with these
restructuring plans are expected to be approximately $1.0 million to $1.5 million, of which $1.0 million has been
recorded within other charges during 2011. These charges are comprised of workforce reduction charges and
network consolidation costs. These plans are expected to be completed in 2012 with the expected remaining costs
to be primarily related to workforce reductions.
74
The following table shows the changes in the restructuring provision for restructuring related to fiscal 2011
acquisitions.
Balance at January 31, 2010
Accruals and adjustments
Cash draw downs
Balance at January 31, 2011
Workforce
Reduction
-
823
(765)
58
Network
Consolidation
Costs
-
188
(184)
4
Total
-
1,011
(949)
62
Fiscal 2011 Restructuring Plan
In the first quarter of 2011, management approved and began to implement the fiscal 2011 restructuring plan to
reduce operating expenses and increase operating margins. The total cost to be incurred in conjunction with this
restructuring plan is expected to be approximately $0.9 million to $1.1 million, of which $0.9 million has been
recorded within other charges during 2011. These charges are comprised of workforce reduction charges, office
closure costs and network consolidation costs. This plan is expected to be completed by April 30, 2011 with the
expected remaining costs to be primarily related to workforce reductions.
The following table shows the changes in the restructuring provision for the fiscal 2011 restructuring plan.
Balance at January 31, 2010
Accruals and adjustments
Cash draw downs
Balance at January 31, 2011
Workforce
Reduction
-
690
(380)
310
Office Closure
Costs
-
142
(123)
19
Network
Consolidation
Costs
-
34
(34)
-
Total
-
866
(537)
329
Fiscal 2010 Restructuring Plan
In the first quarter of 2010, management approved and began to implement the fiscal 2010 restructuring plan to
reduce operating expenses and increase operating margins. The total cost to be incurred in conjunction with this
restructuring plan is expected to be approximately $0.9 million, of which $0.9 million total has been recorded
within other charges to date, with $0.2 million of this total amount recorded within other charges in fiscal 2011.
These charges are comprised of workforce reduction charges, office closure costs and network consolidation
costs. This plan is complete with only the remaining provision below as payable.
The following table shows the changes in the restructuring provision for the fiscal 2010 restructuring plan.
Balance at January 31, 2009
Accruals and adjustments
Cash draw downs
Balance at January 31, 2010
Accruals and adjustments
Cash draw downs
Noncash draw downs and foreign
exchange
Balance at January 31, 2011
Office Closure
Costs
-
27
-
27
-
(27)
Network
Consolidation
Costs
-
-
-
-
56
(56)
-
-
-
-
Workforce
Reduction
-
727
(632)
95
100
(168)
2
29
75
Total
-
754
(632)
122
156
(251)
2
29
Note 19 - Segmented Information
We review our operating results, assess our performance, make decisions about resources, and generate discrete
financial information at the single enterprise level. Accordingly, we have determined that we operate in one
business segment providing logistics technology solutions. The following tables provide our segmented revenue
information by geographic location of customer and revenue type:
Year Ended
Revenues
United States
Canada
Americas, excluding Canada and United States
Belgium
EMEA, excluding Belgium
Asia Pacific
Year Ended
Revenues
Services
Licenses
January 31, January 31, January 31,
2009
2010
2011
44,903
12,960
958
17,705
19,149
3,500
99,175
44,544
9,167
789
1,450
14,249
3,569
73,768
38,793
6,247
696
526
16,340
3,442
66,044
January 31, January 31, January 31,
2009
2010
2011
93,684
5,491
99,175
69,590
4,178
73,768
61,024
5,020
66,044
Services revenues are composed of the following: (i) ongoing transactional and/or subscription fees for use of our
services and products by our customers; (ii) professional services revenues from consulting, implementation and
training services related to our services and products; and (iii) maintenance and other related revenues, which
include revenues associated with maintenance and support of our services and products. License revenues are
derived from licenses granted to our customers to use our software products.
The following table provides our segmented information by geographic area of operation for our long-lived
assets. Long-lived assets represent capital assets, goodwill and intangibles that are attributed to individual
geographic segments.
Total long-lived assets
United States
Canada
Belgium
EMEA, excluding Belgium
Asia Pacific
January 31,
2011
January 31,
2010
31,666
25,908
43,055
4,120
5
104,754
34,926
18,096
1,761
6,206
7
60,996
76
CORPORATE INFORMATION
Stock Exchange Information
Our common stock trades on the Toronto Stock Exchange under
the symbol DSG and on The Nasdaq Stock Market under the
symbol DSGX.
Transfer Agents
Computershare Investor Services Inc.
100 University Avenue
Toronto, Ontario M5J 2Y1
North America: (800) 663-9097
International: (416) 263-9200
Computershare Trust Company
12039 West Alameda Parkway
Suite Z-2 Lakewood, Colorado
80228 USA
International: (303) 262-0600
Independent Registered Chartered Accountants
Deloitte & Touche LLP
5140 Yonge Street
Suite 1700
North York, Ontario M2N 6L7
(416) 601-6150
Investor Inquiries
Investor Relations
The Descartes Systems Group Inc.
120 Randall Drive
Waterloo, Ontario N2V 1C6
(519) 746-8110 ext. 2358
(800) 419-8495
E-mail: investor@descartes.com
www.descartes.com
The Descartes Systems Group Inc.
Corporate Headquarters
120 Randall Drive
Waterloo, Ontario N2V 1C6
Canada
Phone: (519) 746-8110
(800) 419-8495
(519) 747-0082
Fax:
info@descartes.com
www.descartes.com