THE DESCARTES SYSTEMS GROUP INC.
ANNUAL REPORT
US GAAP FINANCIAL RESULTS FOR 2013 FISCAL YEAR
TABLE OF CONTENTS
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...................... 3
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 ..................................................................................................... 21
Trends / Business Outlook ................................................................................................... 22
Certain Factors That May Affect Future Results ....................................................................... 25
Management’s Report on Financial Statements and Internal Control Over Financial Reporting ............. 35
Consolidated Financial Statements
Consolidated Balance Sheets ............................................................................................... 38
Consolidated Statements of Operations ................................................................................. 39
Consolidated Statements of Comprehensive Income (Loss) ...................................................... 40
Consolidated Statements of Shareholders’ Equity .................................................................... 41
Consolidated Statements of Cash Flows ................................................................................. 42
Notes to Consolidated Financial Statements ........................................................................... 43
Corporate Information ............................................................................................................. 71
2
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, 2013, is referred
to as the “current fiscal year,” “fiscal 2013,” “2013” or using similar words. Our fiscal year, which ended
on January 31, 2012, is referred to as the “previous fiscal year,” “fiscal 2012,” “2012” or using similar
words. Other fiscal years are referenced by the applicable year during which the fiscal year ends. For
example, 2014 refers to the annual period ending January 31, 2014 and the “fourth quarter of 2014”
refers to the quarter ending January 31, 2014.
This MD&A, which is prepared as of March 7, 2013, covers our year ended January 31, 2013, as
compared to years ended January 31, 2012 and 2011. You should read the MD&A in conjunction with
our audited consolidated financial statements for 2013. 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; 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 baseline calibration; our ability to keep our operating
expenses at a level below our baseline revenues; our future business plans and business planning
process; allocation of purchase price for completed acquisitions; our expectations regarding future
restructuring charges and 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; 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
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
3
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.
4
OVERVIEW
and
rate,
audit
(“SaaS”)
to unite
shipments;
logistics-intensive
We are a global provider of on-demand, software-
as-a-service
focused on
solutions
the productivity, performance and
improving
security
businesses.
of
Descartes' business to business (“B2B”) network,
the Global Logistics Network, integrates more than
164,000 connected parties to our cloud-based
Logistics Technology Platform
their
businesses
in commerce. Customers use our
modular, SaaS solutions to route, schedule, track
and measure delivery resources; plan, allocate and
execute
pay
transportation invoices; file customs and security
documents for imports and exports; and complete
numerous other logistics processes by participating
in the world's largest, collaborative multi-modal
logistics community. Our pricing model provides
our customers with flexibility in purchasing our
solutions either on a perpetual license, subscription
or transactional basis. Our primary focus is on
serving transportation providers (air, ocean and
truck modes), 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.
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
management
integrate
applications (“MRM”) with end-to-end supply chain
as
execution
transportation management,
and
scheduling, inventory visibility, and global trade
and compliance systems (“GT&C”), such as
customs filing.
applications,
resource
(“SCE”)
routing
mobile
such
We believe logistics-intensive organizations are
seeking new ways to reduce operating costs,
differentiate themselves, and improve margins that
are trending downward. Existing global trade and
3
transportation processes are often manual and
complex to manage. This is a consequence of the
growing number of business partners participating
in companies’ global supply chains and a lack of
standardized business processes.
Additionally, global sourcing, logistics outsourcing
and changes
in day-to-day requirements are
adding to the overall complexities that companies
face in planning and executing their supply chains.
Whether a shipment 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.
greater
customers
These challenges are heightened for suppliers that
have end
frequently demanding
narrower order-to-fulfillment periods, lower prices
and
and
rescheduling deliveries. End customers also want
real-time updates on delivery status, adding
considerable burden to supply chain management
as process efficiency is balanced with affordable
service.
scheduling
flexibility
in
In this market, manual, 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
to efficiently
accommodate varied processes for organizations to
remain competitive. We believe this presents an
opportunity for logistics technology providers to
unite the highly fragmented community and help
customers improve efficiencies in their operations.
flexibility
required
the
As the market continues to change, we have been
evolving to meet our customers’ needs. The rate of
adoption of newer RiMMS-like logistics technology
is evolving, but a disproportionate number of
organizations still have manual business processes.
We have been educating our prospects and
customers on the value of connecting to trading
partners through our federated global logistics
network and automating, as well as standardizing,
multi-party business processes. We believe that
our customers are increasingly looking for a single
source, network-based solution provider who can
help them manage the end-to-end shipment
process – from the booking of the move of a
shipment, to the tracking of that shipment as it
moves, to the regulatory compliance filings to be
made during the move and, finally, the settlement
and audit of the invoice relating to that move.
emerging regulatory compliance documents, and
customer specific needs.
to
and
remain
logistics
regulatory
filing of shipment
initiatives mandating
Additionally,
information with
electronic
customs authorities require companies to automate
their processes
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
efficiently
carriers
coordinate with customs brokers and agencies to
expedite cross-border shipments. While many
compliance initiatives started in the US, compliance
issue with
is quickly becoming a global
international shipments crossing several borders on
the way to their final destinations.
forwarders
freight
and
file
Solutions
To help deliver the advantages of RiMMS solutions
to customers, Descartes developed the Logistics
Descartes’
Technology
Logistics
Technology Platform
the simple, elegant
is
synthesis of a network, applications and a
community.
Platform.
The Logistics Technology Platform fuses 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. It’s a new paradigm in logistics
technology, designed to help accelerate time-to-
value and increase productivity and performance
for businesses of all sizes.
Descartes’ GLN, as the foundation of the Logistics
Technology Platform, manages the flow of data and
documents that track and control inventory, assets
and people in motion. Designed expressly for
logistics-intensive operations, it is native to the
particularities of different transportation modes and
country borders. As a state-of-the-art messaging
network with wireless capabilities, the GLN helps
manage business processes in real-time and in-
logistics,
Its capabilities go beyond
motion.
transactions,
supporting
commercial
common
The GLN extends its reach using interconnect
agreements with other general and
logistics-
specific networks, to offer access to a wide array of
a company’s trading partners. With the flexibility to
connect and collaborate in unique ways, companies
can effectively route or transform data to and from
partners and leverage new and existing Descartes
solutions on the network. We believe the GLN
allows “low tech” partners to act and respond with
“high tech” capabilities and connect to the transient
partners that exist in many logistics operations. We
believe that this inherent adaptability creates
opportunities
logistics business
processes that can help customers differentiate
from the competition.
to develop
and wireless
Descartes’ Logistics Application Suite offers the
industry’s widest array of modular, cloud-based,
interoperable web
logistics
management applications. These solutions embody
Descartes’ deep domain expertise, not merely
“check box”
these
solutions deliver value for a broad range of logistics
intensive organizations whether they purchase
transportation, run their own fleet, operate globally
or locally, or work across air, ocean and ground
transportation. Descartes’ comprehensive suite of
solutions includes:
functionality. We believe
• Routing, Mobile and Telematics
• Transportation Management
• Customs & Regulatory Compliance
• Global Logistics Network Services
• Broker & Forwarder Enterprise Systems
solutions.
applications
are modular
Powered by the Logistics Technology Platform,
and
Descartes’
interoperable to allow organizations the flexibility
to deploy them quickly within an existing portfolio
of
streamlined
Implementation
because these solutions use web-native or wireless
user interfaces and are pre-integrated with the
GLN. With interoperable and multi-party solutions,
Descartes delivers functionality with the “1+1=3”
effect that can revolutionize a logistics operation’s
performance and productivity both within the
organization and across a complex network of
partners.
is
Descartes’ Global Logistics Community members
enjoy extended command of operations and
accelerated
inter-
time-to-value. Given
enterprise nature of logistics, we believe that
the
4
quickly gaining access to partners is paramount.
For this reason, Descartes has focused on growing
a community that strategically attracts and retains
relevant
logistics parties. Descartes’ Global
Logistics Community comprises over 164,000
connected parties collaborating in more than 160
countries. With that reach, many companies find
their trading partners are already members, pre-
connected to the GLN. This helps to minimize the
time required to integrate Descartes’ logistics
management applications and to begin realizing
results. Descartes is committed to continuing to
expand community membership. Companies that
join the Global Logistics Community or extend their
participation find a single place where their entire
logistics network can exist regardless of the range
of transportation modes, the number of trading
partners or the variety of regulatory agencies.
By uniting the reach of the GLN with the power of
these applications, our federated network creates
an ecosystem that supports and streamlines the
logistics
key
managers.
functional areas
today’s
facing
Sales and Distribution
Our sales efforts are primarily directed towards two
specific customer markets: (a)
transportation
companies and logistics service providers (“LSPs”);
and (b) manufacturer, retailer, distributor and
mobile service providers (“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
include
our
distributors, alliance partners and value-added
resellers.
international
operations
other
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
5
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 1, 2012, we acquired privately-held
Infodis B.V. (“Infodis”), a leading Netherlands-
based
transportation
management solutions. Infodis’ solutions enable
clients to manage both inbound and outbound
purchased transportation to and from Europe, with
particular strength in Europe/Asia Pacific shipping.
provider
SaaS
of
freight
On June 15, 2012, we acquired substantially all of
the assets of Integrated Export Systems, Ltd. and
IES Asia Limited (collectively referred to as “IES”).
IES provides software-as-a-service solutions that
help
forwarders, non-vessel operating
common carriers and custom brokers manage their
business and improve profitability. The company is
also a leader in regulatory compliance solutions,
where its collaborative security filing solutions
connect thousands of logistics service providers
who are processing shipments that primarily
originate from the Asia Pacific region.
On November 14, 2012, we acquired Exentra
Transport Solutions Limited (“Exentra”), a leading
UK-based provider of SaaS driver compliance
solutions for the European Union (“EU”). Exentra’s
cloud-based compliance management platform,
Smartanalysis, helps customers leverage the data
from a vehicle’s tachograph to comply with EU-
wide legislation governing driver compliance, such
as the EU working-time directive.
On March 7, 2013, we entered into a $50.0 million
credit agreement with the Bank of Montreal, for a
five year term. The credit agreement includes a
$48.0 million revolving facility that can be drawn
on to accommodate future acquisition activity and
a $2.0 million revolving facility that can be drawn
on for general working capital purposes.
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,
2011
99.2
2013
126.9
2012
114.0
42.4
84.5
50.8
2.3
14.2
17.2
-
17.2
1.2
16.0
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
0.26
0.25
0.19
0.19
0.19
0.18
62,556
63,860
62,218
63,400
61,523
62,888
274.9
258.9
241.3
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; (iii) maintenance, subscription and other related
revenues, including revenues associated with maintenance and support of our services and products,
which are recognized ratably over the subscription period; and (iv) hardware revenues, which are
recognized when units are shipped. 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, January 31, January 31,
2011
93.7
94%
2013
116.8
92%
2012
105.7
93%
10.1
8%
126.9
8.3
7%
114.0
5.5
6%
99.2
Our services revenues were $116.8 million, $105.7 million and $93.7 million in 2013, 2012 and 2011,
respectively. Services revenues were positively impacted by the inclusion of a full year of services
revenues from the fiscal 2012 acquisitions of Telargo Inc. (“Telargo”) on June 10, 2011, InterCommIT
BV (“InterCommIT”) on November 2, 2011, and GeoMicro, Inc. (“GeoMicro”) on January 20, 2012, as
well as services revenues from the fiscal 2013 acquisitions of Infodis on June 1, 2012, IES on June 15,
2012, and Exentra on November 14, 2012. The increase was partially offset by unfavourable foreign
exchange rates for the translation of euro denominated revenues as compared to the same period of
2012 as well as the decrease in professional services and managed services of non-core services
revenues in Belgium.
Services revenues in 2012 were positively impacted by 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 services revenues from our acquisitions
of Telargo, InterCommIT and GeoMicro during 2012.
Our license revenues were $10.1 million, $8.3 million and $5.5 million in 2013, 2012 and 2011,
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 Routing, Mobile and
Telematics 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. The increase in license revenues in 2013 was primarily due to
the inclusion of certain larger license sales in the year.
As a percentage of total revenues, our services revenues were 92%, 93% and 94% in 2013, 2012
and 2011, 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
Europe, Middle-East and Africa (“EMEA”), excluding Belgium
Percentage of total revenues
Belgium
Percentage of total revenues
Canada
Percentage of total revenues
Asia Pacific
Percentage of total revenues
January 31, January 31, January 31,
2011
44.9
45%
2013
60.4
48%
2012
48.6
43%
29.3
23%
15.7
12%
14.2
11%
6.2
5%
24.5
21%
19.3
17%
15.1
13%
5.3
5%
19.1
19%
17.7
18%
13.0
13%
3.5
4%
1.0
1%
99.2
Americas, excluding Canada and United States
Percentage of total revenues
Total revenues
1.1
1%
126.9
1.2
1%
114.0
Revenues from the United States were $60.4 million, $48.6 million and $44.9 million in 2013, 2012
and 2011, respectively. Revenues for 2013 were positively impacted by the inclusion of a full period of
United States-based revenue from our acquisitions of Telargo and GeoMicro, acquired in the second and
fourth quarters of 2012, respectively. Revenues were also impacted by the inclusion of United States-
based revenues from the acquisition of IES in the second quarter of 2013, as well as increased license
revenues.
Revenues in 2012 were positively impacted by 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 was also due to increased
license revenues.
Revenues from the EMEA region, excluding Belgium, were $29.3 million, $24.5 million and $19.1
million in 2013, 2012 and 2011, respectively. Revenues were positively impacted by the inclusion of a
full year of European-based revenues from our acquisitions of InterCommIT and Telargo, acquired in the
fourth and second quarters of 2012, respectively. Also contributing to the increase in revenues in 2013
was the acquisition of Infodis and Exentra in the second and fourth quarters of 2013, respectively.
Revenues from the EMEA region, excluding Belgium were also negatively impacted by unfavourable
foreign exchange rates for the translation of euro denominated revenues as compared to 2012.
Revenues in 2012 were positively impacted by the 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 was also due to the favourable impact of foreign exchange rates for the
translation of revenues earned in euros as compared to 2011.
Revenues from Belgium were $15.7 million, $19.3 million and $17.7 million in 2013, 2012 and 2011,
respectively. Revenues in 2013 were negatively impacted by a decline in professional services and
managed services of non-core services revenues in the region as well as unfavourable foreign exchange
rates from the translation of euro denominated revenues as compared to 2012.
8
Revenues in 2012 were positively impacted by the inclusion of a full year of revenue from our
acquisitions of Belgian-based Porthus and Routing International in 2011.
Revenues from Canada were $14.2 million, $15.1 million and $13.0 million in 2013, 2012 and 2011,
respectively. Revenues in 2013 were negatively impacted by a decrease in professional services
revenues in the region as well as unfavourable foreign exchange rates for the translation of Canadian
dollar revenues as compared to the same period of 2012.
Revenues in 2012 positively impacted by 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.
Revenues from the Asia Pacific region were $6.2 million, $5.3 million and $3.5 million in 2013, 2012
and 2011, respectively. Revenues in 2013 were positively impacted by the inclusion of a full year of
Asia-Pacific based revenues from Telargo as well as the inclusion of the acquisition of IES.
Revenues in 2012 were positively impacted by the inclusion of Asia-Pacific based revenues from our
acquisition of Telargo.
Revenues from the Americas region, excluding Canada and the United States, were $1.1 million,
$1.2 million and $1.0 million in 2013, 2012 and 2011, respectively. Revenues in 2013 were negatively
impacted by a decrease in license revenues in the region.
Revenues in 2012 were positively impacted by increased license revenues from resellers.
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,
2011
2013
2012
116.8
41.1
75.7
65%
10.1
1.3
8.8
87%
126.9
42.4
84.5
67%
105.7
36.3
69.4
66%
8.3
2.0
6.3
93.7
32.7
61.0
65%
5.5
1.2
4.3
76%
78%
114.0
38.3
75.7
66%
99.2
33.9
65.3
66%
Cost of services revenues consists of internal costs of running our systems and applications, as well
as salaries and other personnel-related expenses incurred in providing professional service and
maintenance work, including consulting and customer support.
9
Gross margin percentage for services revenues was 65%, 66% and 65% in 2013, 2012 and 2011,
respectively. Gross margin in 2013 compared to 2012 was negatively impacted by the inclusion of a full
year of gross margin from our acquisition of Telargo, which is an area of key strategic investment and
currently operates at lower margins than our other service revenue streams.
The increase in 2012 compared to 2011 was primarily due to the 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.
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 87%, 76% and 78% in 2013, 2012 and 2011,
respectively. Our gross margin on license revenues is dependent on the proportion of our license
revenues that involve third-party technology. Consequently, our gross margin percentage for license
revenues is higher when a lower proportion of our license revenues attracts third-party technology costs,
and vice versa. This was the primary contributor to the change in license margins in 2012. In 2013, we
were able to reduce the proportion of our license revenues that involve third-party technology by
replacing certain third-party technology included in our products with Descartes’ own geographic
information systems (“GIS”) technology, obtained in the acquisition of GeoMicro.
Operating expenses (consisting of sales and marketing, research and development and general and
administrative expenses) were $50.8 million, $46.3 million and $42.1 million for 2013, 2012 and 2011,
respectively. In 2013, operating expenses were impacted by the inclusion of a full year of operating
expenses from the fiscal 2012 acquisitions of Telargo, InterCommIT and GeoMicro, as well as operating
expenses from the fiscal 2013 acquisitions of Infodis, IES and Exentra. The increase in 2013 was
partially offset by the favourable foreign exchange rates for the translation of Canadian dollar and euro
denominated operating expenses as compared to 2012 as well as cost savings from previously
announced restructuring plans.
Our operating expenses in 2011 were impacted by the inclusion of a full year of operating expenses
from the fiscal 2011 acquisitions of Porthus, Imanet and Routing International, as well as operating
expenses from the fiscal 2012 acquisitions of Telargo, InterCommIT and GeoMicro.
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,
2011
99.2
2013
126.9
2012
114.0
13.8
11%
21.3
17%
15.7
12%
50.8
40%
13.0
11%
19.0
17%
14.3
13%
46.3
41%
11.5
12%
17.0
17%
13.6
14%
42.1
42%
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 $13.8 million, $13.0 million and $11.5 million in 2013, 2012 and 2011,
10
respectively. Sales and marketing expenses as a percentage of total revenues were 11%, 11% and 12%
in 2013, 2012 and 2011, respectively. Sales and marketing expenses in 2013 were impacted by the
fiscal 2012 acquisitions of Telargo, InterCommIT and GeoMicro, as well as, the fiscal 2013 acquisitions of
Infodis, IES and Exentra. These increases were partially offset by favourable foreign exchange rates for
the translation of euro and Canadian denominated sales and marketing expenses as compared to 2012.
The increase in sales and marketing expenses in 2012 as compared to 2011 was 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 was
also a result of an unfavourable foreign exchange impact from our Canadian dollar and euro
denominated sales and marketing expenses.
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 2013, 2012 and 2011, as applicable.
Research and development expenses were $21.3 million, $19.0 million and $17.0 million in 2013, 2012
and 2011, respectively. Research and development expenses as a percentage of total revenues were
17% in each of 2013, 2012 and 2011. Research and development expenses in 2013 were impacted by
increased payroll and related costs from the inclusion of the fiscal 2012 acquisitions of Telargo,
InterCommIT and GeoMicro, as well as the fiscal 2013 acquisitions of Infodis, IES and Exentra. These
increases were partially offset by favourable foreign exchange rates for the translation of euro and
Canadian denominated research and development expenses for 2013 as compared to 2012.
The increase in research and development expenses in 2012 as compared to 2011 was 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 was also a result of an unfavourable foreign
exchange impact from our Canadian dollar and euro denominated research and development expenses.
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 $15.7 million, $14.3 million and $13.6
million in 2013, 2012 and 2011, respectively. General and administrative expenses as a percentage of
total revenues were 12%, 13% and 14% in 2013, 2012 and 2011, respectively. In 2013, general and
administrative expenses were impacted by the inclusion of a full year of general and administrative
expenses from the fiscal 2012 acquisitions of Telargo, InterCommIT and GeoMicro, as well as the
inclusion of the fiscal 2013 acquisitions of Infodis and IES. General and administrative expenses in 2013
as compared to 2012 were also impacted by increased stock-based compensation expense related to
Performance Share Units and Cash-Settled Restricted Share Units granted in the second quarter of
2013. These increases were partially offset by favourable foreign exchange rates for the translation of
euro and Canadian denominated general and administrative expenses for 2013 as compared to 2012.
The increase in general and administrative expenses in 2012 as compared to 2011 is primarily
attributable to additional general and administrative expenses related to our recent acquisitions. The
increase in 2012 as compared to 2011 was also a result of an unfavourable foreign exchange impact
from our Canadian dollar and euro denominated general and administrative expenses.
Other charges consist primarily of acquisition-related costs with respect to completed and prospective
acquisitions and restructuring charges. Other charges were $2.3 million, $2.1 million and $4.0 million in
2013, 2012 and 2011, respectively. Other charges was comprised of acquisition-related costs of $1.4
million, $1.6 million and $1.5 million in 2013, 2012 and 2011, respectively, and restructuring costs of
$0.9 million, $0.5 million and $2.1 million in 2013, 2012 and 2011, respectively. Acquisition-related
costs primarily include advisory services, brokerage services and administrative costs with respect to
completed and prospective acquisitions. Restructuring costs relate to the integration of previously
completed acquisitions and other cost-reduction activities. 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
11
acquisition. These assets became redundant during the year ended January 31, 2011 due to the
integration of Porthus into our operations.
Amortization of intangible assets is the 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, 2013. 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 $14.2 million, $12.0 million and $11.5 million in 2013, 2012 and 2011,
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, 2013, the unamortized
portion of all intangible assets amounted to $71.3 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 nil, $0.1 million and $0.2 million in 2013, 2012 and 2011, respectively. The
decrease in investment income in 2013 was primarily due to a lower average cash and cash equivalents
balance during 2013 compared to 2012. The decrease in investment income in 2012 was primarily due
to lower interest rates compared to 2011. Investment income is reflective of current market rates.
Income tax expense (recovery) is comprised of current and deferred income tax expense (recovery).
Income tax expense (recovery) for 2013, 2012 and 2011 was 7%, 22%, and (46%) of income before
income taxes, respectively, with current income tax expense being 12%, 9% and 4% of income before
income taxes, respectively.
Income tax expense – current was $2.1 million, $1.4 million and $0.3 million in 2013, 2012 and
2011, 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, and
income in Europe which is not sheltered by loss carryforwards. The increase in current income taxes in
2013 resulted from increased income earned in jurisdictions without loss carryforwards.
Income tax (recovery) expense – deferred was ($0.9) million, $1.9 million and ($3.9) million in
2013, 2012 and 2011, respectively. Deferred income tax expense decreased in 2013 primarily as a
result of a release of valuation allowance in the UK which has decreased income tax expense by $5.3
million. This decrease was partially offset by a $1.0 million increase in regards to a change of estimate
in the US.
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, as
compared to 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 $31.3 million is recorded on our 2013 consolidated balance sheet for tax
benefits that we currently expect to realize in future years. We have provided a valuation allowance of
$21.3 million in 2013 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 $16.0 million, $12.0 million and $11.5 million in 2013, 2012 and
2011, respectively. The $4.0 million increase in 2013 from 2012 was primarily a result of an $8.8 million
increase in gross margin and a $2.2 million decrease in income tax expense from the $5.3 million
recovery of deferred taxes in the UK. Partially offsetting this change was a $4.5 million increase in
operating expenses, a $2.2 million increase in amortization of intangible assets, a $0.2 million increase
in other charges and a $0.1 million decrease in investment income.
The $0.5 million increase in net income from 201 to 2012 was primarily a result of a $10.4 million
increase in gross margin and a $1.9 million decrease in other charges. Partially offsetting these changes
was 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.
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,
2013
2012
2012
2012
Total
2013
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
2012
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
29,862
19,276
11,357
2,606
0.04
0.04
30,537
19,957
11,569
2,487
0.04
0.04
32,685
22,253
13,581
3,115
0.05
0.05
33,799 126,883
84,484
22,998
50,725
14,218
15,996
7,788
0.26
0.12
0.25
0.12
62,454
63,836
62,535
63,869
62,599
63,793
62,633
63,910
62,556
63,860
April 30, July 31, October 31, January 31,
2012
2011
2011
2011
Total
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
Revenues have been positively impacted by the nine acquisitions that we have completed since the
beginning of 2011. 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.
13
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. In the third quarter, we have historically seen shipment and transactional
volumes at their highest. In the fourth quarter, the various international holidays impact the aggregate
number of shipping days in the quarter, and historically we have seen this adversely impact the number
of transactions our network processes and, consequently, the amount of services revenues we receive.
In the first quarter of 2013, net income was positively impacted by the inclusion of a full quarter of
operations from our acquisitions of InterCommIT and GeoMicro, acquired in the fourth quarter of 2012.
Net income was negatively impacted by $0.4 million of acquisition-related costs with respect to
completed and prospective acquisitions.
In the second quarter of 2013, revenue and expenses were impacted by the inclusion of a partial quarter
of revenues and expenses from the acquisitions of Infodis and IES, as well as the inclusion of a full
quarter of operations from our acquisitions of InterCommIT and GeoMicro, acquired in the fourth quarter
of 2012. Net income was negatively impacted by $0.7 million of acquisition-related costs and $0.4
million of restructuring charges.
In the third quarter of 2013, revenue and net income were impacted by the inclusion of a full quarter of
operations from our acquisitions of Infodis and IES, acquired in the second quarter of 2013. As well,
license revenues and gross margin from license revenues in the third quarter of 2013 were higher than
previous quarters as license revenues in the period included a larger license sale.
In the fourth quarter of 2013, revenue and net income were impacted by the inclusion of a partial
quarter of revenues and expenses from the acquisition of Exentra. As well, license revenues in the
fourth quarter of 2013 were higher than any of the previous quarters indicated in the above table as
license revenues in the period included a larger license sale. A deferred income tax recovery in the UK of
$5.3 million also favourably contributed to net income in the fourth quarter of 2013. Net income was
negatively impacted by $0.3 million of acquisition-related costs and $0.2 million of restructuring
charges.
In 2012, net income was positively impacted by the acquisitions of InterCommIT and GeoMicro. Net
income was also negatively impacted by $0.1 million and $0.4 million of restructuring charges related to
integration of previously completed acquisitions and other cost-reduction activities expensed in the
second and fourth quarters of 2012, respectively. As well, $0.3 million, $0.3 million, $0.3 million and
$0.7 million of acquisition-related costs were incurred in the first, second, third and fourth quarters of
2012, respectively. An income tax recovery of $0.7 million also contributed to net income in the fourth
quarter of 2012. The income tax recovery resulted primarily from a release of valuation allowance in the
Netherlands which reduced our deferred income tax expense.
Our weighted average shares outstanding has increased since the first quarter of 2012 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,
2013, we had $37.6 million in cash and cash equivalents and no long term debt or available lines of
credit. As at January 31, 2012, we had $65.5 million in cash and cash equivalents and $3.0 million in
available lines of credit.
14
On March 7, 2013, we entered into a $50.0 million credit agreement with the Bank of Montreal, for a
five year term. The credit agreement provides for a $48.0 million revolving facility, to be repaid in equal
quarterly installments over a period of five years from the advance date, and a $2.0 million revolving
facility, with no fixed repayment date prior to the end of the term. Borrowings under the credit
agreement are secured by a first charge over substantially all of our assets. Depending on the type of
advance under the available facilities, interest will be charged at a rate of either i) Canada or US prime
rate plus 0% to 1.5%; or ii) LIBOR plus 1.5% to 3%. Interest is payable monthly in arrears under both
facilities. The credit agreement contains certain customary representations, warranties and guarantees,
and covenants. No amounts have been borrowed under the credit agreement as of March 7, 2013.
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 continue 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 or draw
against the above mentioned credit agreement in connection with any such potential strategic
transaction.
If any of our non-Canadian subsidiaries have earnings, our intention is that these earnings be reinvested
in the subsidiary indefinitely. Of the $37.6 million of cash and cash equivalents as at January 31, 2013,
$35.9 million was held by our foreign subsidiaries, most significantly in the United States with lesser
amounts held in Belgium and other countries in the EMEA and Asia Pacific regions. 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. In the future, if we elect to repatriate the unremitted earnings of our foreign subsidiaries in
the form of dividends, or if the shares of the foreign subsidiaries are sold or transferred, then we would
likely be subject to additional Canadian income taxes, net of the impact of any available foreign tax
credits, which could result in a higher effective tax rate. However, since we currently anticipate investing
outside of Canada, it is our current intent to permanently reinvest unremitted earnings in our foreign
subsidiaries.
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
Settlement of acquisition earn-out
Acquisition of subsidiaries, net of cash acquired
Proceeds from the sale of investment in affiliate
Issuance of common shares, net of issue costs
Settlement of stock options
Repayment of other liabilities
Effect of foreign exchange rate on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2013
30.3
(3.5)
(0.6)
(54.1)
January 31, January 31, January 31,
2011
19.9
(1.6)
-
(45.0)
0.5
1.1
-
(0.4)
2012
23.9
(4.7)
-
(21.3)
-
1.7
-
(4.3)
-
0.7
(1.5)
(0.1)
0.9
(27.9)
65.5
37.6
0.6
(4.1)
69.6
65.5
0.5
(25.0)
94.6
69.6
Cash provided by operating activities was $30.3 million, $23.9 million and $19.9 million for 2013,
2012 and 2011, respectively. For 2013, the $30.3 million of cash provided by operating activities
resulted from $16.0 million of net income, plus $17.7 million of non-cash items included in net income
and less $3.4 million of cash used in changes in our operating assets and liabilities. For 2012, the $23.9
15
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. Cash
provided by operating activities increased in 2013 compared to 2012, due to net income adjusted for
non-cash expenses which increased $3.9 million in 2013 compared to 2012 and cash used in changes in
our operating assets and liabilities which decreased $2.5 million in 2013 compared to 2012.
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.
Additions to capital assets were $3.5 million, $4.7 million and $1.6 million in 2013, 2012 and 2011,
respectively. We continue to invest in computing equipment as well as software related to the phased
implementation of a new ERP system.
Settlement of acquisition earn-out of $0.6 million in 2013 was comprised of a partial payout of the
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.
Acquisition of subsidiaries, net of cash acquired, of $54.1 million in 2013 was related to the
acquisitions of Infodis, IES and Exentra. Acquisition of subsidiaries, net of cash acquired, of $21.3
million in 2012 was related to the acquisitions of Telargo, InterCommIT and GeoMicro. In 2011, the
$45.0 million of cash paid for acquisition of subsidiaries, net of cash acquired, was related primarily to
the acquisition of Porthus, Imanet and Routing International.
Proceeds from the sale of investment in affiliate of $0.5 million in 2011 were related to the sale of
an investment in Desk Solutions NV, which was acquired as part of the Porthus acquisition. There was
no such sale of investment in affiliates during 2013 or 2012.
Issuance of common shares of $0.7 million, $1.7 million and $1.1 million in 2013, 2012 and 2011,
respectively, was a result of the exercise of employee stock options.
Settlement of stock options of $1.5 million in 2013 was a result of the settlement of surrendered
stock options.
Repayment of other liabilities of $0.1 million, $4.3 million and $0.4 million in 2013 and 2011,
respectively, relates primarily to repayment of debt obligations acquired as part of the Porthus, Imanet,
Routing International and Telargo acquisitions.
Working capital. As at January 31, 2013, our working capital (current assets less current liabilities)
was $52.8 million. Current assets include $37.6 million of cash and cash equivalents, $20.5 million in
current trade receivables and $13.0 million in current deferred tax assets. Current liabilities include
$12.4 million of accrued liabilities, $7.3 million of deferred revenue and $6.1 million of accounts
payable. Our working capital has decreased since January 31, 2012 by $24.9 million, primarily as a
result of decreased cash and cash equivalents. Cash and cash equivalents have decreased since January
31, 2012 primarily due to the use of cash for business acquisitions, additions to capital assets and the
use of cash in financing activities. This decrease has been partially offset by cash provided by operating
activities.
Cash and cash equivalents. As at January 31, 2013, 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
3.7
0.1
3.8
5.3
-
5.3
1.7
-
1.7
0.6
-
0.6
Total
11.3
0.1
11.4
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.
Other Obligations
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 cash-settled restricted
share unit (“CRSU”) 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 Toronto Stock Exchange
(“TSX”) at the consolidated balance sheet date. For CRSUs, 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 CRSUs of $1.3 million for which no liability was recorded on our consolidated balance sheet at
January 31, 2013, in accordance with FASB Accounting Standard Codification (“ASC”) Topic 718
“Compensation – Stock Compensation” (“ASC Topic 718”). The ultimate liability for any payment of
DSUs and CRSUs 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 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”. The following lists our significant
guarantees:
17
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 agreements 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 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.
OUTSTANDING SHARE DATA
We have an unlimited number of common shares authorized for issuance. As of March 6, 2013, we had
62,654,284 common shares issued and outstanding.
As of March 6, 2013, there were 2,510,161 options issued and outstanding, and 185,418 remaining
available for grant under all stock option plans. As of March 6, 2013, there were 139,071 performance
share units (“PSUs”) and 119,799 restricted share units (“RSUs”) issued and outstanding, and 689,559
remaining available for grant under the Performance and Restricted Share Unit Plan (the “PRSU Plan”).
On November 30, 2004, we announced that our board of directors had adopted a shareholder rights plan
(the “Rights Plan”) to ensure the fair treatment of shareholders in connection with any take-over offer,
and to provide our board of directors and shareholders with additional time to fully consider any
unsolicited take-over bid. We did not adopt the Rights Plan in response to any specific proposal to
acquire control of the company. The Rights Plan was approved by the TSX and was originally approved
by our shareholders on May 18, 2005. The Rights Plan took effect as of November 29, 2004. On May 29,
2008, our shareholders approved certain amendments to the Rights Plan and approved the Rights Plan
continuing in effect. At our 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. The
Rights Plan will expire at the termination of our annual shareholders’ meeting in calendar year 2014
unless its continued existence is ratified by the shareholders before such expiration. We understand that
the Rights Plan is similar to plans adopted by other Canadian companies and approved by their
shareholders.
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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
2013 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 2013 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 receivable 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.
Long-Lived Assets
We test long-lived assets for recoverability when events or changes in circumstances indicate evidence
of impairment.
Intangible assets are amortized on a straight-line basis over their estimated useful lives. An impairment
loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less
than the carrying amount. Measurement of the impairment loss is based on the present value of the
expected future cash flows. Our impairment analysis contains estimates due to the inherently
speculative nature of forecasting long-term estimated cash flows and determining the ultimate useful
lives of assets. Actual results will differ, which could materially impact our impairment assessment.
In the case of goodwill, we test for impairment at least annually at October 31st of each year and at any
other time if any event occurs or circumstances change that would more likely than not reduce our
enterprise value below our carrying amount. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assigning assets and liabilities to reporting
units, assigning goodwill to reporting units, assessing qualitative factors and determining the fair value
of each reporting unit. Significant judgments are required to estimate the fair value of reporting units
and 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.
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Stock-based compensation
We account for stock-based compensation in accordance with ASC Topic 718. Accordingly, the fair value
of employee stock-based compensation that is ultimately expected to vest is amortized to expense in
our consolidated statement of operations based on the straight-line attribution method.
The fair value of stock option grants is calculated using the Black-Scholes Merton 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 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.
PSUs are measured at fair value estimated using a Monte Carlo Simulation approach. 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 PSUs at the time of the grant. The expected PSU life is based on the historical life of our stock 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 have 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 allowances 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 foreseeable future. In
making the projection for the period, we made certain assumptions, including the following: (i) that
there will be continued customer migration from technology platforms owned by foreign jurisdictions to
a technology platform owned by another entity in our corporate group; and (ii) that tax rates in these
jurisdictions will be consistent over the period of projection. 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.
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 average cost
of units.
The valuation of inventory, including the determination of obsolete or excess inventory, requires
management to estimate the future demand for our products within specified time horizons. We perform
an assessment of inventory which includes a review of, among other factors, demand requirements,
product life cycle and development plans, product pricing and quality issues. If the demand for our
products indicates we are no longer able to sell inventories above cost or at all, we write down inventory
to net realizable value or excess inventory is written off.
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CHANGE IN / INITIAL ADOPTION OF ACCOUNTING POLICIES
Recently adopted accounting pronouncements
In May 2011, the FASB issued Accounting Standards Update (“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 has not had 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 shareholders’ 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 reflected in the separate statement of comprehensive income in our
consolidated financial statements.
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 FASB 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. ASU 2011-12 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 has not had 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 Certification of Disclosure in Issuers’ Annual and Interim Filings)
as of January 31, 2013. Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of our disclosure controls and procedures were effective.
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, management assessed the effectiveness of our internal control over
financial reporting (as defined in National Instrument 52-109 Certification of Disclosure in Issuers’
Annual and Interim Filings) as of January 31, 2013, 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, 2013, our internal control over financial reporting was effective.
During the fiscal year ended January 31, 2013, 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.
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TRENDS / BUSINESS OUTLOOK
This section discusses our outlook for fiscal 2014 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.
Customs and Border Protection (“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 have begun 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 2013, our services revenues comprised 92% of our total revenues, with the balance being license
revenues. We expect that our focus in 2014 will remain on generating services revenues, primarily by
promoting the 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
2014, based on our historic 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
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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 with 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, 2013, using foreign exchange rates of CAD $1.00 to $1.00, the euro 1.30 to
$1.00 and £1.53 to $1.00, we estimated that our baseline revenues for the first quarter of 2014 were
approximately $31.8 million and our baseline operating expenses were approximately $24.1 million. We
consider this to be our baseline calibration of approximately $7.7 million for the first quarter of 2014, or
approximately 24% of our baseline revenues as at February 1, 2013.
Periodically we incur 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. In 2013, we incurred $1.0 million in restructuring charges and we expect to incur $0.1
million to $0.2 million in additional charges pursuant to established restructuring and integration plans in
2014.
We estimate that amortization expense for existing intangible assets will be $16.2 million for 2014,
$14.0 million for 2015, $11.4 million for 2016, $9.7 million for 2017, $5.7 million for 2018 and $14.3
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 2014 will be approximately $0.2 million to $0.3
million, subject to any necessary adjustments resulting from reconciling estimated stock-based
compensation forfeitures to actual stock-based compensation forfeitures.
We performed our annual goodwill impairment tests in accordance with ASC Topic 350 on October 31,
2012 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, 2013. We will continue to perform
quarterly analyses of whether any event has occurred that would more likely than not reduce our
enterprise value below our carrying amounts and, if so, we will perform a goodwill impairment test
between the annual dates. The likelihood of any future impairment increases if our public market
capitalization is adversely impacted by global economic, capital market or other conditions for a
sustained period of time. Any future impairment adjustment will be recognized as an expense in the
period that the adjustment is identified.
In 2013, capital expenditures were $3.5 million or 3% of revenues, as we continue to invest in our
network and build out our administrative infrastructure, including the implementation of a new ERP
system. While we are still advancing on these initiatives we anticipate that we will incur up to $4.0
million in capital expenditures in 2014.
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 daily exchange rates. Translation adjustments
resulting from this process are accumulated in other comprehensive income (loss) as a separate
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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 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, 55% of our revenues in 2013 were in US dollars, 26% in euro, 13% in
Canadian dollars, and the balance in mixed currencies, while 35% of our operating expenses were in US
dollars, 30% in Canadian dollars, 30% in euro, and the balance in mixed currencies.
As at March 6, 2013, we had 102,821 outstanding DSUs and 200,301 outstanding CRSUs. DSUs and
CRSUs 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. CRSUs generally vest and are paid over a
period of three- to five-years. Our liability to pay amounts for DSUs and CRSUs 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 CRSUs, the amount of any expense or recovery is based on the number of CRSUs
outstanding and our stock price which is recognized as employees perform services. 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.
We expect that these unrecognized tax benefits will increase within the next 12 months, although at this
time a reasonable estimate of the possible increase cannot be made. While we believe that we have
adequately provided for all tax positions, amounts asserted by taxing authorities could differ from our
accrued position. To the extent that the uncertain tax positions do not materialize, up to $4.1 million of
the unrecognized tax benefits would then be recognized and decrease the effective tax rate.
In 2013, we recorded a net deferred income tax recovery of $0.9 million primarily as a result of change
in valuation allowance in the UK which has decreased income tax expense by $5.3 million. This decrease
was partially offset by a $1.0 million increase in regards to a change of estimate in the US. The amount
of any tax expense or recovery in a period will depend on the amount of taxable income, if any, we
generate in a jurisdiction, our then current effective tax rate in that jurisdiction, and estimations of our
ability to utilize deferred tax asset balances in the future. We can provide no assurance as to the timing
or amounts of any income tax expense or recovery, nor can we provide any assurance that our current
valuation allowance for deferred tax assets will not need to be adjusted further.
Our tax expense for a period is difficult to predict as it depends on many factors, including the actual
jurisdictions in which income is earned, the tax rates in those jurisdictions, the amount of deferred tax
assets relating to the jurisdictions and the valuation allowances relating to those tax assets. At this time,
we anticipate that our income tax expense (current and deferred) for 2014 will be 30% - 33% 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 2014 will be approximately 8% - 12% of income before income taxes.
We intend to continue to actively explore business combinations to add complementary services,
products and customers to our existing businesses. We also intend to continue to focus our acquisition
activities on companies that are targeting the same customers as us and processing similar data and, to
that end, we 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
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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 our 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 2011 downgrade in US debt and ongoing 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 regions.
Investments in acquisitions and other business initiatives involve 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 and businesses that we believe are complementary to ours. For example, in
2013 we acquired Infodis, IES and Exentra. In 2012 we acquired Telargo, InterCommIT and GeoMicro.
In 2011 we acquired Porthus, Imanet and Routing International. In 2010 we acquired two businesses,
Oceanwide and Scancode, and from 2007 to 2009 we acquired ten businesses in total. 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. We also, from time to time, take on investments
in other business initiatives, such as the implementation of a new enterprise resource planning system.
Acquisitions and other business initiatives involve a number of risks, including: diversion of
management’s attention from current operations; additional demands on resources, systems,
procedures and controls; and disruption of our ongoing business. Acquisitions specifically involve risks,
including: 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 continue to integrate a business with
inventory. In addition, we may not identify all risks or fully assess risks identified in connection with an
investment. As well, by investing in such initiatives, we may deplete our cash resources or dilute our
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shareholder base by issuing additional shares. Furthermore, for acquisitions, 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 or other investment 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;
• Non-compatible business cultures;
•
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;
• Our failure to make appropriate capital investments in infrastructure to facilitate growth; 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
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.
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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 highly qualified management,
technical expertise, and sales and marketing personnel, which we define as key individuals to our
business. 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 key individuals. Competition for key individuals is always strong. If we fail to cross train key
employees, particularly those with specialized knowledge it could impair our ability to provide consistent
and uninterrupted service to our customers. If we are not able to attract or retain, or establish an
effective succession planning program for, necessary key individuals it 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.
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.
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;
•
•
• Earthquake, fire, flood or other natural disaster; or
• An act of war or terrorism.
Information or infrastructure security breaches;
Insufficient investment in infrastructure;
27
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.
As we continue to increase our international operations we increase our exposure to
international business risks that could cause our operating results to suffer.
While our headquarter is in Canada, we currently have direct operations in the US, 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.
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 2013, 55% of our revenues were denominated in US dollars, and historically the majority of our
revenues have been denominated 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 programs 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 their businesses.
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 telematics 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
28
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
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.
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.
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, 2013, we had cash and cash equivalents of $37.6 million
and no operating lines of credit.
On March 7, 2013, we entered into a $50.0 million credit agreement with the Bank of Montreal, for a
five year term. The credit agreement includes a $48.0 million revolving facility that can be drawn on to
accommodate future acquisition activity and a $2.0 million revolving facility that can be drawn on for
general working capital purposes.
In addition to this credit agreement, 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 incremental financing transactions. If we raise additional funds through further issuances of
convertible debt or equity securities, our existing shareholders could suffer significant dilution, and any
new equity securities we issue could have rights, preferences, and privileges superior to those attaching
to our common shares. Any debt financing secured by us in the future could involve restrictive
covenants relating to our capital-raising activities and other financial and operational matters, which
may make it more difficult for us to obtain additional capital and to pursue business opportunities,
including potential acquisitions. In addition, we may not be able to obtain additional financing on terms
favorable to us, if at all. If adequate funds are not available on terms favorable to us, our operations and
growth strategy may be adversely affected and the market price for our common shares could decline.
We 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
29
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
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.
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.
30
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:
Larger installed base of customers;
• Established relationships with existing customers or prospects that we are targeting;
• Superior product functionality and industry-specific expertise;
• Broader range of products to offer and better product life cycle management;
•
• Greater financial, technical, marketing, sales, distribution and other resources;
• Better performance;
•
• Greater investment in infrastructure;
• Greater worldwide presence;
• Early adoption of, or adaptation to changes in, technology;
•
Longer operating history; and/or greater name recognition.
Lower cost structure and more profitable operations;
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 or maintain
acceptable services and products to address new market conditions or technological changes. 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
31
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
indemnification
Claims that we
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
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 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.
32
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. 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, 2012 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.
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.
33
Our results of operations may vary significantly from quarter to quarter and therefore may be
difficult to predict or may fail to meet investment community expectations.
Our results of operations may vary from quarter to quarter in the future due to a variety of factors,
many of which are outside of our control. Such factors include, but are not limited to:
• Volatility or fluctuations in foreign currency exchange rates;
• Timing of acquisitions and related costs;
• Timing of restructuring activities;
• The termination of any key customer contracts, whether by the customer or by us;
• Recognition and expensing of deferred tax assets;
•
Legal costs incurred in bringing or defending any litigation with customers or third-party
providers, and any corresponding judgments or awards;
Legal and compliance costs incurred to comply with regulatory requirements;
Fluctuations in the demand for our services and products;
•
•
• The impact of stock-based compensation expense;
• Price and functionality competition in our industry;
• Changes in legislation and accounting standards;
• Our ability to satisfy contractual obligations in customer contracts and deliver services and
products to the satisfaction of our customers; and
• Other risk factors discussed in this report.
Although our revenues may fluctuate from quarter to quarter, significant portions of our expenses are
not variable in the short term, and we may not be able to reduce them quickly to respond to decreases
in revenues. If revenues are below expectations, this shortfall is likely to adversely and/or
disproportionately affect our operating results.
We have a substantial accumulated deficit and a history of losses and may incur losses in the
future.
As at January 31, 2013, our accumulated deficit was $308.7 million accumulated from 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 2013, 2012
and 2011 benefited from non-cash, net deferred income tax recoveries of $5.3 million, $0.7 million and
$4.4 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.
34
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 the independent auditors to review the consolidated financial statements and 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, 2013, 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, 2013, our internal control over
financial reporting was effective.
Management’s internal control over financial reporting as of January 31, 2013, has been audited by
Deloitte LLP, Independent Registered Chartered Accountants, who also audited our Consolidated
Financial Statements for the year ended January 31, 2013, 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, 2013, 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
Waterloo, Ontario
Stephanie Ratza
Chief Financial Officer
Waterloo, Ontario
35
Report of Independent Registered Chartered Accountants
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
We have audited the internal control over financial reporting of The Descartes Systems Group Inc. and its subsidiaries (the “Company”) as
control over financial reporting of The Descartes Systems Group Inc. and its subsidiaries (the “Company”) as
control over financial reporting of The Descartes Systems Group Inc. and its subsidiaries (the “Company”) as
issued by the Committee of Sponsoring
iteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
of January 31, 2013, based on the criteria established in
Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over
of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over
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
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
Management’s Report on Financial Statements and Internal Control over Financial Reporting. Our responsibility is to express an opinion
Management’s Report on Financial Statements and Internal Control over Financial Reporting. Our responsibility is to express
Management’s Report on Financial Statements and Internal Control over Financial Reporting. Our responsibility is to express
on the Company's internal control over financial reporting based on our audit.
on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
th the standards of the Public Company Accounting Oversight Board (United States). Those
th 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
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
n all material respects. Our audit included obtaining an understanding of internal control over financial
n all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
d on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our
d on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe tha
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe tha
audit provides a reasonable basis for our opinion.
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process design
ed by, or under the supervision of, the company's principal
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of d
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of d
ce regarding the reliability of financial reporting and the preparation of
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
management, and other personnel to provide reasonable assuran
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
s and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
s and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that tran
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that tran
essary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
essary 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
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of
pany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
pany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disp
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disp
the company's assets that could have a material effect on the financial statements.
the company's assets that could have a material effect on the financial statements.
of internal control over financial reporting, including the possibility of collusion or improper
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
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,
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely ba
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely ba
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that
aluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that
aluation 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
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or pr
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or pr
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2013,
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of J
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of J
Committee of Sponsoring Organizations of the
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
based on the criteria established in Internal Control
Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Compa
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Compa
financial statements as of and for the year ended January 31, 2013 of the
Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 31, 201
Accounting Oversight Board (United States), the consolidated
expressed an unqualified opinion on those financial statements.
Company and our report dated March 7, 2013 expressed an unqualified opinion on those financial statements.
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
March 7, 2013
36
Report of Independent Registered Chartered Accountants
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
have audited the accompanying consolidated financial statements of The Descartes Systems Group
We have audited the accompanying consolidated
“Company”), which comprise the consolidated balance sheets
of operations, comprehensive income (loss), shareholders’ equity
January 31, 2013, and a summary of significant accounting policies and
comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the
, and a summary of significant accounting policies and other explanatory information.
balance sheets as at January 31, 2013 and January 31, 2012, and the consolidated
Inc. and subsidiaries (the
, and the consolidated statements
years in the three-year period ended
Management's Responsibility for the Consolidated Financial Statements
Management's Responsibility for the Consolidated Financial Statements
consolidated financial statements in accordance with
s responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
Management is responsible for the preparation
accounting principles generally accepted in the United States of America, and for such internal control as management determines is
accounting principles generally accepted in the United States of America, and for such internal control as management determi
accounting principles generally accepted in the United States of America, and for such internal control as management determi
financial statements that are free from material misstatement, whether due to fraud or
y to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or
necessary to enable the preparation of consolidated
error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated
sed on our audits. We conducted our audits in
to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight B
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight B
ts and plan and perform the audit to obtain reasonable
(United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
(United States). Those standards require that we comply with ethical requiremen
financial statements are free from material misstatement.
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and d
the consolidated financial
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material miss
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material miss
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
financial statements in order to design audit procedures that are
n and fair presentation of the consolidated financial statements in order to design audit proc
relevant to the entity's preparation and fair presentation of the consolidated
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the
of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
of accounting estimates made by management, as well as evaluating the overall pr
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our au
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our au
Opinion
In our opinion, the consolidated financial statements present fairly, in
Group Inc. and subsidiaries as at January 31, 201
years in the three-year period ended January 31, 2013
America.
financial statements present fairly, in all material respects, the financial position of
January 31, 2013 and January 31, 2012, and the results of their operations and cash flows for each of
31, 2013 in accordance with accounting principles generally accepted in the Un
all material respects, the financial position of The Descartes Systems
and cash flows for each of the
in accordance with accounting principles generally accepted in the United States of
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
internal control over financial reporting as of January 31, 2013, based on the criteria established in Internal Control
Internal Control—Integrated
Company's internal control over financial reporting as of January 31, 201
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2013
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March
expressed an unqualified opinion on the Company’s internal control over financial reporting.
expressed an unqualified opinion on the Company’s internal control over financial reporting.
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
March 7, 2013
37
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)
LONG-TERM RECEIVABLE (Note 5)
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
DEFERRED REVENUE
INCOME TAX LIABILITY (Note 17)
DEFERRED INCOME TAXES (Note 17)
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 12)
SHAREHOLDERS’ EQUITY
Common shares – unlimited shares authorized; Shares issued and outstanding totaled
62,654,284 at January 31, 2013 (January 31, 2012 – 62,432,727) (Note 13)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board:
January 31,
January 31,
2013
2012
37,638
65,547
20,491
16,858
5,655
3,412
812
12,978
80,986
149
10,236
88,297
71,297
23,945
5,324
2,814
413
12,420
103,376
296
9,287
68,005
46,681
31,279
274,910
258,924
6,113
12,373
2,354
7,320
28,160
318
3,770
5,620
5,250
12,415
1,318
6,636
25,619
1,718
3,277
9,754
37,868
40,368
92,472
451,434
1,869
90,924
452,424
(63)
(308,733)
(324,729)
237,042
274,910
218,556
258,924
E. Demirian
Director
Stephen Watt
Director
38
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND WEIGHTED AVERAGE 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,
2013
2012
2011
126,883
113,990
99,175
42,399
38,313
33,875
84,484
75,677
65,300
13,765
21,269
15,691
2,364
14,202
67,291
17,193
(45)
73
13,009
19,044
14,272
2,131
11,996
60,452
15,225
(9)
174
11,492
16,971
13,633
3,995
11,471
57,562
7,738
(14)
209
17,221
15,390
7,933
2,078
(853)
1,225
1,438
1,926
3,364
277
(3,883)
(3,606)
15,996
12,026
11,539
0.26
0.25
0.19
0.19
0.19
0.18
62,556
63,860
62,218
63,400
61,523
62,888
The accompanying notes are an integral part of these consolidated financial statements.
39
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(US DOLLARS IN THOUSANDS; US GAAP)
January 31, January 31, January 31,
2011
2013
2012
Comprehensive income
Net income
Other comprehensive income (loss):
15,996
12,026
11,539
Foreign currency translation adjustment, net of income tax recovery
1,932
(1,885)
3,856
(expense) of $310 for the year ended January 31, 2013 (January 31, 2012 –
($188); January 31, 2011 – $534)
Total other comprehensive income (loss)
Comprehensive income
1,932
17,928
(1,885)
10,141
3,856
15,395
The accompanying notes are an integral part of these consolidated financial statements.
40
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(US DOLLARS IN THOUSANDS; US GAAP)
Common shares
Balance, beginning of year
Shares issued:
Stock options exercised
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
Settlement of stock options (Note 15)
Stock option income tax benefits
Purchase of non-controlling interest (Note 3)
Balance, end of year
Accumulated other comprehensive income (loss)
Balance, beginning of year
Foreign currency translation adjustments, net of income taxes
Balance, end of year
Accumulated deficit
Balance, beginning of year
Net income
Balance, end of year
January 31, January 31, January 31,
2011
2013
2012
90,924
88,148
86,609
1,548
92,472
2,776
90,924
1,539
88,148
452,424
-
1,278
(348)
(2,021)
101
-
452,300
11
1,213
(1,001)
-
(99)
-
451,591
8
1,076
(404)
-
-
29
451,434
452,424
452,300
(63)
1,932
1,869
1,822
(1,885)
(2,034)
3,856
(63)
1,822
(324,729)
15,996
(336,755)
12,026
(348,294)
11,539
(308,733)
(324,729)
(336,755)
Total Shareholders’ Equity
237,042
218,556
205,515
The accompanying notes are an integral part of these consolidated financial statements.
41
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 unearned compensation
Stock-based compensation expense
Gain on sale of investment in affiliate (Note 7)
Loss from investment in affiliate (Note 7)
Deferred tax expense
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
Additions to capital assets
Proceeds from the sale of investment in affiliate (Note 7)
Settlement of acquisition earn-out (Note 9)
Acquisition of subsidiaries, net of cash acquired and bank indebtedness
assumed
Cash used in investing activities
FINANCING ACTIVITIES
Issuance of common shares for cash
Settlement of stock options (Note 15)
Repayment of other liabilities
Cash (used in) provided by financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Decrease 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,
2013
2012
2011
15,996
12,026
11,539
2,877
14,202
2,462
11,996
-
-
-
11
2,420
11,471
417
8
1,278
1,213
1,076
-
-
-
-
(853)
196
1,926
196
(1,697)
(183)
(379)
(343)
873
(736)
451
(460)
(822)
(619)
75
(1,065)
(1,682)
99
(1,342)
(1,430)
(20)
19
(3,883)
196
2,748
106
51
-
(275)
(3,088)
(1,733)
(1,163)
30,340
23,926
19,889
-
-
5,071
(3,496)
(4,734)
(1,656)
-
(590)
-
-
487
-
(54,155)
(21,281)
(44,989)
(58,241)
(26,015)
(41,087)
704
1,775
1,133
(1,525)
-
-
(77)
(4,342)
(358)
(898)
(2,567)
890
559
775
513
(27,909)
(4,097)
(19,910)
65,547
37,638
69,644
65,547
89,554
69,644
46
1,149
9
727
21
1,319
The accompanying notes are an integral part of these consolidated financial statements.
42
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. Our pricing model provides our customers with flexibility in
purchasing our solutions either on a perpetual license, subscription or transactional basis. Our primary
focus is on serving transportation providers (air, ocean and truck modes), 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.
Note 2 - Significant Accounting Policies
Basis of presentation
The accompanying consolidated financial statements are presented in United States (“US”) dollars and
are prepared in accordance with generally accepted accounting principles in the US (“GAAP”) and the
rules and regulations of the Canadian Securities Administrators and US Securities and Exchange
Commission (“SEC”) for the preparation of consolidated financial statements.
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, 2013, is referred to as the “current fiscal year,” “fiscal 2013,”
“2013” or using similar words. Our fiscal year, which ended January 31, 2012, is referred to as the
“previous fiscal year,” “fiscal 2012,” “2012” or using similar words. Other fiscal years are referenced by
the applicable year during which the fiscal year ends. For example, “2014” refers to the annual period
ending January 31, 2014 and the “fourth quarter of 2014” refers to the quarter ending January 31,
2014.
Certain immaterial reclassifications have been made to the consolidated financial statements and the
notes to conform to the current presentation. Specifically, the long-term portion of trade accounts
receivable has been presented on a separate line on the balance sheet and other liabilities have been
included in the accrued liabilities line on the balance sheet.
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, long-term
receivable, accounts payable, accrued liabilities and income taxes payable. The estimated fair values of
these financial instruments are approximate to book values.
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.
43
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.
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 daily 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, 2013, foreign currency transaction losses of $0.2 million were
included in net income (January 31, 2012 - nil; January 31, 2011 - $0.3 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,
valuation of inventory, 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
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 average cost
of units.
44
The valuation of inventory, including the determination of obsolete or excess inventory, requires
management to estimate the future demand for our products within specified time horizons. We perform
an assessment of inventory which includes a review of, among other factors, demand requirements,
product life cycle and development plans, product pricing and quality issues. If the demand for our
products indicates we are no longer able to sell inventories above cost or at all, we write down inventory
to net realizable value or excess inventory is written off.
Impairment of long-lived assets
We account for the impairment and disposition of long-lived assets in accordance with Accounting
Standard Codification (“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, 2012
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 technologies
Trade names
Straight-line over four to twenty years
Straight-line over two to seven years
Straight-line over three to ten years
Straight-line over one 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”).
45
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; (iii)
maintenance, subscription and other related revenues, including revenues associated with maintenance
and support of our services and products, which are recognized ratably over the subscription period; and
(iv) hardware revenues, which are recognized upon delivery of goods.
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
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.
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,
46
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 account for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock
Compensation” (“ASC Topic 718”). Accordingly, the fair value of employee stock-based compensation
that is ultimately expected to vest is amortized to expense in our consolidated statement of operations
based on the straight-line attribution method.
The fair value of stock option grants is calculated using the Black-Scholes Merton 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 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.
Performance share units (“PSUs”) are measured at fair value estimated using a Monte Carlo Simulation
approach. 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 PSUs at the time of the grant. The expected PSU life is based on the
historical life of our stock options and other factors.
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.
We apply 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.
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-based compensation.
Recently adopted accounting pronouncements
In May 2011, the FASB issued Accounting Standards Update (“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 has not had a material impact on our results of
operations or disclosures.
47
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 shareholders’ 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 reflected in the separate statement of comprehensive income in our
consolidated financial statements.
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 FASB 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. ASU 2011-12 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 has not had a material impact on our results of operations or
disclosures.
Note 3 - Acquisitions
On November 14, 2012, we acquired all outstanding shares of privately-held Exentra Transport Solutions
Limited (“Exentra”), a leading UK-based provider of software-as-a-service (“SaaS”) driver compliance
solutions for the European Union. The total purchase price for the acquisition was $16.6 million, net of
cash acquired. We also incurred acquisition-related costs, primarily for advisory services, of $0.3 million
included in other charges in our consolidated statements of operations in 2013. The gross contractual
amount of trade receivables acquired was $0.8 million with a fair value of $0.8 million at the date of
acquisition. Our acquisition date estimate of contractual cash flows not expected to be collected was nil.
We have recognized $0.8 million of revenues and $0.1 million of net loss from Exentra since the date of
acquisition in our consolidated statements of operations for 2013.
On June 15, 2012, we acquired substantially all of the assets of Integrated Export Systems, Ltd. and IES
Asia Limited (collectively referred to as “IES”). IES provides SaaS solutions that help freight forwarders,
non-vessel operating common carriers and custom brokers manage their businesses. The total purchase
price for the acquisition was $33.9 million, net of cash acquired. We also incurred acquisition-related
costs, primarily for advisory services, of $0.3 million included in other charges in our consolidated
statements of operations in 2013. The gross contractual amount of trade receivables acquired was $0.8
million with a fair value of $0.6 million at the date of acquisition. Our acquisition date estimate of
contractual cash flows not expected to be collected was $0.2 million. We have recognized $6.4 million of
revenues and $2.0 million of net income from IES since the date of acquisition in our consolidated
statements of operations for 2013.
On June 1, 2012, we acquired all outstanding shares of privately-held Infodis B.V. (“Infodis”), a
Netherlands-based provider of SaaS transportation management solutions that enable its clients to
manage both inbound and outbound purchased transportation. The total purchase price for the
acquisition was $3.7 million, net of cash acquired. We also incurred acquisition-related costs, primarily
for advisory services, of $0.4 million included in other charges in our consolidated statements of
operations in 2013. The gross contractual amount of trade receivables acquired was $0.7 million with a
fair value of $0.7 million at the date of acquisition. Our acquisition date estimate of contractual cash
flows not expected to be collected was nil. We have recognized $2.2 million of revenues and $0.2 million
of net income from Infodis since the date of acquisition in our consolidated statements of operations for
2013.
48
The preliminary purchase price allocations for businesses we acquired during fiscal 2013 are as follows:
Purchase price consideration:
Cash, excluding cash acquired related to
Infodis ($375), IES (nil) and Exentra ($663)
Net working capital adjustments
Allocated to:
Current assets, excluding cash acquired related to
Infodis ($375) IES (nil) and Exentra ($663)
Capital assets
Deferred tax assets
Current liabilities
Deferred revenue
Deferred tax liability
Net tangible assets (liabilities) assumed
Finite life intangible assets acquired:
Customer agreements and relationships
Existing technology
Non-compete covenants
Goodwill
Exentra
IES
Infodis
Total
16,559
(27)
16,532
33,909
12
33,921
3,687
2
3,689
54,155
(13)
54,142
883
116
-
(1,008)
(26)
(3,112)
(3,147)
767
-
-
(184)
(901)
-
(318)
831
194
22
(386)
-
(565)
96
2,481
310
22
(1,578)
(927)
(3,677)
(3,369)
2,621
10,827
-
6,231
16,532
6,941
15,236
239
11,823
33,921
834
1,420
-
1,339
3,689
10,396
27,483
239
19,393
54,142
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Customer agreements and relationships
Non-compete covenants
Existing technology
Exentra
12 years
N/A
10 years
IES
10 years
5 years
8 years
Infodis
6 years
N/A
5 years
The goodwill on the Infodis, IES and Exentra 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 Infodis and Exentra acquisition are not deductible for tax purposes. The goodwill arising
from the IES acquisition is deductible for tax purposes.
On January 20, 2012, we acquired all outstanding shares of 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.
On November 2, 2011, we acquired all outstanding shares of 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
49
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 June 10, 2011, we acquired all outstanding shares of privately-held Telargo Inc. (“Telargo”), a
provider of telematics solutions. Telargo is a 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.
The final purchase price allocations for businesses we acquired during fiscal 2012 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
13,605
(38)
13,567
5,002
(829)
4,173
21,281
(871)
20,410
194
715
29
(672)
(559)
(987)
-
(1,280)
364
1,746
90
51
1,699
2,670
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 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
7 years
7 years
5 years
2 years
Telargo
6 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
50
goodwill arising from the Telargo, InterCommIT and GeoMicro acquisitions is not deductible for tax
purposes.
On June 16, 2010, we acquired all outstanding shares of privately-held Belgian-based Routing
International NV (“Routing International”), a developer and distributor of optimized route planning
solutions. Routing International’s solutions join Descartes’ MRM 2.0 solution suite, which combines
optimized real-time planning with wireless mobile technology to manage resources in motion. The
purchase price for the acquisition was $3.9 million in cash. We also incurred acquisition-related costs,
primarily for advisory services included in other charges in 2011, of $0.2 million. The gross contractual
amount of trade accounts receivable acquired was $1.4 million with a fair value of $1.0 million at the
date of acquisition. Our acquisition date estimate of contractual cash flows not expected to be collected
is $0.4 million. We have recognized $1.8 million of revenues and $0.2 million of net income before
amortization expense of $0.3 million from Routing International NV since the date of acquisition in our
consolidated statements of operations for 2011.
On April 19, 2010, we purchased all outstanding 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.
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.
51
The final purchase price allocations for businesses we acquired during fiscal 2011 are as follows:
Routing
International
Imanet
Porthus
Total
Purchase price consideration:
Cash, excluding cash acquired related to
Porthus ($6,282), Imanet ($146) and
Routing International ($567)
Net working capital adjustments
Allocated to:
Current assets
Current deferred tax asset
Investment in affiliate
Capital assets
Current liabilities
Deferred revenue
Deferred income tax liability
Other long term liabilities
Net tangible assets (liabilities) assumed
Finite life intangible assets acquired:
Customer agreements and relationships
Existing technology
Non-compete covenants
Trade names
Goodwill
Non-controlling interest
4,339
(491)
3,848
1,686
136
-
62
(719)
(956)
(536)
(137)
(464)
592
1,168
-
-
2,552
-
3,848
5,973
(216)
5,757
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 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
4 years
n/a
Imanet
8 years
5 years
4 years
3 years
Porthus
7 years
5 years
5 years
2 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.
The above transactions were accounted for using the acquisition method in accordance with ASC Topic
805, “Business Combinations”. The purchase price allocations in the tables 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 net assets of Infodis, IES and Exentra are preliminary as we
finalize the net tangible assets and liabilities assumed. The preliminary purchase price 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 allocation for Infodis, IES and Exentra will be completed within one year from the
acquisition date.
52
No in-process research and development was acquired in the above transactions.
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 Infodis, Exentra, Telargo, InterCommIT,
GeoMicro, Imanet and Routing International transactions have not been included in the table below as
they are not material to our consolidated financial statements. The pro forma results of operations for
the IES transaction have not been presented as this disclosure is considered impracticable since IES has
not been audited in the past and historic financial statements would not be auditable due to the use of
cash based accounting.
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
Note 4 – Cash and Cash Equivalents
Cash and cash equivalents
Cash on deposit with banks
Total cash and cash equivalents
January 31,
2011
102,519
12,230
0.20
0.19
January 31, January 31,
2012
2013
37,638
37,638
65,547
65,547
We have no operating lines of credit as at January 31, 2013 ($3.0 million as at January 31, 2012, of
which none was utilized).
As at January 31, 2013 we have outstanding letters of credit of approximately $0.2 million (EUR 0.1
million) related to our leased premises ($0.1 million at January 31, 2012).
Note 5 - Trade Receivables
Trade receivables
Less: Allowance for doubtful accounts
January 31, January 31,
2012
2013
21,602
(1,111)
20,491
17,590
(732)
16,858
Trade receivables of $0.2 million and $0.3 million, not presented in the above table, have been
presented as long-term receivables in our consolidated balance sheets at January 31, 2013 and January
31, 2012, respectively. These receivables are not expected to be collected within the next year.
53
Bad debt expense was $0.3 million, $0.3 million and $0.5 million for the years ended January 31, 2013,
January 31, 2012 and January 31, 2011, respectively.
Note 6 –Inventory
Finished goods
January 31,
2013
812
812
January 31,
2012
413
413
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 years ended January 31, 2013 or 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,
2012
2013
29,592
1,538
1,140
95
32,365
20,118
1,153
858
22,129
10,236
25,746
1,947
3,086
2,637
33,416
19,851
1,700
2,578
24,129
9,287
Computer equipment and software cost includes $0.2 million and $0.3 million of assets recorded under
capital leases as of January 31, 2013 and January 31, 2012, respectively. Amortization expense related
to assets under capital leases was less than $0.1 million, $0.1 million and $0.1 million for the years
ended January 31, 2013, January 31, 2012 and January 31, 2011, respectively.
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.
54
Note 9 - Goodwill
Balance, beginning of year
Acquisition of subsidiaries
Infodis
IES
Exentra
Telargo
InterCommIT
GeoMicro
Adjustments on account of foreign exchange and prior acquisitions
Balance, end of year
January 31, January 31,
2012
56,742
2013
68,005
1,339
11,823
6,231
-
-
-
899
88,297
-
-
-
4,322
5,370
1,699
(128)
68,005
The business acquisitions of Infodis, IES, Exentra, Telargo, InterCommIT and GeoMicro 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. During 2013,
$0.6 million of the earn-out adjustment was paid. No adjustments relating to the earn-out were recorded in
2013.
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,
2013
January 31,
2012
51,820
1,867
66,296
4,164
124,147
25,936
1,235
22,402
3,277
52,850
71,297
40,851
1,607
38,012
4,115
84,585
20,532
1,052
13,380
2,940
37,904
46,681
Intangible assets related to our acquisitions are recorded at their fair value at the acquisition date.
During 2013, additions to intangible assets primarily consisted of the acquisitions of Infodis, IES and
Exentra, 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 $71.3 million over the following periods: $16.2
million for 2014, $14.0 million for 2015, $11.4 million for 2016, $9.7 million for 2017, $5.7 million for
55
2018 and $14.3 million thereafter. Expected future amortization expense is subject to fluctuations in
foreign exchange rates.
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
Accrued professional fees
Amounts payable to former shareholders of prior acquisitions
Accrued purchase price consideration and other acquisition-related costs
Other accrued liabilities
January 31,
2013
6,989
1,063
-
237
4,084
12,373
January 31,
2012
6,284
1,233
390
792
3,716
12,415
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,
2014
2015
2016
2017
2018
Thereafter
Operating
Leases
3,706
2,967
2,274
1,129
572
614
11,262
Capital
Leases
64
32
-
-
-
-
96
Total
3,770
2,999
2,274
1,129
572
614
11,358
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 $3.7 million, $3.6 million and $3.1 million for the years ended
January 31, 2013, January 31, 2012 and January 31, 2011, respectively.
Other Obligations
Deferred Share Unit and Restricted Share Unit Plans
As described in Note 15 to the consolidated financial statements, we maintain deferred share unit
(“DSU”) and cash-settled restricted share unit (“CRSU”) 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 Toronto Stock Exchange (“TSX”) at the consolidated balance sheet date. For CRSUs, 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 CRSUs of $1.3 million for which no liability was recorded on our
consolidated balance sheet at January 31, 2013, in accordance with FASB ASC Topic 718 “Compensation
56
– Stock Compensation” (“ASC Topic 718”). The ultimate liability for any payment of DSUs and CRSUs 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 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”. 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 agreements 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 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.
57
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:
January 31, January 31, January 31,
2011
61,411
2013
62,433
2012
61,742
Stock options exercised
Stock options settled for shares (Note 15)
Balance, end of year
163
58
62,654
691
-
62,433
331
-
61,742
Note 14 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):
Year Ended
January 31,
2013
January 31,
2012
January 31,
2011
Net income for purposes of calculating basic and diluted
earnings per share
15,996
12,026
11,539
(number of shares in thousands)
Weighted average shares outstanding
Dilutive effect of employee stock options
Dilutive effect of restricted and performance share units
Weighted average common and common equivalent shares
outstanding
Earnings per share
Basic
Diluted
62,556
1,279
25
62,218
1,182
-
61,523
1,365
-
63,860
63,400
62,888
0.26
0.25
0.19
0.19
0.19
0.18
For the years ended January 31, 2013, 2012 and 2011, respectively, 40,000, 15,000 and 219,607
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 2013, 2012 and 2011, respectively, the
application of the treasury stock method excluded 7,500, 418,480 and 222,500 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. 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 the 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.
58
During the quarter ended July 31, 2012, we amended our stock option plan agreements to allow for
stock options to be surrendered to the Company and settled for cash and/or shares. The Company does
not have an obligation to settle outstanding stock options on a cash basis. The cash settlement value is
determined using the closing share price for the day preceding the elected settlement date less the
exercise price. For the year ended January 31, 2013, 340,840 options were settled for $1.5 million in
cash and $0.5 million of common shares were issued from treasury.
As of January 31, 2013, we had 2,496,161 stock options granted and outstanding under our
shareholder-approved stock option plan and 185,418 remained available for grant. In addition, we had
14,000 stock options outstanding under stock option plans which were not approved by shareholders.
Total estimated stock-based compensation expense recognized under ASC Topic 718 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,
2013
56
412
44
766
1,278
January 31,
2012
110
251
308
544
1,213
January 31,
2011
73
229
130
644
1,076
Differences between how GAAP and applicable income tax laws treat the amount and timing of
recognition of stock-based compensation expense may result in a deferred tax asset. We have recorded
a valuation allowance against any such deferred tax asset except for $0.4 million ($0.5 million at
January 31, 2012) recognized in the United States. We realized a nominal tax expense in connection
with stock options exercised during 2013.
As of January 31, 2013, $0.6 million of total unrecognized compensation costs, net of forfeitures, related
to non-vested stock option awards is expected to be recognized over a weighted average period of 1.3
years. The total fair value of stock options vested during 2013 was $0.5 million.
The fair value of stock option grants is estimated using the Black-Scholes Merton 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, 2013
January 31, 2012
January 31, 2011
Weighted
-Average
Range
Weighted-
Average
Range
Weighted-
Average
Range
-
-
37.3 34.6 to 37.9
1.8 to 2.6
5
2.5
5
Expected dividend yield (%)
Expected volatility (%)
Risk-free rate (%)
Expected option life (years)
-
33.2
1.2
5
-
N/A
N/A
N/A
-
33.6
2.4
5
-
N/A
N/A
N/A
59
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
A summary of option activity under all of our plans is presented as follows:
Balance at January 31, 2012
Granted
Exercised
Settled for Cash/ Shares
Forfeited
Balance at January 31, 2013
Number of
Stock Options
Outstanding
2,987,251
40,000
(163,050)
(340,840)
(13,200)
2,510,161
$3.97
$8.97
$4.29
$2.59
$5.72
$4.35
Vested or expected to vest at January 31,
2013
2,441,011
$4.32
Exercisable at January 31, 2013
2,114,258
$4.04
2.4
12.8
2.4
2.0
12.6
11.5
The weighted average grant-date fair value of options granted during 2013, 2012 and 2011 was $2.73,
$2.18, and $2.27 per option, respectively. The total intrinsic value of options exercised during 2013,
2012 and 2011 was approximately $0.7 million, $2.9 million and $1.0 million, respectively. The total
intrinsic value of options settled during 2013, 2012 and 2011 was approximately $2.0 million, nil and nil,
respectively.
Options outstanding and options exercisable as at January 31, 2013 by range of exercise price are as
follows:
Range of Exercise Prices
$3.15 – $3.89
$4.20 – $4.43
$4.69 – $6.54
$7.23 – $9.01
Options Outstanding
Weighted
Average
Exercise
Price
Number of
Stock
Options
1,254,531
$3.39
521,650
$3.94
686,480
$5.81
$8.73
47,500
$4.35 2,510,161
Weighted
Average
Remaining
Contractual
Life (years)
2.4
0.7
3.3
6.2
2.4
Options Exercisable
Number of
Stock
Options
Weighted
Average
Exercise
Price
1,169,522
$3.39
521,650
$3.94
420,086
$5.44
$7.23
3,000
$4.04 2,114,258
A summary of the status of our unvested stock options under our shareholder-approved stock option
plan and stock option plans which were not approved by shareholders as of January 31, 2013 is
presented as follows:
Balance at January 31, 2012
Granted
Vested
Forfeited
Balance at January 31, 2013
60
Number of
Stock Options
Outstanding
682,538
40,000
(317,935)
(8,700)
395,903
Weighted-
Average Grant-
Date Fair Value
per Share
$1.89
$2.73
$1.70
$6.17
$2.08
Performance Share Units
Our board of directors adopted a performance and restricted share unit plan effective as of April 30,
2012 pursuant to which certain of our employees are eligible to receive grants of PSUs. PSUs vest at the
end of a three-year performance period. The ultimate number of PSUs that vest is based on the total
shareholder return (“TSR”) of our Company relative to the TSR of companies comprising a peer index
group. TSR is calculated based on the weighted-average closing price of shares for the five trading days
preceding the beginning and end of the performance period. The fair value of PSUs is expensed to stock-
based compensation expense over the vesting period. PSUs expire ten years from the grant date. New
shares are issued from treasury upon the redemption of a PSU.
PSUs are measured at fair value estimated using a Monte Carlo Simulation approach. 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 PSUs at the time of the grant. The expected PSU life is based on the historical life of our stock options
and other factors.
A summary of PSU activity is as follows:
Balance at January 31, 2012
Granted
Balance at January 31, 2013
Number of
PSUs
Outstanding
Weighted-
Average
Grant Date
Fair Value
-
139,071
139,071
-
$11.90
$11.90
Vested or expected to vest at January 31,
2013
139,071
$11.90
Exercisable at January 31, 2013
-
-
Weighted-
Average
Remaining
Contractual
Life (years)
-
9.0
9.0
-
Aggregate
Intrinsic
Value
(in millions)
-
1.3
1.3
-
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
aggregate closing share price of our common shares on January 31, 2013) that would have been
received by PSU holders if all PSUs had been vested on January 31, 2013.
As of January 31, 2013, $1.3 million of total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of 2.0 years.
Restricted Share Units
Our board of directors adopted a performance and restricted share unit plan effective as of April 30,
2012 pursuant to which certain of our employees are eligible to receive grants of restricted share units
(“RSUs”). RSUs vest annually over a three-year period starting from the grant date and expire ten years
from the grant date. We issue new shares from treasury upon the redemption of a RSU.
RSUs are measured at fair value based on the closing price of our common shares for the day preceding
the date of the grant and will be expensed to stock-based compensation expense over the vesting
period.
61
A summary of RSU activity is as follows:
Balance at January 31, 2012
Granted
Balance at January 31, 2013
Number of
RSUs
Outstanding
Weighted-
Average
Grant Date
Fair Value
-
119,799
119,799
-
$8.80
$8.80
Vested or expected to vest at January 31,
2013
119,799
$8.80
Exercisable at January 31, 2013
39,933
$8.80
Weighted-
Average
Remaining
Contractual
Life (years)
-
9.0
9.0
9.0
Aggregate
Intrinsic
Value
(in millions)
-
1.1
1.1
0.4
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
aggregate closing share price of our common shares on January 31, 2013) that would have been
received by RSU holders if all RSUs had been vested on January 31, 2013.
As of January 31, 2013, $0.7 million of total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of 2.0 years.
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, 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 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, 2012
Granted
Balance at January 31, 2013
Number of
DSUs
Outstanding
84,060
18,761
102,821
As at January 31, 2013, the total number of DSUs held by participating directors was 102,821,
representing an aggregate accrued liability of $1.0 million ($0.7 million at January 31, 2012). 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 $0.1 million for 2013, 2012 and 2011, respectively.
Cash-Settled Restricted Share Unit Plan
Our board of directors adopted a cash-settled 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 cash-
settled 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 CRSUs
62
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 CRSU plan is as follows:
Balance at January 31, 2012
Granted
Vested and settled in cash
Balance at January 31, 2013
Vested at January 31, 2013
Unvested at January 31, 2013
Number of
CRSUs
Outstanding
Weighted-
Average
Remaining
Contractual Life
(years)
385,640
65,441
(209,592)
241,489
11,058
230,431
1.4
-
1.4
We have recognized the compensation cost of the CRSUs ratably over the service/vesting period relating
to the grant and have recorded an aggregate accrued liability of $1.0 million at January 31, 2013 ($1.2
million at January 31, 2012). As at January 31, 2013, the unrecognized aggregate liability for the non-
vested CRSUs was $1.3 million ($1.9 million at January 31, 2012). The fair value of the CRSU liability is
based on the closing price of our common shares at the balance sheet date. The total compensation cost
related to CRSUs recognized in our consolidated statements of operations was approximately $1.3
million, $1.5 million and $1.5 million for 2013, 2012 and 2011, 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 $0.7 million, $0.6
million and $0.5 million in 2013, 2012 and 2011, respectively, of which $0.3 million was payable at both
January 31, 2013 and January 31, 2012.
Note 17 - Income Taxes
Income before income taxes is earned in the following tax jurisdictions:
Year Ended
Canada
United States
Other countries
January
31,
2013
14,908
1,529
784
17,221
January 31, January 31,
2012
2011
17,225
87
(1,922)
15,390
5,045
5,380
(2,492)
7,933
63
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,
2011
2013
2012
478
446
1,154
2,078
5,177
(833)
(5,197)
(853)
1,225
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)
In 2013, our current income tax expense was primarily impacted by $0.8 million increase for certain
income incurred in Europe for which no offsetting loss carryforwards are available. Deferred income tax
expense decreased in 2013 primarily as a result of change in valuation allowance in the UK which has
decreased income tax expense by $5.3 million. This decrease was partially offset by a $1.0 million
increase in regards to a change of estimate in the US.
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.
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
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
64
January 31, January 31,
2012
2013
4,355
36,194
1,391
12,716
1,119
5,266
419
61,460
(7,968)
(915)
(8,883)
52,577
(21,274)
31,303
12,978
23,945
(5,620)
31,303
3,538
48,027
1,312
13,099
1,053
4,659
860
72,548
(3,410)
(1,230)
(4,640)
67,908
(33,963)
33,945
12,420
31,279
(9,754)
33,945
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 $21.3 million ($33.9 million at January 31, 2012) of our net deferred
tax assets of $52.6 million ($67.9 million at January 31, 2012), resulting in a total net deferred tax
asset of $31.3 million at January 31, 2013 ($33.9 million at January 31, 2012).
As at January 31, 2013, we had not accrued for foreign withholding taxes and Canadian income taxes
applicable to approximately $30.3 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.
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,
2011
30.7%
2013
26.5%
2012
28.1%
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
Increases (decreases) in tax reserves
Valuation allowance
Other
Income tax expense (recovery)
4,564
4,325
2,436
182
165
(156)
(503)
565
(4,070)
478
1,225
586
(275)
(228)
(1,242)
734
(864)
328
3,364
(2,198)
695
659
(59)
(149)
(5,241)
251
(3,606)
We have income tax loss carryforwards which expire as follows:
Expiry year
2014
2015
2016
2017
2018
Thereafter
Canada
United
States
9,972
9,972
2,341
22,974
25,315
65
800
EMEA Asia Pacific
490
3,576
614
364
1,252
25
10,626
13,371
798
81,488
86,662
Total
4,066
614
1,164
1,252
3,164
125,060
135,320
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits arising from
uncertain tax positions taken:
January 31, January 31, January 31,
2011
2013
2012
Unrecognized tax benefits, beginning of year
Gross (decreases) increases – tax benefits in prior periods
Gross increases – tax benefits in the current period
Lapsing of statutes of limitations
Unrecognized tax benefits, end of year
4,857
-
1,389
(607)
5,639
4,246
42
1,010
(441)
4,857
5,168
(1,368)
874
(428)
4,246
We expect that these unrecognized tax benefits will increase within the next 12 months, although at this
time a reasonable estimate of the possible increase cannot be made. While we believe that we have
adequately provided for all tax positions, amounts asserted by taxing authorities could differ from our
accrued position. To the extent that the uncertain tax positions do not materialize, up to $4.1 million of
the unrecognized tax benefits would then be recognized and decrease the effective tax rate.
Consistent with our historical financial reporting, we recognize accrued interest and penalties related to
unrecognized tax positions in general and administrative expense. As at January 31, 2013 and January
31, 2012, the unrecognized tax positions have resulted in no material liability for estimated interest and
penalties.
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
Netherlands
Belgium
Note 18 - Other Charges
Years No Longer Subject to
Audit
2010 and prior
2006 and prior
2010 and prior
2008 and prior
2008 and prior
2010 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.
66
Other charges included in our consolidated statements of operations are as follows:
Acquisition-related costs
Fiscal 2013 restructuring plan
Fiscal 2012 restructuring plan
Restructuring related to fiscal 2012 acquisitions
Fiscal 2011 restructuring plan
Restructuring related to fiscal 2011 acquisitions
Fiscal 2010 restructuring plan
Write-off of redundant assets
January 31, January 31, January 31,
2011
1,545
-
-
-
866
1,011
156
417
3,995
2013
1,405
755
117
-
-
-
87
-
2,364
2012
1,599
-
353
60
97
22
-
-
2,131
Fiscal 2013 Restructuring Plan
In the second quarter of 2013, management approved and began to implement the fiscal 2013
restructuring plan to reduce operating expenses and increase operating margins. To date $0.8 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 has expected remaining
workforce costs of $0.1 million to be expensed in 2014.
The following table shows the changes in the restructuring provision for the fiscal 2013 restructuring
plan.
Balance at January 31, 2012
Accruals and adjustments
Cash draw downs
Noncash draw downs and foreign exchange
Balance at January 31, 2013
Workforce
Reduction
-
730
(707)
8
31
Office Closure
Costs
-
25
(25)
-
-
Total
-
755
(732)
8
31
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 $0.5 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 has expected remaining
office closure costs of $0.1 million to be expensed in 2014.
The following table shows the changes in the restructuring provision for the fiscal 2012 restructuring
plan.
Balance at January 31, 2012
Accruals and adjustments
Cash draw downs
Noncash draw downs and foreign exchange
Balance at January 31, 2013
Workforce
Reduction
9
16
(25)
-
-
Office Closure
Costs
19
101
(120)
-
-
Total
28
117
(145)
-
-
67
Restructuring Related to Fiscal 2012 Acquisitions
During the year ended January 31, 2012, we completed three acquisitions. As these acquisitions were
completed, management approved and began to implement a restructuring plan 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 no further expected costs. As at January 31, 2013, no liability remains relating to this
restructuring plan.
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 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. As at January 31, 2013, no liability remains relating to
this restructuring plan.
Restructuring Related to Fiscal 2011 Acquisitions
During the year ended January 31, 2011, we completed three acquisitions. As these acquisitions were
completed, management approved and began to implement a restructuring plan 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. As at January 31, 2013, no
liability remains relating to this restructuring plan.
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 $1.0 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 no further expected costs. As at January 31, 2013, no liability remains relating to
this restructuring plan.
The following table shows the changes in the restructuring provision for the fiscal 2010 restructuring
plan.
Balance at January 31, 2012
Accruals and adjustments
Cash draw downs
Balance at January 31, 2013
Workforce
Reduction
29
87
(116)
-
Office Closure
Costs
-
-
-
-
Network
Consolidation
Costs
-
-
-
-
Total
29
87
(116)
-
68
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,
2011
2013
2012
60,420
14,212
1,052
15,668
29,286
6,245
126,883
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
January 31, January 31, January 31,
2011
2013
2012
116,822
10,061
126,883
105,645
8,345
113,990
93,684
5,491
99,175
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; (iii) maintenance and other
related revenues, including revenues associated with maintenance and support of our services and
products; and (iv) hardware revenues. 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
Note 20 - Subsequent Event
January 31,
2013
January 31,
2012
72,510
24,249
32,840
40,227
4
169,830
43,312
24,926
36,581
19,148
6
123,973
On March 7, 2013, we entered into a $50.0 million credit agreement with the Bank of Montreal, for a
five year term. The credit agreement provides for a $48.0 million revolving facility, to be repaid in equal
quarterly installments over a period of five years from the advance date, and a $2.0 million revolving
facility, with no fixed repayment date prior to the end of the term. Borrowings under the credit
69
agreement are secured by a first charge over substantially all of our assets. Depending on the type of
advance under the available facilities, interest will be charged at a rate of either i) Canada or US prime
rate plus 0% to 1.5%; or ii) LIBOR plus 1.5% to 3%. Interest is payable monthly in arrears under both
facilities. The credit agreement contains certain customary representations, warranties and guarantees,
and covenants. No amounts have been borrowed under the credit agreement as of March 7, 2013.
70
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
Phone: (416) 263-9200
Computershare Trust Company
12039 West Alameda Parkway
Suite Z-2 Lakewood, Colorado
80228 USA
Phone: (303) 262-0600
Independent Registered Chartered Accountants
Deloitte LLP
5140 Yonge Street
Suite 1700
North York, Ontario M2N 6L7
Phone: (416) 601-6150
Investor Inquiries
Investor Relations
The Descartes Systems Group Inc.
120 Randall Drive
Waterloo, Ontario N2V 1C6
Phone: (519) 746-8110 ext. 202358
Toll Free: (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