THE DESCARTES SYSTEMS GROUP INC.
2012 ANNUAL REPORT
US GAAP FINANCIAL RESULTS FOR 2012 FISCAL YEAR
TABLE OF CONTENTS
Letter from the CEO...........................................................................................................................3
Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................4
Overview .......................................................................................................................................3
Consolidated Operations ..................................................................................................................6
Quarterly Operating Results ........................................................................................................... 13
Liquidity and Capital Resources ...................................................................................................... 14
Commitments, Contingencies and Guarantees .................................................................................. 17
Outstanding Share Data ................................................................................................................ 18
Application of Critical Accounting Policies ......................................................................................... 19
Change In / Initial Adoption of Accounting Policies ............................................................................ 21
Controls and Procedures ................................................................................................................ 22
Trends / Business Outlook ............................................................................................................. 23
Certain Factors That May Affect Future Results ................................................................................. 26
Management’s Report on Financial Statements and Internal Control Over Financial Reporting ................... 36
Report of Independent Registered Chartered Accountants .................................................................... 38
Consolidated Financial Statements
Consolidated Balance Sheets .......................................................................................................... 40
Consolidated Statements of Operations ........................................................................................... 41
Consolidated Statements of Shareholders’ Equity.............................................................................. 42
Consolidated Statements of Cash Flows ........................................................................................... 43
Notes to Consolidated Financial Statements ..................................................................................... 44
Corporate Information ..................................................................................................................... 74
2
LETTER FROM THE CEO
Dear Shareholders,
Descartes’ focus on delivering superior results for our customers fuelled our own solid financial
performance in fiscal 2012, despite a challenging economic environment in Europe.
Logistics is the backbone of commerce. Descartes’ focus is helping logistics-intensive businesses work
with each other. Uniting business in commerce has never been more important for improving the
productivity, performance and security of logistics operations. In difficult economic times where
shipment volumes fluctuate and costs increase, logistics-intensive companies need to become even
more efficient to survive. It’s in these types of challenging times that customers can count on Descartes.
Our solutions thrive on driving efficiencies. For customers, our solutions don’t cost, they pay.
Our business continued to grow profitably in fiscal 2012 thanks to our customers. Customers continue to
place 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.
By working as one learning team with our customers, in fiscal 2012, we also enhanced our Logistics
Technology Platform and grew our logistics cloud through acquisitions. In June 2011, we added Telargo’s
telematics solutions to our platform to deliver on our customers’ request to have routing, mobile, and
telematics solutions available as one integrated suite. In November 2011, we combined with
InterCommIT to enhance our ability to collect logistics data earlier in the “Purchase Order to Dock-Door
Process” and enlarge our logistics-focused community in Europe. Finally, in January 2012, we joined
forces with GeoMicro to enhance our domain expertise in geographic information systems and
commercial turn-by-turn navigation. Together, these businesses put us in an even stronger position to
drive additional value for customers.
In fiscal 2012, our team members had a FOCUS on expanding our network by Federating Our Customers
by Uniting Systems. In fiscal 2013, our plan is to Invest to be the Best. Our plan includes investments
in our solutions, our operations, our partner relationships and our people – all with the goal of putting us
in the strongest position to best serve our customers and continue delivering on our long-term operating
plan.
At Descartes, we are metrics-driven, focused on results. We put our customers first, mindful that their
successes are the driving force behind Descartes’ own success. In fiscal 2012, this enabled us to deliver
another year of record operating results. We entered fiscal 2013 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. Most importantly, we entered the year with a continued motivation to help improve
logistics operations to make the world more safe, secure and efficient.
We look forward to continuing to deliver for you and our customers in the coming year.
Arthur Mesher,
Chairman of the Board and Chief Executive Officer
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, 2012, is referred
to as the “current fiscal year,” “fiscal 2012,” “2012” or using similar words. Our fiscal year, which ended
on January 31, 2011, is referred to as the “previous fiscal year,” “fiscal 2011,” “2011” or using similar
words. Other fiscal years are referenced by the applicable year during which the fiscal year ends. For
example, 2013 refers to the annual period ending January 31, 2013 and the “fourth quarter of 2013”
refers to the quarter ending January 31, 2013.
This MD&A, which is prepared as of March 9, 2012, covers our year ended January 31, 2012, as
compared to years ended January 31, 2011 and 2010. You should read the MD&A in conjunction with
our audited consolidated financial statements for 2012. 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 to Shareholders, 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 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;
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 plans to continue to
allow customers to elect to license technology in lieu of subscribing to services; our planning for
anticipated loss of revenues and customers in fiscal 2013 and beyond; our baseline calibration; our
ability to keep our operating expenses at a level below our baseline revenues; our future business plans
and business planning process; use of proceeds from previously completed financings or other
transactions; allocation of purchase price for completed acquisitions; 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;
income tax provision and expense; effective tax rates applicable to future fiscal periods; anticipated tax
benefits; 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 and our anticipated
growth strategy; our ability to raise capital; and other matters related thereto constitute forward-looking
information for the purposes of applicable securities laws (“forward-looking statements”). When used in
4
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, monitoring and reporting;
inventory
and
transportation management; and warehouse
operations. Our pricing model provides our
in purchasing our
customers with
solutions
license,
subscription or transactional basis. Our primary
focus is on serving transportation providers (air,
ocean and
logistics service
providers (including third-party 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.
truck modes),
a perpetual
either on
visibility;
flexibility
asset
rate
and
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 for integrated resources 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
as
(SCE)
execution
transportation management,
and
scheduling, inventory visibility, and global trade
and compliance systems (GT&C), such as customs
filing.
applications,
routing
such
We believe logistics-intensive organizations are
seeking new ways to reduce operating costs,
3
differentiate themselves, and improve margins
that are trending downward. Existing global trade
and 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 in their supply
chains. Whether a shipment is 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.
These challenges are heightened for suppliers that
have end customers
frequently demanding
narrower order-to-fulfillment periods, lower prices
scheduling and
and greater
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.
flexibility
in
this market, manual,
In
fragmented and
distributed logistics solutions are often proving
inadequate to address the needs of operators.
Connecting 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
flexibility
required
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.
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
the value of
prospects and customers on
through our
connecting
and
federated
automating, as well as standardizing, multi-party
business processes. We believe
that our
customers are increasingly looking for a single
trading partners
to
global
network
logistics
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.
and
require
logistics
regulatory
companies
Additionally,
initiatives mandating
electronic filing of shipment information with
customs authorities
to
automate their processes to remain compliant and
competitive. Our customs compliance technology
helps shippers, transportation providers, freight
intermediaries
forwarders and other
securely
shipment
electronically
information with customs authorities and self-
audit their own efforts. Our technology also helps
carriers
efficiently
coordinate with customs brokers and agencies to
expedite cross-border shipments. While many
compliance
the US,
compliance is quickly becoming a global issue with
international shipments crossing several borders
on the way to their final destinations.
forwarders
initiatives
started
freight
and
file
in
Solutions
To help deliver the advantages of RiMMS solutions
to customers, Descartes developed the Logistics
Descartes’
Technology
Logistics
the simple, elegant
Technology Platform
synthesis
and
community.
applications
Platform.
network,
of
is
Platform
Logistics
The
fuses
Technology
Descartes’ Global Logistics Network (GLN), one of
the world's most extensive logistics networks
covering multiple transportation modes, with a
broad array of modular, interoperable web and
wireless logistics management applications. The
Logistics Technology Platform leverages one of the
world’s largest multimodal logistics communities
to enable companies
to quickly and cost-
effectively connect and collaborate.
The applications available over the Logistics
Technology Platform that work in conjunction with
the GLN, help transportation companies and
logistics service providers (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
4
of the shipment with the transportation provider
to the settlement and audit of the invoice relating
to the shipment.
reduce
logistics
Applications are also available on the Logistics
to help manufacturer,
Technology Platform
retailer, distributor and mobile service provider
(MRDM) enterprises
costs,
efficiently use logistics assets and decrease lead-
time variability for their global shipments and
regional operations. In addition, these applications
arm the customer service departments of private
fleets and contract carriers with information about
the location, availability, usage and scheduling of
vehicles so they can provide better information to
their own clients.
Our applications are designed to support:
• GT&C
– which
encompasses
the
preparation and filing of the necessary
electronic documentation relating to a
shipment, such as cross-border customs
documentation,
or
manifests;
freight waybills
• SCE – which entails the processes related
to managing shipments from their point of
origin to their point of destination, as well
as
those
shipments (e.g. booking data, orders,
contracts and rates, shipment status,
invoices, payments,
proof of delivery,
etc.); and
the documents
related
to
• MRM
involves
gathering,
– which
tracking,
information
measuring,
filing, delegating
reporting, compliance
and optimizing the use of mobile assets
and people that are involved in the
movement of goods.
The Logistics Technology Platform supports a
community of over 35,000 trading partners
sending over 1 billion messages annually in over
160 countries. Designed specifically for logistics
Logistics
their users,
processes and
Technology Platform 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.
the
By uniting the reach of the GLN with the power of
these applications, our federated network creates
an ecosystem that supports and streamlines the
key
logistics
managers.
functional areas
facing today’s
InterCommIT is a SaaS provider of electronic data
management services that enable its clients to
seamlessly exchange data electronically.
provider
On January 20, 2012, we acquired privately-held
GeoMicro, Inc. (“GeoMicro”), a leading California-
based
geographic
information systems and commercial turn-by-turn
navigation. GeoMicro’s platform enables advanced
routing, navigation, field service, and spatial data
business intelligence solutions.
advanced
of
Sales and Distribution
Our sales efforts are primarily directed toward two
specific customer markets: (a) 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.
United by Design
Descartes’ ‘United By Design’ strategic alliance
program is intended 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
logistics-intensive organizations
ecosystem of
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 June 10, 2011, we acquired privately-held
Telargo Inc., (“Telargo”), a provider of telematics
solutions. Telargo
is a software-as-a-service
(“SaaS”) provider of MRM telematics solutions
that enable its clients to monitor and manage
mobile assets and help fleet owners comply with
various transportation regulations.
On November 2, 2011, we acquired privately-held
InterCommIT B.V. (“InterCommIT”), a provider of
integration-as-a-service.
business-to-business
5
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
Income from operations
Investment income
Income before income taxes
Income tax expense (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,
2010
73.8
2011
99.2
114.0
2012
38.3
75.7
46.3
2.1
12.0
15.3
0.1
15.4
3.4
12.0
33.9
65.3
42.1
4.0
11.5
7.7
0.2
7.9
(3.6)
11.5
23.0
50.8
35.8
1.7
6.9
6.4
0.3
6.7
(7.6)
14.3
0.19
0.19
0.19
0.18
0.26
0.25
62,218
63,400
61,523
62,888
55,389
56,437
258.9
241.3
208.2
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.
6
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,
2012
105.7
93%
January 31, January 31,
2010
69.6
94%
2011
93.7
94%
8.3
7%
114.0
5.5
6%
99.2
4.2
6%
73.8
Our services revenues were $105.7 million, $93.7 million and $69.6 million in 2012, 2011 and 2010,
respectively. The increase in services revenues in 2012 was primarily due to the inclusion of a full year
of services revenues from our acquisitions of Porthus NV (“Porthus”), Imanet (“Imanet”) and Routing
International NV (“Routing International”) during 2011, as well as the inclusion of service revenues from
our acquisitions of Telargo, InterCommIT and GeoMicro during 2012.
The increase in services revenues in 2011 from 2010 is primarily due to the inclusion of a full year of
services revenues from our acquisition of Scancode Systems Inc. (“Scancode”) during 2010, as well as
the inclusion of services revenues from our acquisitions of Porthus, Imanet and Routing International
during 2011.
Our license revenues were $8.3 million, $5.5 million and $4.2 million in 2012, 2011 and 2010,
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 93%, 94% and 94% in 2012, 2011
and 2010, 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.
7
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, January 31, January 31,
2010
44.5
60%
2012
48.6
43%
2011
44.9
45%
15.1
13%
1.2
1%
19.3
17%
24.5
21%
5.3
5%
114.0
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
Revenues from the United States were $48.6 million, $44.9 million and $44.5 million in 2012, 2011
and 2010, respectively. The increase in 2012 was primarily attributable to the inclusion of revenue in the
United States from our acquisitions of Telargo and GeoMicro, increased shipping volumes, as well as new
customers in the MRM market in the United States. The increase in revenues from the United States is
also due to increased license revenues.
The increase in 2011 as compared to 2010 was primarily due to the inclusion of a full year of revenue in
the United States from our acquisition of Scancode as well as increased license revenues. These
increases were partially offset by the recent departure of certain customers for our legacy ocean
services.
Revenues from Canada were $15.1 million, $13.0 million and $9.2 million in 2012, 2011 and 2010,
respectively. The increase in 2012 was primarily attributable to the inclusion of a full period of Canadian
revenues from our acquisition of Canadian-based Imanet in 2011. Revenues from Canada in 2012 were
also impacted by favourable foreign exchange rates for the translation of Canadian dollar revenues as
compared to 2011.
The increase in 2011 as compared to 2010 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.
Revenues from the Americas region, excluding Canada and the United States, were $1.2 million,
$1.0 million and $0.8 million in 2012, 2011 and 2010, respectively. The increase in 2012 compared to
2011 was principally due to increased license revenues from resellers.
The increase in 2011 as compared to 2010 was primarily due to increased license revenues.
8
Revenues from Belgium were $19.3 million, $17.7 million and $1.5 million in 2012, 2011 and 2010,
respectively. The increase in 2012 was principally due to the inclusion of a full year of revenue from our
acquisitions of Belgian-based Porthus and Routing International in 2011.
The increase in 2011 as compared to 2010 was principally due to the acquisitions of Belgian-based
Porthus and Routing International.
Revenues from the EMEA region, excluding Belgium, were $24.5 million, $19.1 million and $14.2
million in 2012, 2011 and 2010, respectively. The increase in 2012 was primarily due to inclusion of a
full year of revenue from our acquisitions of Porthus and Routing International in 2011, as well as the
acquisition of InterCommIT in 2012. The increase in 2012 is also due to the favourable impact of foreign
exchange rates for the translation of revenues earned in euros as compared to 2011.
The increase in 2011 as compared to 2010 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.
Revenues from the Asia Pacific region were $5.3 million, $3.5 million and $3.6 million in 2012, 2011
and 2010, respectively. The increase in 2012 as compared to 2011 was principally due to the inclusion
of revenues from our acquisition of Telargo.
The decrease in 2011 as compared to 2010 was primarily due to lower license revenues.
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, January 31, January 31,
2010
2012
2011
105.7
36.3
69.4
66%
8.3
2.0
6.3
76%
114.0
38.3
75.7
66%
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%
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.
Gross margin percentage for services revenues was 66%, 65% and 68% in 2012, 2011 and 2010,
respectively. The increase in 2012 compared to 2011 was primarily due to creation of operating
efficiencies. This increase was partially offset by the acquisition of Telargo in 2012, which currently
operates at lower margins than our other services revenue streams.
9
The decrease in 2011 compared to 2010 was primarily due to the acquisition of Porthus which operated
at lower margins than our other services revenue streams.
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 royalties.
Gross margin percentage for license revenues was 76%, 78%, and 76% in 2012, 2011 and 2010,
respectively. Our gross margin on license revenues is dependent on the proportion of our license
revenues that involve third-party technology and the type of 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 2012, 2011 and 2010.
Operating expenses (consisting of sales and marketing, research and development and general and
administrative expenses) were $46.3 million, $42.1 million and $35.8 million for 2012, 2011 and 2010,
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 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 and $1.2 million in 2011 and 2012, respectively. As described in Note 2 to the
consolidated financial statements, the increased stock-based compensation expense in 2010, 2011 and
2012 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
Percentage of total revenues
January 31, January 31, January 31,
2010
73.8
2012
114.0
2011
99.2
13.0
11%
19.0
17%
14.3
13%
46.3
41%
11.5
12%
17.0
17%
13.6
14%
42.1
42%
10.6
14%
14.5
20%
10.7
14%
35.8
49%
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 $13.0 million, $11.5 million and $10.6 million in 2012, 2011 and 2010,
respectively, representing as a percentage of total revenues 11%, 12% and 14% in 2012, 2011 and
2010, respectively. The increase in sales and marketing expenses in 2012 as compared to 2011 is
primarily due to the acquisitions in 2012 of Telargo, InterCommIT and GeoMicro, as well as the inclusion
of a full year of expenses for Porthus, Imanet and Routing International. The increase in 2012 as
compared to 2011 is also a result of an unfavourable foreign exchange impact from our Canadian dollar
and euro denominated sales and marketing expenses.
10
Sales and marketing expenses increased in 2011 as compared to 2010 from the acquisition of Porthus
and to a lesser extent the 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.
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 2012, 2011 and 2010. Research and
development expense was $19.0 million, $17.0 million and $14.5 million in 2012, 2011 and 2010,
respectively, representing as a percentage of total revenues 17%, 17% and 20% in 2012, 2011 and
2010, respectively. The increase in research and development expenses in 2012 as compared to 2011 is
primarily attributable to increased payroll and related costs from the acquisitions of Telargo,
InterCommIT and GeoMicro in 2012, as well as the inclusion of a full year of expenses for Porthus,
Imanet and Routing International. The increase in 2012 as compared to 2011 is also a result of an
unfavourable foreign exchange impact from our Canadian dollar and euro denominated research and
development expenses.
The increase in research and development expenses in 2011 as compared to 2010 is primarily
attributable to increased payroll and related costs from the acquisition 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.
General and administrative expenses consist primarily of salaries, stock-based compensation and
other personnel-related costs of administrative personnel, as well as professional fees and other
administrative expenses. General and administrative costs were $14.3 million, $13.6 million and $10.7
million in 2012, 2011 and 2010, respectively, representing as a percentage of total revenues 13%, 14%
and 14% in 2012, 2011 and 2010, respectively. The increase in general and administrative expenses in
2012 as compared to 2011 is primarily attributable to additional general and administrative expenses
associated related to our recent acquisitions. The increase in 2012 as compared to 2011 is also a result
of an unfavourable foreign exchange impact from our Canadian dollar and euro denominated general
and administrative expenses.
The increase in general and administrative expenses in 2011 as compared to 2010 is primarily
attributable to additional general and administrative expenses associated with 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.
Other charges consist primarily of acquisition-related costs and restructuring charges. Other charges
were $2.1 million, $4.0 million and $1.7 million in 2012, 2011 and 2010, respectively. The decrease in
2012 as compared to 2011 was due to $0.5 million in 2012, compared to $2.1 million in 2011, of
restructuring charges related to integration of previously completed acquisitions and other cost-
reduction activities. The decrease is also due to a one-time $0.4 million write-off, in 2011, of computer
software assets acquired as part of the Porthus acquisition.
The increase in 2011 as compared to 2010 was primarily due to $2.1 million in 2011, 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 computer
software assets acquired as part of the Porthus acquisition.
11
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, 2012. 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 $12.0 million, $11.5 million and $6.9 million in 2012, 2011 and
2010, 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, 2012, the unamortized
portion of all intangible assets amounted to $46.7 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.
Investment income was $0.1 million, $0.2 million and $0.3 million in 2012, 2011 and 2010,
respectively. The decrease in investment income over those three years is principally a result of lower
interest rates in the 2012 and 2011 periods.
Income tax expense (recovery) is comprised of current and deferred income tax expense (recovery).
Income tax expense (recovery) for 2012, 2011 and 2010 was 22%, (46%) and (113%) of income before
income taxes, respectively, with current income tax expense being approximately 9%, 4% and 13% of
income before income taxes, respectively.
Income tax expense – current was $1.4 million, $0.3 million and $0.9 million in 2012, 2011 and
2010, 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,
Canadian income earned by Imanet, income earned by the Belgian and Slovakian operations of Porthus,
income earned by InterCommIT, and income earned by the France and Netherlands operations of
Routing International.
Income tax expense (recovery) – deferred was $1.9 million, ($3.9) million and ($8.5) million in
2012, 2011 and 2010, respectively. The deferred income tax expense increased in 2012 relative to
2011, primarily as a result of utilizing loss carryforwards to offset increased taxable income, especially in
Canada. In addition, a release of valuation allowances in the UK and Netherlands increased the deferred
income tax recovery in 2011, but this recovery did not recur in 2012. Partially offsetting the increase in
deferred income tax expense was a change in valuation allowance and other tax estimates in the United
States.
A net deferred tax asset of $33.9 million is recorded on our 2012 consolidated balance sheet for tax
benefits that we currently expect to realize in future years. We have provided a valuation allowance of
$33.9 million in 2012 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.
12
Overall, we generated net income of $12.0 million, $11.5 million and $14.3 million in 2012, 2011 and
2010, respectively. The $0.5 million increase in 2012 from 2011 was primarily a result of a $10.4 million
increase in gross margin, a $1.9 million decrease in other charges, partially offset by a $7.0 million
increase in income tax expense, a $4.2 million increase in operating expenses, a $0.5 million increase in
amortization of intangible assets, and a $0.1 million decrease in investment income.
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 changes was a $14.5 million increase in gross margin.
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,
2012
2011
2011
2011
Total
2012
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
2011
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
27,076
18,162
11,239
2,152
0.03
0.03
28,841
19,058
11,618
2,640
0.04
0.04
28,502
19,007
11,403
2,724
0.04
0.04
29,571 113,990
75,677
19,450
46,325
12,065
12,026
4,510
0.19
0.07
0.19
0.07
61,881
63,194
62,221
63,358
62,350
63,408
62,410
63,629
62,218
63,400
April 30, July 31, October 31, January 31,
2011
2010
2010
2010
21,286
13,899
9,417
192
-
-
25,249
16,696
10,951
2,023
0.03
0.03
25,787
17,208
10,968
1,616
0.03
0.03
26,853
17,497
10,760
7,708
0.13
0.12
Total
99,175
65,300
42,096
11,539
0.19
0.18
61,432
62,681
61,481
62,718
61,526
62,849
61,651
63,181
61,523
62,888
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
13
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 eight acquisitions that we have completed since the
beginning of 2010. In addition, over the past three 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 US, Canadian and European Union customs regulations. These increases have
been tempered by the general economic downturn that started impacting our business and global
shipping volumes in 2009.
In 2011, net income was positively impacted by the acquisitions of Porthus, Imanet and Routing
International. Net income was also impacted by $0.6 million, $0.3 million, $0.2 million and $0.9 of
restructuring charges related to integration of previously completed acquisitions and other cost-
reduction activities expensed in the first, second, third and fourth quarters of 2011, respectively. As
well, $0.9 million, $0.5 million and $0.2 million of acquisition-related costs were incurred in the first,
second and fourth quarters of 2011, respectively. Net income in the third quarter of 2011 was negatively
impacted by $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. An income tax recovery of $5.2 million also contributed to net
income in the fourth quarter of 2011. The income tax recovery resulted 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 BVBA (“Dexx”) and Australian operations.
In the first quarter of 2012, net income was positively impacted by the strengthening of the euro in
comparison to the US dollar, while the strengthening of the Canadian dollar in comparison to the US
dollar negatively impacted net income. Also negatively impacting net income was $0.3 million of
acquisition-related costs with respect to completed and prospective acquisitions.
In the second quarter of 2012, our revenues and expenses increased as a result of including a partial
quarter of revenues and expenses from the acquisition of Telargo. As well, revenue was positively
impacted by increased shipping volumes and new customers in the MRM market. Net income was
negatively impacted by $0.3 million of acquisition-related costs and $0.1 million of restructuring
charges.
In the third quarter of 2012, our revenues and expenses increased as a result of including a full quarter
of revenues and expenses from our acquisition of Telargo. Net income was negatively impacted by $0.4
million of acquisition-related costs and restructuring charges.
In the fourth quarter of 2012, our revenues and expenses increased as a result of including a partial
quarter of revenues and expenses from our acquisitions of InterCommIT and GeoMicro. As well, net
income was negatively impacted by $0.7 million of acquisition-related costs and $0.4 million of
restructuring charges.
Our weighted average shares outstanding has increased since the first quarter of 2011 due to 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,
2012, we had $65.5 million in cash and cash equivalents and $3.0 million in unused available lines of
credit. As at January 31, 2011, prior to our acquisitions of Telargo, InterCommIT and GeoMicro, we had
$69.6 million in cash and cash equivalents and $3.0 million in available lines of credit.
14
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. 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 periods 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, 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,
2010
16.5
(1.6)
-
(15.0)
40.3
-
2012
23.9
(4.7)
-
(21.3)
1.7
(4.3)
2011
19.9
(1.6)
0.5
(45.0)
1.1
(0.4)
0.6
(4.1)
69.6
65.5
0.5
(25.0)
(3.2)
37.0
94.6
57.6
69.6
94.6
Cash provided by operating activities was $23.9 million, $19.9 million and $16.5 million for 2012,
2011 and 2010, respectively. For 2012, the $23.9 million of cash provided by operating activities
resulted from $12.0 million of net income, plus $17.8 million of non-cash items included in net income
and less $5.9 million of cash used in changes in our operating assets and liabilities. 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. Cash provided by operating activities increased in 2012 compared to 2011, primarily due
to net income adjusted for non-cash expenses which increased $6.6 million in 2012 compared to 2011.
This increase was partially offset by cash used in changes in our operating assets and liabilities which
increased $2.6 million in 2012 compared to 2011. 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.
15
Additions to capital assets of $4.7 million, $1.6 million and $1.6 million in 2012, 2011 and 2010,
respectively, were primarily composed of investments in computing equipment and software to support
our network and build out infrastructure. The increase in additions in 2012 was primarily composed of
investments in software related to the implementation of a new enterprise resource planning (ERP)
system.
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. There was
no such sale of investment in affiliates during 2012.
Business acquisitions, net of cash acquired of $21.3 million in 2012 was primarily comprised of
$5.0 million of cash, net of cash acquired, for the acquisition of Telargo, $13.6 million of cash, net of
cash acquired, for the acquisition of InterCommIT and $2.7 million of cash, net of cash acquired, for the
acquisition of GeoMicro.
Business acquisitions, net of cash acquired of $45.0 million in 2011 were 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, net of cash acquired of $15.0 million in 2010 were primarily comprised of $8.9
million of cash, net of cash acquired, for the acquisition of Oceanwide Inc. (“Oceanwide”) and $5.9
million of cash, net of cash acquired, for the acquisition of Scancode. The balance of this amount
consists of additional purchase price and acquisition-related cost paid in 2010 for business acquisitions
that we completed prior to 2010.
Issuance of common shares of $1.7 million in 2012 and $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.
Repayment of financial liabilities of $4.3 million in 2012 was primarily due to repayment of debt
obligations acquired as part of the Telargo acquisition.
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, 2012, our working capital (current assets less current liabilities)
was $78.2 million. Current assets include $65.5 million of cash and cash equivalents, $17.2 million in
current trade receivables and $12.4 million in current deferred tax assets. Current liabilities include
$12.2 million of accrued liabilities, $6.6 million of deferred revenue and $5.2 million of accounts
payable. Our working capital has decreased since January 31, 2011 by $0.3 million, primarily as a result
of net income of $12.0 million, offset by cash used for business.
Cash and cash equivalents and short-term investments. As at January 31, 2012, 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.
16
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
3.3
0.1
3.4
4.5
0.1
4.6
2.3
-
2.3
1.0
-
1.0
Total
11.1
0.2
11.3
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 believe that it is reasonably possible that the gross unrecognized tax benefit as of January 31, 2012
could increase tax expense in the next twelve months by $4.9 million primarily relating to underlying
uncertain tax positions, relating primarily to the tax years becoming statute barred for the purpose of
future tax examinations by local taxing jurisdictions and the expiration of competent authority relief.
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 $1.9 million for which no liability was
recorded on our consolidated balance sheet at January 31, 2012, 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.
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
consolidated financial statements.
17
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 8, 2012, we had
62,432,727 common shares issued and outstanding.
As of March 8, 2012, there were 2,987,251 options issued and outstanding, and 212,218 remaining
available for grant under all stock option plans.
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 could 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 8, 2012 there were no purchases
made pursuant to this normal course issuer bid. We did not renew the normal course issuer bid in fiscal
2012.
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
18
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. At the annual shareholders meeting held on June 2, 2011, our shareholders
approved certain amendments to the Rights Plan and approved the Rights Plan continuing in effect. 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
2012 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 2012 consolidated financial
statements:
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 collectability 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, the selling price 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 statements of operations 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
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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, assessing qualitative factors 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. We record deferred tax assets on our consolidated balance sheet for tax benefits that we
currently expect to realize in future periods. Over recent years, we determined that there was sufficient
positive evidence such that it was more likely than not that we would utilize all or a portion of deferred
tax assets in certain jurisdictions, 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 two preceding tax years. As such, over recent years, we have
reduced our valuation allowance by amounts which represent the amount of tax loss carry forwards that
we project will be used to offset taxable income in these jurisdictions 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
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.
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Inventory
Finished goods inventories are stated at the lower of cost and market value. Market value is the current
replacement cost of the inventory. The cost of finished goods is determined on the basis of the first-in-
first-out method.
CHANGE IN / INITIAL ADOPTION OF ACCOUNTING POLICIES
Recently adopted accounting pronouncements
In October 2009, the FASB issued Accounting Standards Update (“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 and requires entities to allocate revenue using the relative-
selling-price method. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010,
which was our fiscal year beginning February 1, 2011. The adoption of this amendment has not had a
material impact on our results of operations to date.
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 was our fiscal year beginning February 1, 2011. The adoption of this amendment has
not had a material impact on our results of operations to date.
In January 2010, the FASB issued 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 was our fiscal year beginning February 1, 2011. The adoption of ASU 2010-
06, including the requirements adopted in the current period, has not had a material impact on our
results of operations or disclosure to date.
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 was our fiscal year beginning February 1, 2011. The
adoption of this amendment has not had a material impact on our results of operations to date.
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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 was our fiscal year beginning February 1, 2011.The adoption of ASU 2010-29 has not had a
material impact on our results of operations or disclosure to date.
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”).
ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely
than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the two step goodwill impairment test described in ASC Topic 350-20
“Intangibles – Goodwill and Other: Goodwill”. ASU 2011-08 is effective for condensed and annual
periods beginning after December 15, 2011, with the option of early adoption. The adoption of ASU
2011-08 has been completed for our fiscal 2012 third quarter results. The adoption of this amendment
has not had a material impact on our results of operations or disclosures.
Recently issued accounting pronouncements not yet adopted
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in US GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends the
wording used to describe many of the requirements in US GAAP for measuring fair value and for
disclosing information about fair value measures. ASU 2011-04 is effective for condensed and annual
periods beginning after December 15, 2011, which is our fiscal year beginning February 1, 2012. The
adoption of this amendment is not expected to have a material impact on our results of operations or
disclosures.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-
05”). ASU 2011-05 eliminates the option to present the components of other comprehensive income as
part of the statement of changes in stockholders’ equity and requires the presentation of the statement
of income and other comprehensive income consecutively. ASU 2011-05 is effective for condensed and
annual periods beginning after December 15, 2011, which is our fiscal year beginning February 1, 2012.
The adoption of this amendment is not expected to have a material impact on our results of operations
or disclosures.
In December 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the
Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 amends certain pending
paragraphs in Update 2011-05 to allow the Board time to redeliberate whether to present on the face of
the financial statements the effects of reclassifications out of accumulated other comprehensive income
on the components of net income and other comprehensive income for all periods presented. All other
requirements in Update 2011-05 are not affected by this update. The adoption of this amendment is not
expected to have a material impact on our results of operations or disclosures.
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, 2012. 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.
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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, 2012, based on criteria
established in “Internal Control – 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, 2012, our internal control over financial
reporting was effective.
TRENDS / BUSINESS OUTLOOK
This section discusses our outlook for fiscal 2013 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; 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 fiscal quarter ended July 31, 2011, we did not see,
and going forward, we do not expect to see, as large an increase in our second fiscal quarter revenues
as we have seen historically in the second fiscal quarter, primarily due to departures of customers for
our legacy ocean services in prior fiscal periods.
CBP enforces e-manifest initiatives 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 Canadian Border
Service Agency with a phased implementation which began in the fourth quarter of calendar 2010.
Similar advanced notification manifest security filing requirements have been introduced in the European
Union (“EU”), and import controls systems began being phased in at different EU member states with
export control systems and enforcement penalties 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 continue to be positively impacted by these initiatives in fiscal 2013.
In fiscal 2012, our services revenues comprised 93% of our total revenues, with the balance being
license revenues. We expect that our focus in fiscal 2013 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. We 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.
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
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fiscal 2013, 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. 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 calibration,” a non-GAAP financial measure, which we
define as the difference between our “baseline revenues” and “baseline operating expenses”. We define
our “baseline revenues,” a non-GAAP financial measure, as our visible, recurring and contracted
revenues. 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. We define our “baseline operating expenses,” a non-GAAP financial measure, as our total
expenses less interest, taxes, depreciation and amortization (for which we include amortization of
intangible assets and deferred compensation), stock-based compensation, acquisition-related costs and
restructuring charges. Baseline operating 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. 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 costs of goods sold or
other 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, 2012, using foreign exchange rates of CDN $1.00 to $1.00 and the euro 1.32 to
$1.00, we estimated that our baseline revenues for the first quarter of 2013 were approximately $28.0
million and our baseline operating expenses were approximately $21.4 million. We consider this to be
our baseline calibration of approximately $6.6 million for the first quarter of 2013, or approximately
24% of our baseline revenues as at February 1, 2012.
In fiscal 2012, we incurred $0.5 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 $0.1 million to $0.2 million in additional charges
pursuant to established restructuring and integration plans in fiscal 2013.
We anticipate that in fiscal 2013, 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 2013.
We estimate that amortization expense for existing intangible assets will be $12.0 million for 2013,
$11.4 million for 2014, $9.3 million for 2015, $6.7 million for 2016, $5.1 million for 2017 and $2.2
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 2013 will be approximately $0.4 million
to $0.5 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 on October 31,
2011 and determined that there was no evidence of impairment as of that date. We are currently
scheduled to perform our next annual impairment test on October 31, 2012. 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
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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 2012, capital expenditures were $4.7 million, or 4% of revenues, as we began implementing a new
ERP system and continued 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 2013.
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
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 program 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 2013, going forward. 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. By way of illustration, 52% of our revenues in 2012 were in US dollars, 29% in
euro, 15% in Canadian dollars, and the balance in mixed currencies, while 31% of our operating
expenses are in US dollars, 33% in Canadian dollars, 31% in euro, and the balance in mixed currencies.
As at March 8, 2012, we had 84,060 outstanding deferred share units and 329,570 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.
As of January 31, 2012, our gross amount of unrecognized tax benefits was $4.9 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 2012, we recorded a deferred income tax expense of $1.9 million resulting primarily from the
utilization of loss carry forwards to offset taxable income, especially in Canada. 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.
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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 2013 will be 32% to 37% 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 2013 will be approximately 10% to 15% of income before income taxes.
We intend to actively explore business combinations during fiscal 2013 to add complementary services,
products and customers to our existing businesses. Going forward, 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 acquisition 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, 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 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, the downgrade in US debt and debt concerns in Europe
may adversely impact the availability of credit already arranged and the availability and cost of credit in
the future, which could result in the delay or cancellation of projects or capital programs on which our
business depends. In addition, 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 Europe
and in other geographies.
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 2012
we acquired Telargo, InterCommIT and GeoMicro. In 2011 we acquired Porthus, one of our largest
acquisitions in the past several years, as well as Imanet and Routing International. In 2010 we acquired
two businesses, Oceanwide and Scancode, and from 2007 to 2009 we acquired ten businesses in total.
26
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 Telargo, we are in the process of integrating a
business with inventory, which we have not had as part of our business previously. In addition, we may
not identify all risks or fully assess risks identified in connection with an acquisition. 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. The individual or combined effect of these
risks could have a material adverse effect on our business.
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, InterCommIT provides messaging services to insurance and
financial institutions, Telargo manages inventory, and Porthus offers media and technology services. 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.
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.
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
27
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, changes in enforcement practices
or changing the government agency responsible for the requirement could impact our business, perhaps
adversely.
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.
During 2012, 52% of our revenues were denominated in US dollars, and historically 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 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.
We are dependent on certain key vendors for our inventory of mobile asset units, which could
impede our development and expansion.
We currently have relationships with a small number of mobile asset unit vendors over which we have
no operational or financial control and no influence in how these vendors conduct business. Suppliers of
mobile asset units could among other things, extend delivery times, raise prices and limit supply due to
their own shortages and business requirements. Interruption in the supply of equipment from these
vendors could delay our ability to maintain, grow and expand our telematic solutions business.
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 against a portion 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
28
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.
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. 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.
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 may 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;
•
• Developments with respect to our intellectual property rights or those of our competitors;
•
Introduction of new products or significant customer wins or losses by us or by 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.
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, 2012, we had cash and cash equivalents of $65.5 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 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
29
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.
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.
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. 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 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
30
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,
among others, 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.
System or network failures or information security 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. In addition, any disruption to the availability of customer information, or any compromise
to the integrity or confidentiality of customer information in our systems or networks, or the systems or
networks of third parties on which we rely, could result in our customers being unable to effectively use
our products or services or forced to take mitigating actions to protect their information. 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;
•
Information or infrastructure security breaches;
• Earthquake, fire, flood or other natural disaster; or
• An act of war or terrorism.
31
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 or the integrity or availability of our customers’ information.
Any disruption to our services or compromise of customer information 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.
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, which 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, 2011 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.
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 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.
32
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 have a substantial accumulated deficit and a history of losses and may incur losses in the
future.
As at January 31, 2012, our accumulated deficit was $324.7 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 and
2010 benefited from non-cash, net deferred income tax recoveries of $4.4 million and $10.9 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.
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:
Longer operating history;
Lower cost structure and more profitable operations;
•
• Greater financial, technical, marketing, sales, distribution and other resources;
•
• Superior product functionality and industry-specific expertise;
• Greater name recognition;
• Broader range of products to offer;
• Better performance;
33
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 depend 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.
infringe third-party proprietary rights could trigger
Claims that we
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 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
34
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
results.
disproportionately
operating
affect
our
35
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, 2012, 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, 2012, our internal control over
financial reporting was effective.
Management’s internal control over financial reporting as of January 31, 2012, has been audited by
Deloitte & Touche LLP, Independent Registered Chartered Accountants, who also audited our
Consolidated Financial Statements for the year ended January 31, 2012, 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, 2012, 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
Chairman of the Board
Chief Executive Officer
Stephanie Ratza
Chief Financial Officer
Waterloo, Ontario
36
Waterloo, Ontario
37
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
We have audited the internal control over financial reporting of The Descartes Systems Group Inc. and its subsidiaries (the “Company”) as
of January 31, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. 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
Management’s Report on Financial Statements and Internal Control over Financial Reporting. Our responsibility is to express an opinion
on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our
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
executive and principal financial officers, or persons performing similar functions, and effected by the company's 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 generally accepted accounting principles. A company's internal control over
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
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness 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
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2012,
based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 31, 2012 of the
Company and our report dated March 9, 2012 expressed an unqualified opinion on those financial statements.
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
March 9, 2012
38
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
We have audited the accompanying consolidated financial statements of The Descartes Systems Group Inc. and subsidiaries (the
“Company”), which comprise the consolidated balance sheets as at January 31, 2012 and January 31, 2011, and the consolidated statements
of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended January
31, 2012, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or
error.
Auditor's Responsibility
Our responsibility is 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
(United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
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 disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances. An audit also 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 financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of The Descartes Systems
Group Inc. and subsidiaries as at January 31, 2012 and January 31, 2011, and the results of their operations and cash flows for each of the
years in the three-year period ended January 31, 2012 in accordance with accounting principles generally accepted in the United States of
America.
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of January 31, 2012, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2012
expressed an unqualified opinion on the Company’s internal control over financial reporting.
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
March 9, 2012
39
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS; US GAAP)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 4)
Accounts receivable (net)
Trade (Note 5)
Other
Prepaid expenses and other
Inventory (Note 6)
Deferred income taxes (Note 17)
CAPITAL ASSETS (Note 8)
GOODWILL (Note 9)
INTANGIBLE ASSETS (Note 10)
DEFERRED INCOME TAXES (Note 17)
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)
SHAREHOLDERS’ EQUITY
Common shares – unlimited shares authorized; Shares issued and outstanding totaled
62,432,727 at January 31, 2012 (January 31, 2011 – 61,741,702) (Note 13)
Additional paid-in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board:
January 31,
January 31,
2012
2011
65,547
69,644
17,154
14,417
5,324
2,814
413
3,967
1,968
-
12,420
11,654
103,672
101,650
9,287
68,005
46,681
31,279
7,309
56,742
40,703
34,865
258,924
241,269
5,250
12,247
1,318
6,636
70
4,992
11,342
471
6,310
67
25,521
23,182
1,718
3,277
9,754
98
1,665
2,468
8,267
172
40,368
35,754
90,924
452,424
(63)
88,148
452,300
1,822
(324,729)
(336,755)
218,556
205,515
258,924
241,269
E. Demirian
Director
Stephen Watt
Director
40
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
INCOME FROM OPERATIONS
INTEREST EXPENSE
INVESTMENT INCOME
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE (RECOVERY) (Note 17)
Current
Deferred
NET INCOME
EARNINGS PER SHARE (Note 14)
Basic
Diluted
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)
Basic
Diluted
January 31,
January 31,
January 31,
2012
2011
2010
113,990
38,313
75,677
13,009
19,044
14,272
2,131
11,996
60,452
15,225
99,175
33,875
65,300
11,492
16,971
13,633
3,995
11,471
57,562
7,738
(9)
174
(14)
209
73,768
22,983
50,785
10,695
14,435
10,728
1,615
6,929
44,402
6,383
-
342
15,390
7,933
6,725
1,438
1,926
3,364
277
(3,883)
(3,606)
12,026
11,539
855
(8,480)
(7,625)
14,350
0.19
0.19
0.19
0.18
0.26
0.25
62,218
63,400
61,523
62,888
55,389
56,437
The accompanying notes are an integral part of these consolidated financial statements.
41
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(US DOLLARS IN THOUSANDS; US GAAP)
January 31, January 31, January 31,
2010
2012
2011
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 (Note 15)
Stock options exercised
Stock option income tax benefits
Purchase of non-controlling interest (Note 3)
Balance, end of year
Accumulated other comprehensive (loss) income
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 (loss) income:
88,148
86,609
44,986
2,776
-
90,924
1,539
-
88,148
3,874
37,749
86,609
452,300
11
1,213
(1,001)
(99)
-
451,591
8
1,076
(404)
-
29
449,462
38
3,371
(1,335)
55
-
452,424
452,300
451,591
1,822
(1,885)
(63)
(2,034)
3,856
1,822
363
(2,397)
(2,034)
(336,755)
12,026
(348,294)
11,539
(362,644)
14,350
(324,729)
(336,755)
(348,294)
218,556
205,515
187,872
12,026
11,539
14,350
Foreign currency translation adjustment, net of income tax recovery of $350
(1,885)
3,856
(2,397)
for the year ended January 31, 2012 (January 31, 2011 - $534)
Total other comprehensive (loss) income
Comprehensive income
(1,885)
10,141
3,856
15,395
(2,397)
11,953
The accompanying notes are an integral part of these consolidated financial statements.
42
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 7)
Loss from investment in affiliate (Note 7)
Deferred income taxes
Deferred tax charge
Changes in operating assets and liabilities:
Accounts receivable
Trade
Other
Prepaid expenses and other
Inventory
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 7)
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 (used in) 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, January 31,
January 31,
2012
2011
2010
12,026
11,539
14,350
2,462
11,996
-
11
2,420
11,471
417
8
1,870
6,929
-
38
1,213
1,076
3,371
-
-
(20)
19
-
-
1,926
196
(3,883)
(8,480)
196
197
(460)
(822)
(619)
75
(1,065)
(1,682)
99
(1,430)
2,748
106
51
(275)
(3,088)
(1,733)
(1,163)
23,926
19,889
788
219
364
478
(3,253)
1,665
(2,001)
16,535
-
-
5,071
40,501
-
(35,362)
(4,734)
(1,656)
(1,626)
-
487
-
(21,281)
(44,989)
(14,964)
-
-
(58)
(26,015)
(41,087)
(11,509)
1,775
(4,342)
(2,567)
559
1,133
(358)
775
513
(4,097)
(19,910)
69,644
65,547
89,554
69,644
40,293
-
40,293
(3,187)
42,132
47,422
89,554
9
727
21
1,319
-
709
The accompanying notes are an integral part of these consolidated financial statements.
43
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, 2012, is referred to as the “current fiscal year,” “fiscal 2012,”
“2012” or using similar words. Our fiscal year, which ended January 31, 2011, is referred to as the
“previous fiscal year,” “fiscal 2011,” “2011” or using similar words. Other fiscal years are referenced by
the applicable year during which the fiscal year ends. For example, “2013” refers to the annual period
ending January 31, 2013 and the “fourth quarter of 2013” refers to the quarter ending January 31,
2013.
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% 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.
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.
44
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, accounts receivable, accounts payable
and accrued liabilities. The estimated fair values of cash and cash equivalents, 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.
Credit risk
We are exposed to credit risk through our invested cash, cash equivalents and accounts receivable. We hold
our cash and cash equivalents with reputable financial institutions. 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.
45
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, 2012, foreign currency transaction losses of nil were included in
net income (January 31, 2011 - $0.3 million; January 31, 2010 - $0.1 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 and cash equivalents
Cash and cash equivalents include short-term deposits with original maturities of three months or less.
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.
Inventory
Inventory consists of finished goods inventory stated at the lower of cost and net realizable value. Cost
is determined on a first-in-first-out basis.
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. 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. 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, 2011
46
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 seven years
Straight-line over one to six 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 30% declining balance
20% declining balance
Furniture and fixtures
Straight-line over lesser of useful life or term of lease
Leasehold improvements
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.
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 enter into arrangements from time to time that may consist of multiple deliverables which may
include any combination of services, hardware and software licenses. Our typical multiple-element
arrangements involve: (i) software with maintenance support services, (ii) professional services with
one time set-up fees and (iii) hardware with services. For any arrangements involving multiple
deliverables involving non software elements (hardware, one time set-up fees, professional services,
subscription, etc.) the consideration from the arrangement is allocated to each respective element based
on its relative selling price, using vendor-specific objective evidence (“VSOE”) of selling price. In
47
instances when we are unable to establish the selling price using VSOE, we attempt to establish selling
price of each element based on acceptable third party evidence of selling price (“TPE”); however we are
generally unable to reliably determine the selling price of similar competitor products or services on a
stand-alone basis. In these instances, we use our best estimate of selling price (“BESP”) in our
allocation of the arrangement consideration. The objective of BESP is to determine the price at which
we would transact a sale if the product or service was sold on a stand-alone basis. We determine BESP
for each specific element in a multiple element arrangement considering multiple factors including, but
not limited to, market conditions, competitive landscape, internal costs, gross margin objectives and
pricing practices.
For arrangements involving multiple deliverables of software with maintenance support services, the
revenue is recognized based on ASC Subtopic 985-605. If we are unable to determine VSOE of fair
value for all of the deliverables of the arrangement, but are able to obtain VSOE of fair value for all the
undelivered elements, revenue is allocated using the residual method. Under the residual method, the
amount of revenue allocated to the delivered elements equals the total arrangement consideration less
the aggregate fair value of any undelivered elements. If VSOE of fair value of any undelivered software
items does not exist, revenue from the entire arrangement is initially deferred and recognized at the
earlier of: (i) delivery of those elements for which VSOE of fair value did not exist; or (ii) when VSOE of
fair value can be established.
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
Topic 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, 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.
48
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 October 2009, the FASB issued Accounting Standards Update (“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 and requires entities to allocate revenue using the relative-
selling-price method. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010,
which was our fiscal year beginning February 1, 2011. The adoption of this amendment has not had a
material impact on our results of operations to date.
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 was our fiscal year beginning February 1, 2011. The adoption of this amendment has
not had a material impact on our results of operations to date.
In January 2010, the FASB issued 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 was our fiscal year beginning February 1, 2011. The adoption of ASU 2010-
06, including the requirements adopted in the current period, has not had a material impact on our
results of operations or disclosure to date.
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
49
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 was our fiscal year beginning February 1, 2011. The
adoption of this amendment has not had a material impact on our results of operations to date.
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 was our fiscal year beginning February 1, 2011.The adoption of ASU 2010-29 has not had a
material impact on our results of operations or disclosure to date.
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”).
ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely
than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the two step goodwill impairment test described in ASC Topic 350-20
“Intangibles – Goodwill and Other: Goodwill”. ASU 2011-08 is effective for condensed and annual
periods beginning after December 15, 2011, with the option of early adoption. The adoption of ASU
2011-08 has been completed for our fiscal 2012 third quarter results. The adoption of this amendment
has not had a material impact on our results of operations or disclosures.
Recently issued accounting pronouncements not yet adopted
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in US GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends the
wording used to describe many of the requirements in US GAAP for measuring fair value and for
disclosing information about fair value measures. ASU 2011-04 is effective for condensed and annual
periods beginning after December 15, 2011, which is our fiscal year beginning February 1, 2012. The
adoption of this amendment is not expected to have a material impact on our results of operations or
disclosures.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-
05”). ASU 2011-05 eliminates the option to present the components of other comprehensive income as
part of the statement of changes in stockholders’ equity and requires the presentation of the statement
of income and other comprehensive income consecutively. ASU 2011-05 is effective for condensed and
annual periods beginning after December 15, 2011, which is our fiscal year beginning February 1, 2012.
The adoption of this amendment is not expected to have a material impact on our results of operations
or disclosures.
In December 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the
Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 amends certain pending
paragraphs in Update 2011-05 to allow the Board time to redeliberate whether to present on the face of
the financial statements the effects of reclassifications out of accumulated other comprehensive income
on the components of net income and other comprehensive income for all periods presented. All other
requirements in Update 2011-05 are not affected by this update. The adoption of this amendment is not
expected to have a material impact on our results of operations or disclosures.
50
Note 3 - Acquisitions
On June 10, 2011, we acquired privately-held Telargo Inc. (“Telargo”), a provider of telematics
solutions. Telargo is a software-as-a-service (“SaaS”) provider of mobile resource management
applications (“MRM”) telematics solutions that enable its clients to monitor and manage mobile assets
and help fleet owners comply with various transportation regulations. The total purchase price for the
acquisition was $9.3 million, including $5.0 million in cash, net of cash acquired, and $4.3 million to
repay financial liabilities. We also incurred acquisition-related costs, primarily for advisory services, of
$0.5 million included in other charges in our consolidated statements of operations in 2012. The gross
contractual amount of trade accounts receivable acquired was $2.3 million with a fair value of $1.1
million at the date of acquisition. Our acquisition date estimate of contractual cash flows not expected to
be collected is $1.2 million. We have recognized $2.4 million of revenues and a $1.3 million net loss
from Telargo since the date of acquisition in our consolidated statements of operations in 2012.
During 2012, the purchase price allocation for Telargo was adjusted due to changes made to opening
working capital estimates. The purchase price allocation adjustments were as follows: (i) current assets
decreased by $0.2 million from $1.8 million to $1.6 million; and (ii) current liabilities increased by $0.2
million from $2.8 million to $3.0 million.
On November 2, 2011, we acquired privately-held InterCommIT BV (“InterCommIT”), a provider of
business-to-business integration-as-a-service. InterCommIT is a SaaS provider of electronic data
management services that enable its clients to seamlessly exchange data electronically. The total
purchase price for the acquisition was $13.6 million in cash, net of cash acquired. We also incurred
acquisition-related costs, primarily for advisory services, of $0.6 million included in other charges in our
consolidated statements of operations in 2012. The gross contractual amount of trade accounts
receivable acquired was $1.2 million with a fair value of $1.2 million at the date of acquisition. Our
acquisition date estimate of contractual cash flows not expected to be collected is nil. We have
recognized $1.5 million of revenues and a $0.1 million net loss from InterCommIT since the date of
acquisition in our consolidated statements of operations for 2012.
On January 20, 2012, we acquired privately-held GeoMicro, Inc. (“GeoMicro”), a leading California-based
provider of advanced geographic information systems and commercial turn-by-turn navigation.
GeoMicro’s platform enables advanced routing, navigation, field service, and spatial data business
intelligence solutions. The total purchase price for the acquisition was $2.7 million in cash, net of cash
acquired. We also incurred acquisition-related costs, primarily for advisory services, of $0.1 million
included in other charges in our consolidated statements of operations in 2012. The gross contractual
amount of trade accounts receivable acquired was $0.2 million with a fair value of $0.2 million at the
date of acquisition. Our acquisition date estimate of contractual cash flows not expected to be collected
is nil. We have recognized $0.4 million of revenues and a $0.4 million net income from GeoMicro since
the date of acquisition in our consolidated statements of operations for 2012.
51
The preliminary purchase price allocations for businesses we acquired during fiscal 2012, which have not
been finalized, are as follows:
GeoMicro InterCommIT Telargo
Total
Purchase price consideration:
Cash, excluding cash acquired related to
Telargo ($201), InterCommIT ($829) and
GeoMicro ($152)
Net working capital adjustments
Allocated to:
Current assets
Deferred tax asset
Capital assets
Current liabilities
Deferred revenue
Deferred income tax liability
Other long term liabilities
Net tangible (liabilities) assumed
Finite life intangible assets acquired:
Customer agreements and relationships
Existing technology
Non-compete covenants
Trade names
Goodwill
2,674
(4)
2,670
194
715
29
(672)
(559)
(987)
-
(1,280)
364
1,746
90
51
1,699
2,670
13,605
(38)
13,567
5,002
(829)
4,173
21,281
(871)
20,410
1,309
4
87
1,606
2,344
381
(510) (3,045)
(410) (893)
(2,693) (2,441)
(229) (4,277)
(6,325)
(2,442)
2,367
427
7,806 5,749
-
-
4,322
4,173
193
273
5,370
13,567
3,109
3,063
497
(4,227)
(1,862)
(6,121)
(4,506)
(10,047)
3,158
15,301
283
324
11,391
20,410
The Telargo, InterCommIT and GeoMicro 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 Telargo, InterCommIT or GeoMicro
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
GeoMicro
4 years
5 years
4 years
2 years
InterCommIT
6.8 years
7 years
5.3 years
2 years
Telargo
6.1 years
6 years
n/a
n/a
The goodwill on the Telargo, InterCommIT and GeoMicro 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 Telargo, InterCommIT and GeoMicro acquisitions is not deductible for tax
purposes.
The pro forma results of operations for the Telargo, InterCommIT and GeoMicro transactions have not
been presented as they are not material to our consolidated financial statements.
52
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 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
53
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.
The final purchase price allocations for businesses we acquired during the year ended January 31, 2011,
are set out in the following table:
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
39,137
-
39,137
797
-
-
14,108
755
544
161 1,813
(471) (7,582)
(245) (1,838)
(1,115) (6,496)
(70) (241)
1,063
(943)
2,198 10,838
1,984 12,053
196 281
109 822
15,878
(1,798)
39,137
2,213
-
5,757
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 results of operations for businesses we acquired in 2011 are included in our consolidated statement
of operations from the date acquired, as indicated below.
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.
No in-process research and development was acquired in the Porthus, Imanet or Routing International
transactions.
54
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
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,
2010
2011
102,519 101,979
12,230 15,729
0.20
0.19
0.28
0.28
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 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.
55
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.
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.
No in-process research and development was acquired in the Oceanwide or Scancode transactions.
56
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
Oceanwide Scancode
8 years
n/a
5 years
2 years
5 years
2 years
3 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.
Note 4 – Cash and Cash Equivalents
Cash and cash equivalents
Cash on deposit with banks
Total cash and cash equivalents
January 31, January 31,
2011
2012
65,547
65,547
69,644
69,644
We have operating lines of credit in Canada aggregating $3.0 million (CDN 3.0 million) as at January 31,
2012, of which nil was utilized (nil at January 31, 2011). Borrowings under these facilities bear interest
at prime based on the borrowed currency (3% on Canadian dollar borrowings and 3.25% on US dollar
borrowings at January 31, 2012), are due on demand, and are secured by our investment portfolio and
a general assignment of inventory and accounts receivable.
As at January 31, 2012 we have outstanding letters of credit of approximately $0.1 million (EUR 0.1
million) related to three of our leased premises ($0.1 million at January 31, 2011).
Note 5 - Trade Receivables
Trade receivables
Less: Allowance for doubtful accounts
January 31, January 31,
2011
2012
17,886
(732)
17,154
15,634
(1,217)
14,417
Bad debt expense was $0.3 million for the year ended January 31, 2012 (January 31, 2011 - $0.5
million; January 31, 2010 – $0.4 million).
57
Note 6 –Inventory
Finished goods
January 31,
2012
413
413
January 31,
2011
-
-
Finished goods inventory consists of hardware and related parts for mobile asset units sold. No provision
for excess or obsolete inventories has been recorded for the year ended January 31, 2012.
Note 7 - 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 8 - Capital Assets
Cost
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Assets under construction
Accumulated amortization
Computer equipment and software
Furniture and fixtures
Leasehold improvements
January 31, January 31,
2011
2012
25,746
1,947
3,086
2,637
33,416
19,851
1,700
2,578
24,129
9,287
24,257
1,895
2,914
-
29,066
17,822
1,630
2,305
21,757
7,309
Computer equipment and software cost includes $0.3 million of assets recorded under capital leases as
of January 31, 2012 ($0.3 million as of January 31, 2011). 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, 2012 (January 31, 2010 - $0.1 million).
Pursuant to ASC Topic 350-40 “Intangibles – Goodwill and Other – Internal Use Software” we have
capitalized $0.6 million of costs relating to the implementation of our SAP Enterprise Resource Planning
System, included in the assets under construction category.
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.
58
Note 9 - Goodwill
Balance, beginning of year
Business acquisition – Telargo
Business acquisition – InterCommIT
Business acquisition – GeoMicro
Business acquisition – Porthus
Business acquisition – Imanet
Business acquisition – Routing International
Adjustments on account of foreign exchange and prior acquisitions
Balance, end of year
January 31, January 31,
2011
34,456
-
-
-
15,878
2,213
2,552
1,643
56,742
2012
56,742
4,322
5,370
1,699
-
-
-
(128)
68,005
The business acquisitions of Telargo, InterCommIT, GeoMicro, Porthus, Imanet and Routing
International are described in Note 3 to these consolidated financial statements.
In 2012, the adjustment on account of foreign exchange and prior acquisitions includes a $0.8 million
earn-out adjustment in respect of the August 17, 2007 acquisition of Global Freight Exchange Limited.
Specific performance targets were met during the period ending August 17, 2011, resulting in an
additional amount payable to the former owners. As this acquisition closed prior to the effective date of
ASC Topic 805 (previously Statement 141(R)), this adjustment has been accrued to goodwill. No adjustments
relating to the earn-out were recorded in 2011.
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,
2012
January 31,
2011
40,851
1,607
38,012
4,115
84,585
20,532
1,052
13,380
2,940
37,904
46,681
38,264
1,349
23,583
3,849
67,045
15,636
951
7,415
2,340
26,342
40,703
Intangible assets related to our acquisitions are recorded at their fair value at the acquisition date.
During 2012, additions to intangible assets primarily consisted of the acquisitions of Telargo,
InterCommIT and GeoMicro, 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 $46.7 million over the following periods: $12.0
million for 2013, $11.4 million for 2014, $9.3 million for 2015, $6.7 million for 2016, $5.1 million for
2017 and $2.2 million thereafter. Expected future amortization expense is subject to fluctuations in
foreign exchange rates.
59
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 shareholders of prior acquisitions
Accrued purchase price consideration and other acquisition-related costs
Other accrued liabilities
January 31,
2012
6,284
390
792
4,781
12,247
January 31,
2011
5,950
391
264
4,737
11,342
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,
2013
2014
2015
2016
2017
Thereafter
Operating
Leases
3,351
2,412
2,024
1,548
801
1,045
11,181
Capital
Leases
62
62
31
-
-
-
155
Total
3,413
2,474
2,055
1,548
801
1,045
11,336
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 outlined in the table above. Rental
expense from operating leases was $3.6 million for the year ended January 31, 2012 (January 31, 2011
- $3.1 million; January 31, 2010 - $1.5 million).
Other Obligations
Income Taxes
We believe that it is reasonably possible that the gross unrecognized tax benefit as of January 31, 2012
could increase tax expense in the next 12 months by $4.9 million primarily relating to the underlying
uncertain tax positions, relating primarily to the tax years becoming statute barred for purpose of future
tax examinations by local taxing jurisdictions and the expiration of competent authority relief.
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 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
60
been settled in cash. As such, we had an unrecognized aggregate liability for the unvested RSUs of $1.9
million for which no liability was recorded on our consolidated balance sheet at January 31, 2012, 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.
Product Warranties
In the normal course of operations, we provide our customers with product warranties relating to the
performance of our hardware, 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 consolidated 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 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.
61
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
Balance, end of year
January 31, January 31, January 31,
2010
53,013
2012
61,742
2011
61,411
691
-
62,433
331
-
61,742
1,227
7,171
61,411
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, 2012 there were no purchases made
pursuant to this normal course issuer bid. We did not renew the normal course issuer bid in fiscal 2012.
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.
62
Note 14 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):
Year Ended
January 31,
2012
January 31,
2011
January 31,
2010
Net income for purposes of calculating basic and diluted
earnings per share
12,026
11,539
14,350
(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
62,218
1,182
61,523
1,365
55,389
1,048
63,400
62,888
56,437
0.19
0.19
0.19
0.18
0.26
0.25
For the years ended January 31, 2012, 2011 and 2010, respectively, 15,000, 219,607 and 348,219
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 2012, 2011 and 2010, respectively, the
application of the treasury stock method excluded 418,480, 222,500 and 1,322,109 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, 2012, we had 2,973,251 stock options granted and outstanding under our
shareholder-approved stock option plan and 212,218 remained available for grant. In addition, we had
14,000 stock options outstanding not approved by shareholders.
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
Effect on net income
January 31,
2012
110
251
308
544
1,213
January 31,
2011
73
229
130
644
1,076
January 31,
2010
172
815
374
2,010
3,371
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
63
a valuation allowance against any such deferred tax asset except for $0.5 million recognized in the
United States ($0.3 million at January 31, 2011). We realized a nominal tax benefit in connection with
stock options exercised during 2012.
As of January 31, 2012, $1.0 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 2012 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, 2012
January 31, 2011
January 31, 2010
Weighted
-Average
Range
Weighted-
Average
Expected dividend yield (%)
Expected volatility (%)
Risk-free rate (%)
Expected option life (years)
-
33.6
2.4
5
-
N/A
N/A
N/A
-
37.3 34.6 to 37.9
1.8 to 2.6
5
2.5
5
Weighted-
Average
-
Range
-
Range
-
43.3 42.7 to 43.5
1.9 to 2.3
5
2.0
5
A summary of option activity under all of our plans is presented as follows:
Number of
Stock Options
Outstanding
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
Balance at January 31, 2011
Granted
Exercised
Forfeited
Expired
Balance at January 31, 2012
3,760,153
284,534
(691,025)
(182,854)
(183,557)
2,987,251
$4.06
$6.38
$2.49
$5.70
$12.42
$3.97
Vested or expected to vest at January 31,
2012
2,886,231
$3.96
Exercisable at January 31, 2012
2,304,713
$3.70
2.9
11.7
2.9
2.4
11.6
9.6
The weighted average grant-date fair value of options granted during 2012, 2011 and 2010 was $2.18,
$2.27, and $1.26 per option, respectively. The total intrinsic value of options exercised during 2012,
2011 and 2010 was approximately $2.9 million, $1.0 million and $3.5 million, respectively.
64
Options outstanding and options exercisable as at January 31, 2012 by range of exercise price are as
follows:
Range of Exercise Prices
$2.41 – $2.77
$3.06– $3.78
$4.08 – $4.94
$6.19 – $7.03
Options Outstanding
Options Exercisable
Weighted
Average
Exercise
Price
Number of
Stock
Options
344,340
$2.53
1,286,531
$3.31
922,900
$4.40
$6.24
433,480
$3.97 2,987,251
Weighted
Average
Remaining
Contractual
Life (years)
0.3
3.4
1.9
5.8
2.9
Weighted
Average
Exercise
Price
Number of
Stock
Options
344,340
$2.53
1,005,829
$3.30
883,150
$4.40
$6.25
71,394
$3.70 2,304,713
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, 2012 is presented as
follows:
Balance at January 31, 2011
Granted
Vested
Forfeited
Balance at January 31, 2012
Number of
Stock Options
Outstanding
1,129,366
284,534
(570,008)
(161,354)
682,538
Weighted-
Average Grant-
Date Fair Value
per Share
$1.60
$2.18
$1.87
$2.09
$1.89
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 $30,000) 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, 2011
Granted
Settled in cash
Balance at January 31, 2012
Number of
DSUs
Outstanding
106,383
16,742
(39,065)
84,060
As at January 31, 2012, the total number of DSUs held by participating directors was 84,060,
representing an aggregate accrued liability of $0.7 million ($0.7 million at January 31, 2011). 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, $0.1 million and $0.3 million for 2012, 2011 and 2010, respectively.
65
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, 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.
A summary of activity under our RSU plan is as follows:
Balance at January 31, 2011
Granted
Vested and settled in cash
Forfeited
Balance at January 31, 2012
Vested at January 31, 2012
Unvested at January 31, 2012
Number of
RSUs
Outstanding
Weighted-
Average
Remaining
Contractual Life
(years)
413,235
284,801
(293,529)
(18,867)
385,640
20,144
365,496
1.8
-
1.8
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 $1.2 million at January 31, 2012 ($1.1
million at January 31, 2011). As at January 31, 2012, the unrecognized aggregate liability for the
unvested RSUs was $1.9 million ($1.7 million at January 31, 2011). 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,
$1.5 million and $0.9 million for 2012, 2011 and 2010, 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 $0.6 million in
2012 (January 31, 2011 - $0.5 million; January 31, 2010 - $0.3 million), of which $0.3 million was
payable at January 31, 2012 ($0.2 million at January 31, 2011).
66
Note 17 - Income Taxes
Income before income taxes is earned in the following tax jurisdictions:
Year Ended
Canada
United States
Other countries
January
31,
2012
17,225
87
(1,922)
15,390
January 31, January 31,
2011
2010
5,045
5,380
(2,492)
7,933
489
6,962
(726)
6,725
Income tax expense (recovery) is incurred in the following jurisdictions:
Year Ended
Current income tax expense (recovery)
Canada
United States
Other countries
Deferred income tax expense (recovery)
Canada
United States
Other countries
January 31, January 31, January 31,
2010
2012
2011
605
295
538
1,438
4,230
(2,515)
211
1,926
3,364
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)
In 2012, our income tax expense was primarily impacted by a change in valuation allowance and other
tax estimates in the United States which reduced our deferred income tax expense by $1.8 million, and
a change in the valuation allowance in the Netherlands which increased deferred income tax expense by
$0.7 million. 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) 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.
67
The components of the deferred income tax assets and liabilities are as follows:
Assets
Accruals not currently deductible
Accumulated net operating 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
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, January 31,
2011
2012
3,538
48,027
1,312
13,099
1,053
4,659
261
599
72,548
(3,410)
(1,230)
(4,640)
67,908
(33,963)
33,945
12,420
31,279
(9,754)
33,945
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
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 $33.9 million ($32.6 million at January 31, 2011) of our net deferred
tax assets of $67.9 million ($70.4 million at January 31, 2011), resulting in a total net deferred tax
asset of $33.9 million at January 31, 2012 ($37.9 million at January 31, 2011).
As at January 31, 2012, we had not accrued for Canadian income taxes and foreign withholding taxes
applicable to approximately $32.5 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.
68
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
January 31, January 31, January 31,
2010
32.9%
2012
28.1%
2011
30.7%
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
Effect of rate reductions on current year timing differences
Prior year adjustments and change in estimates
Application of research and development tax credits
Increases (decreases) in tax reserves
Valuation allowance
Deferral of tax charges
Other
Income tax expense (recovery)
4,325
2,436
2,214
586
(275)
(228)
(1,242)
-
734
(864)
197
131
3,364
(2,198)
695
659
(59)
-
(149)
(5,241)
197
54
(3,606)
3,388
724
-
(11)
(30)
-
(14,162)
197
55
(7,625)
We have income tax loss carryforwards which expire as follows:
Expiry year
2013
2014
2015
2016
2017
Thereafter
Canada
-
-
-
-
-
28,783
28,783
United
States
-
-
-
-
-
30,708
30,708
EMEA
4,261
3,469
1,106
776
-
81,203
90,815
Asia Pacific
773
435
-
22
1,116
18,454
20,800
Total
5,034
3,904
1,106
798
1,116
159,148
171,106
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
2012
January 31, January 31, January 31,
2010
4,778
47
397
(54)
5,168
2011
5,168
(1,368)
874
(428)
4,246
4,246
42
1,010
(441)
4,857
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 $4.9 million of unrecognized tax benefits at January 31, 2012, approximately
$3.3 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, 2012 and January
31, 2011, the unrecognized tax benefits have resulted in no material liability for estimated interest and
penalties.
69
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
2008 and prior
2003 and prior
2008 and prior
2005 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 due to the integration of Porthus into our operations.
Other charges included in our consolidated statements of operations are as follows:
Fiscal 2012 restructuring plan
Restructuring related to fiscal 2012 acquisitions
Fiscal 2011 restructuring plan
Restructuring related to fiscal 2011 acquisitions
Fiscal 2010 restructuring plan
Acquisition-related costs
Write-off of redundant assets
January 31, January 31, January 31,
2010
-
-
-
-
754
861
-
1,615
2012
353
60
97
22
-
1,599
-
2,131
2011
-
-
866
1,011
156
1,545
417
3,995
Fiscal 2012 Restructuring Plan
In the fourth quarter of 2012, management approved and began to implement the fiscal 2012
restructuring plan to reduce operating expenses and increase operating margins. To date $0.4 million
has been recorded within other charges in conjunction with this restructuring plan. These charges are
comprised of workforce reduction charges and office closure costs. This plan is complete with expected
remaining office closure costs of $0.1 million to $0.2 million to be expensed in 2013.
The following table shows the changes in the restructuring provision for the fiscal 2012 restructuring
plan.
Balance at January 31, 2011
Accruals and adjustments
Cash draw downs
Balance at January 31, 2012
Workforce
Reduction
-
314
(305)
9
Office Closure
Costs
-
39
(20)
19
Total
-
353
(325)
28
70
Restructuring Related to Fiscal 2012 Acquisitions
As described in Note 3 to these consolidated financial statements, we completed three acquisitions
during the year ended January 31, 2012. As these acquisitions were completed, management approved
and began to implement restructuring plans to integrate and streamline operations. To date $0.1 million
has been recorded within other charges in conjunction with this restructuring plan. These charges are
comprised of workforce reduction charges. This plan is complete with only the remaining provision below
as payable.
The following table shows the changes in the restructuring provision for restructuring related to fiscal
2012 acquisitions.
Balance at January 31, 2011
Accruals and adjustments
Cash draw downs
Balance at January 31, 2012
Workforce
Reduction
-
60
(51)
9
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. To date $1.0 million
has been recorded within other charges, with $0.1 million in 2012, in conjunction with this restructuring
plan. These charges are comprised of workforce reduction charges, office closure costs and network
consolidation costs. This plan is complete with no further expected costs.
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
Accruals and adjustments
Cash draw downs
Balance at January 31, 2012
Workforce
Reduction
-
690
(380)
310
(2)
(308)
-
Office Closure
Costs
-
142
(123)
19
8
(27)
-
Network
Consolidation
Costs
-
34
(34)
-
91
(91)
-
Total
-
866
(537)
329
97
(426)
-
71
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. To date $1.0 million
has been recorded within other charges in conjunction with this restructuring plan. These charges are
comprised of workforce reduction charges and network consolidation costs. This plan is complete with no
further expected costs.
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
Accruals and adjustments
Cash draw downs
Balance at January 31, 2012
Workforce
Reduction
-
823
(765)
58
(13)
(45)
-
Network
Consolidation
Costs
-
188
(184)
4
35
(39)
-
Total
-
1,011
(949)
62
22
(84)
-
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. To date $0.9 million
has been recorded within other charges in conjunction with this restructuring plan. 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, 2010
Accruals and adjustments
Cash draw downs
Noncash draw downs and foreign
exchange
Balance at January 31, 2011
Accruals and adjustments
Cash draw downs
Noncash draw downs and foreign
exchange
Balance at January 31, 2012
Office Closure
Costs
Network
Consolidation
Costs
Total
27
-
(27)
-
-
-
-
-
-
-
56
(56)
-
-
-
-
-
-
122
156
(251)
2
29
-
-
-
29
Workforce
Reduction
95
100
(168)
2
29
-
-
-
29
72
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,
2010
2012
2011
48,602
15,051
1,196
19,319
24,515
5,307
113,990
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
January 31, January 31, January 31,
2010
2012
2011
105,645
8,345
113,990
93,684
5,491
99,175
69,590
4,178
73,768
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 derive 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,
2012
January 31,
2011
43,312
24,926
36,581
19,148
6
123,973
31,666
25,908
43,055
4,120
5
104,754
73
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
Fax: (519) 747-0082
info@descartes.com
www.descartes.com