THE DESCARTES SYSTEMS GROUP INC.
ANNUAL REPORT
US GAAP FINANCIAL RESULTS FOR 2015 FISCAL YEAR
TABLE OF CONTENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................ 3
OVERVIEW .................................................................................................................................. 5
CONSOLIDATED OPERATIONS ............................................................................................................ 9
QUARTERLY OPERATING RESULTS ..................................................................................................... 17
LIQUIDITY AND CAPITAL RESOURCES .................................................................................................. 19
COMMITMENTS, CONTINGENCIES AND GUARANTEES ................................................................................. 22
OUTSTANDING SHARE DATA ........................................................................................................... 24
APPLICATION OF CRITICAL ACCOUNTING POLICIES .................................................................................. 24
CHANGE IN / INITIAL ADOPTION OF ACCOUNTING POLICIES........................................................................ 27
CONTROLS AND PROCEDURES .......................................................................................................... 28
TRENDS / BUSINESS OUTLOOK ........................................................................................................ 29
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS ............................................................................ 31
MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS AND INTERNAL CONTROL OVER FINANCIAL REPORTING ................ 44
CONSOLIDATED BALANCE SHEETS ..................................................................................................... 47
CONSOLIDATED STATEMENTS OF OPERATIONS ....................................................................................... 48
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ............................................................... 49
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ......................................................................... 50
CONSOLIDATED STATEMENTS OF CASH FLOWS ....................................................................................... 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................. 52
CORPORATE INFORMATION ............................................................................................................. 81
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, 2015, is referred
to as the “current fiscal year,” “fiscal 2015,” “2015” or using similar words. Our fiscal year, which ended
on January 31, 2014, is referred to as the “previous fiscal year,” “fiscal 2014,” “2014” or using similar
words. Other fiscal years are referenced by the applicable year during which the fiscal year ends. For
example, 2016 refers to the annual period ending January 31, 2016 and the “fourth quarter of 2016”
refers to the quarter ending January 31, 2016.
This MD&A, which is prepared as of March 5, 2015, covers our year ended January 31, 2015, as
compared to years ended January 31, 2014 and 2013. You should read the MD&A in conjunction with
our audited consolidated financial statements for 2015. 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; mix of revenues between services revenues
and license revenues and potential variances from period to period; our plans to focus on generating
services revenues yet to continue to allow customers to elect to license technology in lieu of subscribing
to services; our expected loss of revenues and customers; 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; 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, capital expenditure, debt repayment requirements and our anticipated
growth strategy; our ability to raise capital; our adoption of certain accounting standards 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 based on certain assumptions including the following: global shipment volumes continuing to
increase at levels consistent with the average growth rates of the global economy; countries
3
continuing to implement and enforce existing and additional customs and security regulations
relating to the provision of electronic information for imports and exports; Descartes’ continued
operation of a secure and reliable business network; the stability of general economic and market
conditions, currency exchange rates, and interest rates; equity and debt markets continuing to
provide Descartes with access to capital; Descartes’ continued ability to identify and source
attractive and executable business combination opportunities; Descartes’ ability to develop
solutions that keep pace with the continuing changes in technology, and our continued compliance
with third party intellectual property rights. These assumptions may prove to be inaccurate. Such
forward-looking statements also involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of Descartes, or developments in
Descartes’ business or industry, to differ materially from the anticipated results, performance or
achievements or developments expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, the factors discussed under the heading “Certain Factors That
May Affect Future Results” in this MD&A and in other documents filed with the Securities and
Exchange Commission, the Ontario Securities Commission and other securities commissions across
Canada from time to time. 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
Our
and
rate,
audit
solutions
processes.
shipments;
logistics-intensive
We use technology and networks to simplify
complex business processes. We are primarily
focused on logistics and supply chain management
business
are
predominantly cloud-based and are focused on
the productivity, performance and
improving
security
businesses.
of
Customers use our modular, software-as-a-service
(“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; research and
perform trade tariff and duty calculations and
complete numerous other logistics processes by
participating in a large, collaborative multi-modal
logistics community. Our pricing model provides
our customers with flexibility in purchasing our
solutions either on a subscription, transactional or
perpetual license 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
Logistics is the management of the flow of
resources between a point of origin and a point of
destination – processes that move items (such as
goods, people, information) from point A to point
B. Supply chain management is broader than
logistics and includes the sourcing, procurement,
conversion
for
consumption by an enterprise. Logistics and supply
chain management have 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 solutions for managing
inventory in transit, conveyance units, people and
business documents.
resources
storage
and
of
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
5
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,
adoption of additional customs and regulatory
requirements and the increased rate of change in
day-to-day business requirements are adding to
the overall complexities that companies face in
planning and executing in their supply chains.
Whether a shipment is delayed at the border, a
customer changes an order or a breakdown occurs
on the road, there are increasingly more issues
that can significantly impact the execution of
fulfillment schedules and associated costs.
greater
frequently
end-customers
These challenges are heightened for suppliers that
have
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 do not
to efficiently
provide
accommodate varied processes for organizations to
remain competitive. We believe this presents an
opportunity for logistics technology providers to
unite this 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 logistics and supply chain
management technologies is evolving, but a large
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 Global Logistics
Network (“GLN”) and automating, as well as
standardizing, multi-party business processes. We
believe that our customers are increasingly looking
for a single source, neutral, network-based solution
provider who can help them manage the end-to-
end shipment process – from the booking 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, to the
settlement and audit of the invoice.
Its capabilities go beyond
logistics,
motion.
supporting
transactions,
regulatory compliance documents, and customer
specific needs.
commercial
common
and
helps
regulatory
technology
competitive. Our
filing of shipment
initiatives mandating
Additionally,
electronic
information with
customs authorities require companies to automate
aspects of their shipping processes to remain
customs
compliant
compliance
shippers,
transportation providers, freight forwarders and
other logistics intermediaries to securely and
tariff/duty
electronically
information with customs authorities and self-audit
their own efforts. Our technology also helps
carriers
efficiently
coordinate with customs brokers and agencies to
expedite cross-border shipments. While many
compliance initiatives started in the US, compliance
is quickly becoming a global
issue with
international shipments crossing several borders on
the way to their final destinations.
forwarders
shipment
freight
and
and
file
Solutions
Descartes’ Logistics Technology Platform unites a
growing global community of more than 173,000
parties, allowing them to transact business while
leveraging a broad array of applications designed
to help
thrive.
Descartes’ Logistics Technology Platform is the
simple, elegant synthesis of a network, applications
and a community.
logistics-intensive businesses
The Logistics Technology Platform fuses our GLN,
an extensive logistics network covering multiple
transportation modes, with a broad array of
modular, interoperable web and wireless logistics
management solutions. Designed to help accelerate
increase productivity and
time-to-value and
performance
for businesses of all sizes, the
Logistics Technology Platform leverages the GLN’s
multimodal
enable
companies to quickly and cost-effectively connect
and collaborate.
community
logistics
to
Descartes’ GLN, the underlying 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 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-
The GLN extends its reach using interconnect
agreements with other general and
logistics-
specific networks, to offer companies access to a
wide array of trading partners. With the flexibility
in unique ways,
to connect and collaborate
companies can effectively route or transform data
to and from partners and leverage new and
existing Descartes solutions on the network. 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
inherent adaptability creates
operations. This
opportunities
logistics business
processes that can help customers differentiate
themselves from their competitors.
to develop
Descartes’ Logistics Application Suite offers a wide
array of modular, cloud-based, interoperable web
and wireless logistics management applications.
These solutions embody Descartes’ deep domain
expertise, not merely “check box” functionality.
These solutions deliver value for a broad range of
intensive organizations, whether they
logistics
purchase transportation, run their own
fleet,
operate globally or locally, or work across air,
ocean or ground
transportation. Descartes’
comprehensive suite of solutions includes:
• Routing, Mobile and Telematics;
• Transportation Management;
• Customs & Regulatory Compliance;
• Trade Data;
• Global Logistics Network Services; and
• Broker & Forwarder Enterprise Systems.
solutions.
applications
are modular
Powered by the Logistics Technology Platform,
Descartes’
and
interoperable to allow organizations the flexibility
to deploy them quickly within an existing portfolio
streamlined
Implementation
of
because these solutions use web-native or wireless
user interfaces and are pre-integrated with the
GLN. With interoperable and multi-party solutions,
to deliver
Descartes’ solutions are designed
functionality
logistics
operation’s performance and productivity both
within the organization and across a complex
network of partners.
can enhance a
that
is
Descartes’ GLN
community members enjoy
extended command of operations and accelerated
6
over
comprises
time-to-value relative to many alternative logistics
solutions. Given the inter-enterprise nature of
logistics, 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’
GLN
200,000
community
organizations collaborating
in more than 160
countries. With that reach, many companies find
that on joining the GLN community, a number of
their trading partners are already members, with
existing connection to the GLN. This helps to
minimize the time required to integrate Descartes’
logistics management applications and to begin
realizing
to
continuing to expand community membership.
Companies that join the GLN 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.
results. Descartes
is committed
Sales and Distribution
Our sales efforts are primarily directed towards two
specific customer markets: (a)
transportation
companies and logistics service providers; 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
our
include
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
ecosystem of
logistics-intensive organizations
working together to standardize and automate
in
business processes and manage resources
motion. The program centers on Descartes’ Open
Standard Collaborative Interfaces, which provide a
to
wide variety of connectivity mechanisms
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.
Fiscal 2015 Highlights
On April 1, 2014, we acquired privately-held
Computer Management USA, Inc. and Computer
Management NA, Inc. (collectively, “Computer
Management”), a leading US-based provider of
security filing solutions and air cargo management
solutions
partners.
Specifically, Computer Management’s solutions
help air carriers to improve operational efficiency
filing and customs
and streamline security
clearance
through
coordination with ground handlers and container
freight stations. The total purchase price for the
acquisition was $6.7 million, net of cash acquired.
processes,
directly
airlines
their
and
and
for
(vi)
(iv)
preferred
(v) warrants; and
On April 16, 2014, we filed a final short-form base
shelf prospectus, allowing us to offer and issue the
following securities: (i) common shares; (ii)
preferred shares; (iii) senior or subordinated
subscription
unsecured debt
securities;
receipts;
securities
comprised of more than one of the common
shares,
securities,
shares,
subscription receipts and/ or warrants offered
together as a unit. These securities may be offered
separately or together, in separate series, in
amounts, at prices and on terms to be set forth in
one or more shelf prospectus supplements. The
aggregate initial offering price of securities that
may be sold by us (or certain of our current or
future shareholders) pursuant to our base shelf
prospectus during the 25-month period that our
base shelf prospectus, including any amendments
thereto, remains valid is limited to $250 million.
debt
On May 28, 2014, we amended our revolving debt
facility, increasing the borrowing limit from $50.0
million to $77.0 million. The amended facility is
comprised of a $75.0 million revolving facility, with
drawn amounts 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 on drawn amounts
prior to the end of the term. All other terms,
including security, interest rates and payment
and
frequency,
representations, warranties
7
On November 19, 2014, we acquired all the
outstanding shares of privately-held Airclic Inc.
(“Airclic”), a leading US-based provider of mobile
solutions that help companies reduce the cost of
delivering goods by automating traditional paper-
based processes. Airclic's cloud-based mobile
solutions help streamline and automate complex
'last mile' logistics processes. The total purchase
price for the acquisition was $29.6 million, net of
cash acquired, which was funded with cash on
hand.
On December 5, 2014, we acquired all the
outstanding shares of privately-held e-customs Inc.
(“e-customs”), a leading provider of electronic
security and fiscal customs filing solutions in the
United Kingdom (“UK”). e-customs' cloud-based
solution, Webdecs, provides both shippers and
logistics service providers with a wide range of
customs capabilities to cost effectively comply with
UK fiscal filing and security filing requirements. The
total purchase price for the acquisition was $9.6
million, net of cash acquired, which was funded
with
contingent
consideration of up to $1.2 million in cash is
payable if certain revenue performance targets are
met by e-customs during 2016.
cash on hand. Additional
a
leading
(“Pentant”),
On December 5, 2014, we acquired all the
outstanding shares of privately-held Pentant
UK-based
Limited
Community System Provider offering customs
connectivity and import/export inventory control
solutions for ocean, truck and air cargo. Pentant
provides its shipper and logistics service provider
customers with a reliable and secure connection to
both CHIEF (the central UK Revenue & Customs
system) and ICS (the European Union Import
Control System) to streamline declaration, cargo
security and clearance processes. The
total
purchase price for the acquisition was $2.1 million,
net of cash acquired, which was funded with cash
on hand. Additional contingent consideration of up
to $0.4 million in cash is payable if certain revenue
performance targets are met by Pentant during
2016.
guarantees, and covenants remain substantially
unchanged from the original agreement. As of
October 31, 2014, all amounts previously borrowed
under the revolving debt facility have been repaid
and the entire facility remains available for use.
On May 29, 2014, Allan Brett was appointed as our
Chief Financial Officer. Mr. Brett is an experienced
public company executive who served as Chief
Financial Officer of Aastra Technologies Limited
from June 1996 through to its January 2014 sale to
Mitel Networks Corporation.
At our annual meeting of shareholders on May 29,
2014, our shareholders elected two new directors
to our board of directors, being Jane O'Hagan, a
senior executive in the transportation industry with
many years of experience in the railway sector,
and Edward J. Ryan, our Chief Executive Officer.
Following this meeting Eric Demirian was appointed
Chair of our Board of Directors and John Walker
was appointed Chair of our Audit Committee.
On May 30, 2014 we acquired all outstanding
membership interests of privately-held Customs
Info, LLC (“Customs Info”), a leading US-based
provider of trade data content to power Global
Trade Management (GTM) systems and streamline
global trade automation. Customs Info provides
comprehensive trade data and related research
tools to multi-national shippers to help them
customs
costs,
reduce
compliance, and accelerate supply chain speed.
The total purchase price for the acquisition was
$39.5 million, net of cash acquired, which was
funded by $34.1 million in cash and approximately
0.4 million Descartes common shares valued at
$5.4 million.
operating
improve
included the exercise
On July 2, 2014, we completed a public offering of
common shares in the United States and Canada at
a price of $13.50 per common share pursuant to
the short-form base shelf prospectus and related
prospectus supplement filed in connection with the
offering. The total offering of 10,925,000 common
shares
full by the
underwriters of the 15% over-allotment option, for
aggregate gross proceeds to Descartes of $147.5
to Descartes were
million. Net proceeds
approximately $142.1 million once expenses
associated with
the offering were deducted
inclusive of the related deferred tax benefit on
share issuance costs. Excluding share issuance
costs payable and the deferred tax benefit on
issuance costs, the net cash proceeds to Descartes
were approximately $140.7 million.
in
8
CONSOLIDATED OPERATIONS
The following table shows, for the fiscal 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
Interest expense
Income before income taxes
Income tax expense
Current
Deferred
Net income
EARNINGS PER SHARE
BASIC
DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)
BASIC
DILUTED
OTHER PERTINENT INFORMATION
Total assets
Non-current financial liabilities
January 31, January 31, January 31,
2013
126.9
2014
151.3
170.9
2015
54.8
116.1
68.8
2.9
21.7
22.7
0.3
(1.1)
21.9
2.8
4.0
15.1
49.0
102.3
63.1
6.5
18.0
14.7
0.1
(1.0)
13.8
1.8
2.4
9.6
42.4
84.5
50.8
2.3
14.2
17.2
-
-
17.2
2.1
(0.9)
16.0
0.21
0.21
0.15
0.15
0.26
0.25
70,559
71,584
62,841
64,370
62,556
63,860
444.2
-
344.5
31.8
276.1
-
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
hardware is shipped. License revenues are derived from perpetual licenses granted to our customers to
use our software products.
9
The following table provides additional analysis of our services and license revenues (in millions of
dollars and as a percentage of total revenues) generated over each of the periods indicated:
Year ended
Services revenues
Percentage of total revenues
License revenues
Percentage of total revenues
Total revenues
January 31, January 31, January 31,
2013
116.8
92%
2015
159.1
93%
2014
137.8
91%
11.8
7%
170.9
13.5
9%
151.3
10.1
8%
126.9
Our services revenues were $159.1 million, $137.8 million and $116.8 million in 2015, 2014 and
2013, respectively. The increase in 2015 compared to 2014 was primarily due to the inclusion of a full
period of services revenues from the 2014 acquisitions of KSD Software Norway AS (“KSD”), Compudata
AG (“Compudata”) and Impatex Freight Software Ltd. (“Impatex”) as well as services revenues from the
fiscal 2015 acquisitions of Computer Management, Customs Info, Airclic, e-customs and Pentant.
Services revenues in 2015 were negatively impacted by the weakening of the euro, Canadian dollar,
Norwegian krone and Swedish krona compared to the US dollar.
The increase in 2014 compared to 2013 was primarily attributable to the inclusion of services revenues
from the 2013 acquisitions of Infodis B.V. (“Infodis”), Integrated Export Systems, Ltd. (“IES”), and
Exentra Transport Solutions Limited (“Exentra”), as well as services revenues from the 2014 acquisitions
of KSD, Compudata, and Impatex. These increases were partially offset by a decrease in hardware
revenue related to our telematics business. Services revenues in 2014 were positively impacted by the
strengthening of the euro and negatively by the weakening of the Canadian dollar compared to the US
dollar. These impacts resulted in a net positive impact from fluctuations in foreign exchange rates in
2014 compared to 2013.
Our license revenues were $11.8 million, $13.5 million and $10.1 million in 2015, 2014 and 2013,
respectively. The decrease in license revenues in 2015 compared to 2014 was primarily due to the
inclusion of a significant license sale made to one specific customer in the first quarter of 2014. The
increase in 2014 compared to 2013 was primarily attributable to increased license revenues from the
acquisition of KSD. 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 omni-channel
retailing and home delivery logistics solutions. The amount of license revenues in a period is dependent
on our customers’ preference to license our solutions instead of purchasing our solutions as a service
and we anticipate variances from period to period.
As a percentage of total revenues, our services revenues were 93%, 91% and 92% in 2015, 2014
and 2013, respectively. Our high percentage of services revenues reflects our emphasis on selling to
new customers and expanding product offerings to existing customers under our SaaS business model.
10
We operate in one business segment providing logistics technology solutions. The following table
provides additional analysis of our revenues by geographic location of customer (in millions of
dollars and as a percentage of total revenues):
Year Ended
United States
Percentage of total revenues
Europe, Middle-East and Africa (“EMEA”), excluding
Belgium and Netherlands
Percentage of total revenues
Canada
Percentage of total revenues
Netherlands
Percentage of total revenues
Belgium
Percentage of total revenues
Asia Pacific
Percentage of total revenues
January 31, January 31, January 31,
2013
60.4
48%
2015
72.8
43%
2014
68.9
46%
44.1
26%
15.2
9%
14.9
9%
14.0
7%
8.9
5%
33.1
22%
14.4
9%
14.5
9%
14.9
10%
4.5
3%
16.9
13%
14.2
11%
12.4
10%
15.7
12%
6.2
5%
Americas, excluding Canada and United States
Percentage of total revenues
Total revenues
1.0
1%
170.9
1.0
1%
151.3
1.1
1%
126.9
Revenues from the United States were $72.8 million, $68.9 million and $60.4 million in 2015, 2014
and 2013, respectively. The increase in 2015 compared to 2014 was primarily attributable to the
inclusion of United States-based revenue from the 2015 acquisitions of Computer Management, Customs
Info and Airclic.
The increase in 2014 compared to 2013 was primarily attributable to the inclusion of a full year of
United States-based revenue from the 2013 acquisition of IES. Also contributing to the increase in 2014
was increased United States-based license revenues and maintenance revenues. The increase in United
States-based professional services revenues in 2014 compared to 2013 was primarily attributable to a
few significant ongoing projects.
Revenues from the EMEA region, excluding Belgium and Netherlands, were $44.1 million, $33.1
million and $16.9 million in 2015, 2014 and 2013, respectively. The increase in 2015 compared to 2014
was primarily due to the inclusion of European-based revenues from the acquisitions of Compudata,
Impatex and e-customs as well as increased professional services revenues. European-based revenues
for 2015 compared to 2014 were negatively impacted by the weakening of the euro, Norwegian krone
and Swedish krona compared to the US dollar.
The increase in 2014 compared to 2013 was primarily attributable to the inclusion of a full year of
European-based revenues from the 2014 acquisition of KSD. Revenues in 2014 were also positively
impacted by the inclusion of a full period of revenues from the 2013 acquisition of Exentra and a partial
period of revenues from the 2014 acquisitions of Compudata and Impatex. Revenues from the EMEA
region, excluding Belgium and Netherlands also benefited from increased license revenues in 2014
compared to 2013.
11
Revenues from Canada were $15.2 million, $14.4 million and $14.2 million in 2015, 2014 and 2013,
respectively. The increase in 2015 compared to 2014 is principally due to increased license revenues in
the region. Partially offsetting this increase, revenues from Canada were negatively impacted by the
weakening of the Canadian dollar compared to the US dollar.
The increase in 2014 compared to 2013 was primarily attributable to increased services revenues in the
region. Partially offsetting this increase, revenues from Canada were negatively impacted by the
weakening of the Canadian dollar compared to the US dollar.
Revenues from Netherlands were $14.9 million, $14.5 million and $12.4 million in 2015, 2014 and
2013, respectively. The increase in 2015 compared to 2014 was primarily due to the inclusion of a full
period of Netherlands-based revenues from the 2014 acquisition of KSD, which was partially offset by
the weakening of the euro as compared to the US dollar.
The increase in 2014 compared to 2013 was primarily attributable to the inclusion of a full period of
Netherlands-based revenues from the 2013 acquisition of Infodis and a partial period of revenues from
the 2014 acquisition of KSD. Revenues from Netherlands were also positively impacted in 2014 by the
strengthening of the euro compared to the US dollar.
Revenues from Belgium were $14.0 million, $14.9 million and $15.7 million in 2015, 2014 and 2013,
respectively. The decrease in 2015 compared to 2014 was primarily a result of decreased services
revenues primarily a result of the weakening of the euro as compared to the US dollar.
Revenues from the Asia Pacific region were $8.9 million, $4.5 million and $6.2 million in 2015, 2014
and 2013, respectively. The increase in 2015 compared to 2014 is primarily due to increased license
revenues in the region as well as increased services revenues associated with Descartes’ “Japan Ocean
Advanced Filing Rule” solution which helps customers comply with Japan’s new advanced cargo security
initiative.
The decrease in 2014 compared to 2013 was primarily attributable to a decrease in hardware revenues
in the region related to our telematics business as well as decreased license revenues and professional
services revenues in the Asia Pacific region. Partially offsetting this decrease was the inclusion of a full
year of Asia Pacific based revenues from the 2013 acquisition of IES.
Revenues from the Americas region, excluding Canada and the United States, were $1.0 million,
$1.0 million and $1.1 million in 2015, 2014 and 2013, respectively. Revenues in 2015 are consistent
when compared to 2014.
The decrease in 2014 compared to 2013 was primarily attributable to a decrease in hardware revenues
related to our telematics business in the region.
12
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,
2013
2015
2014
159.1
53.0
106.1
67%
11.8
1.8
10.0
85%
170.9
54.8
116.1
68%
137.8
47.7
90.1
65%
13.5
1.3
12.2
90%
151.3
49.0
102.3
68%
116.8
41.1
75.7
65%
10.1
1.3
8.8
87%
126.9
42.4
84.5
67%
Cost of services revenues consists of internal costs of running our systems and applications, hardware
costs, and other personnel-related expenses incurred in providing professional service and maintenance
work, including consulting and customer support.
Gross margin percentage for services revenues was 67%, 65% and 65% in 2015, 2014 and 2013,
respectively. The margin in 2015 was positively impacted by inclusion of the acquisitions of Compudata,
Impatex, Computer Management, Airclic and e-customs which was partially offset by the inclusion of the
acquisition of KSD, as well as the operating results of our telematics business, which operate at margins
lower than our other services revenue streams.
Gross margin in 2014 compared to 2013 was positively impacted by the inclusion of the acquisitions of
IES which operates at margins higher than our other service revenue streams. We also realized
synergies with regards to acquisitions integrated into our operations in 2014 and 2013. Offsetting this
increase were the lower margins associated with the acquisition of KSD and our telematics business.
Cost of license revenues consists of costs related to our sale of third-party technology, such as third-
party map license fees and royalties.
Gross margin percentage for license revenues was 85%, 90% and 87% in 2015, 2014 and 2013,
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.
Operating expenses consisting of sales and marketing, research and development and general and
administrative expenses, were $68.8 million, $63.1 million and $50.8 million for 2015, 2014 and 2013,
respectively. The increase in 2015 compared to 2014 was primarily due to the inclusion of a full period
of operating expenses from the acquisition of KSD and operating expenses from the acquisitions of
Impatex, Compudata, Customs Info, Airclic and, to a lesser extent, Computer Management, e-customs
and Pentant. Operating expenses in 2015 were also impacted by fees to value-added resellers and
13
strategic marketing alliances associated with selling and marketing our solutions, particularly in the Asia
Pacific region. These increases were partially offset by a reduction in professional fees during 2015.
Operating expenses in 2015 were positively impacted by the weakening of the Canadian dollar, euro
Swedish krona and Norwegian krone compared to the US dollar.
The increase in 2014 compared to 2013 was primarily attributable to the inclusion of operating expenses
from the 2014 acquisition of KSD as well as the 2013 acquisitions of Infodis, IES and Exentra, and to a
lesser extent the 2014 acquisitions of Compudata and Impatex. Operating expenses also increased in
2014 compared to 2013 related to compensation costs associated with deferred share units (“DSUs”)
and stock-based compensation expense. The increase in DSU compensation costs was primarily
attributable to mark-to-market adjustments to reflect the appreciation in the value of our common
shares in 2014 compared to 2013, while the increase in stock-based compensation expense was
primarily attributable to performance share units (“PSUs”) and restricted share units (“RSUs”) granted in
the second quarter of 2013 and first quarter of 2014. Operating expenses in 2014 were positively
impacted by the weakening of the Canadian dollar and negatively impacted by the strengthening of the
euro, in each case, compared to the US dollar. These impacts resulted in a net positive impact on
operating expenses from fluctuations in foreign exchange rates year over year.
The following table provides additional analysis of operating expenses (in millions of dollars and as a
percentage of total revenues) for the periods 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,
2013
126.9
2015
170.9
2014
151.3
20.4
12%
28.1
16%
20.3
12%
68.8
40%
16.7
11%
25.9
17%
20.5
14%
63.1
42%
13.8
11%
21.3
17%
15.7
12%
50.8
40%
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 $20.4 million, $16.7 million and $13.8 million in 2015, 2014 and 2013,
respectively. Sales and marketing expenses as a percentage of total revenues were 12% in 2015 and
11% in each of 2014 and 2013, respectively. The increase in sales and marketing expenses in 2015
compared to 2014 was primarily due to the inclusion of sales and marketing expenses from the
acquisitions of KSD, Compudata, Impatex, Customs Info and Airclic. Sales and marketing expenses in
2015 were also impacted by increased fees to value-added resellers and strategic marketing alliances
associated with selling and marketing our solutions, particularly in the Asia Pacific region. Sales and
marketing expenses in 2015 were positively impacted by the weakening of the Canadian dollar, euro
Swedish krona and Norwegian krone compared to the US dollar.
The increase in sales and marketing expenses in 2014 compared to 2013 was primarily attributable to
the inclusion of sales and marketing expenses from the 2014 acquisition of KSD, since the date of
acquisition, as well as the 2013 acquisitions of Infodis, IES and Exentra.
14
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 2015, 2014 and 2013, as applicable.
Research and development expenses were $28.1 million, $25.9 million and $21.3 million in 2015, 2014
and 2013, respectively. Research and development expenses as a percentage of total revenues were
16% in 2015 and 17% in each of 2014 and 2013. The increase in research and development expenses in
2015 as compared to 2014 was primarily due to increased payroll and related costs from the acquisitions
of KSD, Impatex, Computer Management, Customs Info and Airclic. Research and development
expenses in 2015 were positively impacted by the weakening of the Canadian dollar and euro compared
to the US dollar.
The increase in research and development expenses in 2014 compared to 2013 was primarily
attributable to increased payroll and related costs from the inclusion of research and development
expenses from the 2014 acquisition of KSD as well as the 2013 acquisitions of Infodis, IES and Exentra.
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 $20.3 million, $20.5 million and $15.7
million in 2015, 2014 and 2013, respectively. General and administrative expenses as a percentage of
total revenues were 12%, 14% and 12% in 2015, 2014 and 2013, respectively. The decrease in general
and administrative expenses is primarily attributable to the weakening of the Canadian dollar compared
to the US dollar and a reduction in professional fees in 2015. This decrease was partially offset by
increased general and administrative expenses from the acquisitions of KSD, Compudata, Impatex,
Customs Info and Airclic.
The increase in general and administrative expenses in 2014 compared to 2013 was primarily
attributable to the inclusion of general and administrative expenses from the 2014 acquisition of KSD,
since the date of acquisition. Operating expenses also increased in 2014 compared to 2013 for
compensation costs related to DSUs and stock-based compensation expense. The increase in DSU
compensation costs is primarily attributable to the appreciation in the value of our common shares in the
period, while the increase in stock-based compensation expense is primarily attributable to PSUs and
RSUs granted in the second quarter of 2013 and first quarter of 2014. We also incurred increased
professional fees in 2014 compared to 2013, primarily related to investing in rationalization of our
corporate structure, including strategic tax planning.
Other charges consist primarily of acquisition-related costs with respect to completed and prospective
acquisitions, restructuring charges and executive departure charges. Other charges were $2.9 million,
$6.5 million and $2.3 million in 2015, 2014 and 2013, respectively. Other charges were comprised of
restructuring costs of $0.8 million, $1.9 million and $1.0 million in 2015, 2014 and 2013, respectively,
acquisition-related costs of $1.7 million, $1.3 million and $1.4 million in 2015, 2014 and 2013,
respectively, and executive departure charges of $0.4 million, $3.3 million and nil in 2015, 2014 and
2013, 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. The decrease
in other charges in 2015 compared to 2014 was primarily a result of a reduction in executive departure
charges. Partially offsetting this decrease was an increase in acquisition-related costs due to the timing
of acquisition activities.
Amortization of intangible assets is amortization of the value attributable to intangible assets,
including customer agreements and relationships, non-compete covenants, existing technologies and
trade names, in each case associated with acquisitions completed by us as of the end of each reporting
period. 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
15
impairment tests. Amortization of intangible assets was $21.7 million, $18.0 million and $14.2 million in
2015, 2014 and 2013, 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,
2015, the unamortized portion of all intangible assets amounted to $115.1 million.
We test the carrying value of our finite life intangible assets for recoverability when events or changes in
circumstances indicate that there may be evidence of impairment. We write down intangible assets with
a finite life to fair value when the related undiscounted cash flows are not expected to allow for recovery
of the carrying value. Fair value of intangible assets is determined by discounting the expected related
cash flows. No finite life intangible asset impairment has been identified or recorded for any of the fiscal
periods reported.
Investment income was $0.3 million, $0.1 million and nil in 2015, 2014 and 2013, respectively. The
increase in investment income was primarily attributable to changes in the average cash and cash
equivalents balance during the periods. Investment income is reflective of current market rates.
Interest expense was $1.1 million, $1.0 million and nil in 2015, 2014 and 2013, respectively. Interest
expense arises primarily due to the amount borrowed and outstanding on our revolving debt facility. As
of January 31, 2015, all amounts previously borrowed under the revolving debt facility have been repaid
and no amounts remain owing.
Income tax expense is comprised of current and deferred income tax expense (recovery). Income tax
expense for 2015, 2014 and 2013 was 31%, 30% and 7% of income before income taxes, respectively,
with current income tax expense being 13%, 13% and 12% of income before income taxes,
respectively.
Income tax expense – current was $2.8 million, $1.8 million and $2.1 million in 2015, 2014 and
2013, respectively. The increase in current income tax expense in 2015 as compared to 2014 is
primarily as a result of income in the US, Netherlands and EMEA region which is not sheltered by loss
carry-forwards.
The decrease in current income tax expense in 2014 as compared to 2013 was primarily attributable to
changes in the estimate of our uncertain tax positions.
Income tax expense (recovery) – deferred was $4.0 million, $2.4 million and ($0.9) million in
2015, 2014 and 2013, respectively. Deferred income tax expense increased in 2015 compared to 2014
primarily due to a release of valuation allowance which decreased tax expense by $2.7 million in 2014,
while only $1.2 million of valuation allowance was released in 2015.
Deferred income tax expense increased in 2014 compared to 2013 primarily due to a release of
valuation allowance which decreased income tax expense by $4.0 million in 2013, while only $2.7 million
of valuation allowance was released in 2014.
Net income was $15.1 million, $9.6 million and $16.0 million in 2015, 2014 and 2013, respectively.
The $5.5 million increase in 2015 compared to 2014 was primarily a result of a $13.8 million increase in
gross margin and a $3.6 million decrease in other charges. Partially offsetting this increase was a $5.7
million increase in operating expense, a $3.7 million increase in amortization of intangible assets and a
$2.6 million increase in income tax expense.
The $6.4 million decrease in 2014 compared to 2013 was primarily a result of a $12.3 million increase in
operating expenses, a $4.2 million increase in other charges, a $3.8 million increase in amortization of
intangible assets, a $3.0 million increase in income tax expense and a $1.0 million increase in interest
expense. This decrease was partially offset by a $17.8 million increase in gross margin.
16
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,
2015
2014
2014
2014
Total
2015
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
40,836
27,587
16,418
3,694
0.06
0.06
42,680
28,860
17,284
3,613
0.05
0.05
43,057
29,181
17,236
4,157
0.06
0.05
44,287 170,860
30,353 115,981
68,814
17,876
15,059
3,595
0.21
0.05
0.21
0.05
63,667
64,817
67,559
68,567
75,324
76,190
75,460
76,303
70,559
71,584
April 30, July 31, October 31, January 31,
2014
2013
2013
2013
Total
2014
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
2013
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
34,031
23,475
14,314
2,807
0.04
0.04
38,195
25,244
15,805
1,740
0.03
0.03
38,763
26,015
16,020
2,183
0.03
0.03
40,305 151,294
27,517 102,251
63,071
16,932
9,612
2,882
0.15
0.05
0.15
0.04
62,669
64,024
62,711
64,183
62,737
64,301
63,242
64,658
62,841
64,370
April 30, July 31, October 31, January 31,
2013
2012
2012
2012
Total
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
17
Revenues have been positively impacted by the eleven acquisitions that we have completed since the
beginning of 2013. 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, EU and Asia security and customs regulations.
Our services revenues continue to have seasonal trends. In the first fiscal quarter of each year, 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 the second fiscal quarter of each
year, 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 fiscal quarter of each year, we have
historically seen shipment and transactional volumes at their highest. In the fourth fiscal quarter of each
year, 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 fourth quarter of 2015, revenues were positively impacted by the acquisitions of Airclic, e-
customs and Pentant. Net income was negatively impacted in the fourth quarter of 2015 by $1.4 million
in other charges associated with restructuring and acquisition-related costs related to completed and
prospective acquisitions and $0.8 million in DSU compensation costs primarily attributable to mark-to-
market adjustments to reflect the appreciation in the value of our common shares in the quarter. A
deferred income tax recovery of $1.3 million in the UK also favourably contributed to net income in the
fourth quarter of 2015.
In the third quarter of 2015, revenues and net income were positively impacted by the inclusion of a full
quarter of operations from the acquisition of Customs Info. Net income was negatively impacted by $0.2
million of other charges.
In the second quarter of 2015, revenues and net income were positively impacted by the inclusion of a
full quarter of operations from the acquisition of Computer Management as well as a partial period of
operations from the acquisition of Customs Info. Net income was negatively impacted by $0.7 million of
other charges as well as $0.4 million of interest expense related to the revolving debt facility.
In the first quarter of 2015, revenues and net income were positively impacted by the inclusion of a full
quarter of operations from the acquisitions of KSD, Compudata and Impatex, as well as a partial period
of operations from the acquisition of Computer Management. Net income was negatively impacted by
$0.6 million of other charges, primarily attributable to acquisition-related costs with respect to
completed and prospective acquisitions, as well as $0.4 million of interest expense related to amounts
borrowed and outstanding on the revolving debt facility.
In 2014, revenues and net income were positively impacted by the inclusion of a full period of
operations from our fiscal 2013 acquisitions of Infodis, IES and Exentra as well as the inclusion of a
partial period of operations from our fiscal 2014 acquisitions of Compudata and to a lesser extent
Impatex. While the acquisition of KSD contributed positively to fiscal 2014 revenues, it contributed a net
loss of $1.7 million, including $1.7 million of restructuring charges and $1.8 million of amortization of
intangible assets. License revenues and gross margin from license revenues were positively impacted by
the inclusion of significant license sales to three specific customers during 2014. Net income for 2014
was negatively impacted by a $3.3 million charge related to the departure of our former Chairman and
CEO during the fourth quarter of 2014, as well as $1.1 million, $0.6 million and $0.1 million of
restructuring costs during the second, third and fourth quarters of 2014, respectively. Acquisition-
related costs with respect to completed and prospective acquisitions of $0.3 million, $0.2 million, $0.2
million and $0.7 million in the first, second, third and fourth quarters of 2014, respectively, and interest
expense on our revolving debt facility of $0.3 million in each of the second, third and fourth quarters of
2014 reduced net income. Net income was also negatively impacted by $0.6 million in DSU and $0.4
million in CRSU compensation costs, primarily attributable to mark-to-market adjustments to reflect an
18
appreciation in the value of our common shares in the fourth quarter of 2014. A deferred tax recovery of
$2.8 million in the UK and Canada favourably contributed to net income in the fourth quarter of 2014.
In 2013, revenues and net income were impacted by the acquisitions of Infodis, IES and Exentra.
License revenues and gross margin from license revenues in the third and fourth quarters of 2013 were
higher than any of the previous quarters presented in the above table as license revenues in these
periods included certain larger license sales. Net income was negatively impacted by $0.4 million, $0.7
million and $0.3 million of acquisition-related costs with respect to completed and prospective
acquisitions expensed in the first, second and fourth quarters of 2013, respectively, and $0.4 million and
$0.2 million of restructuring charges for the second and fourth quarters of 2013, respectively. A deferred
income tax recovery in the UK of $5.3 million also favourably contributed to net income in the fourth
quarter of 2013.
Our weighted average shares outstanding has increased since the first quarter of 2013 due to the public
offering of common shares completed on July 2, 2014, common shares issued in relation to the
acquisition of Customs Info and common shares issued pursuant to periodic employee stock option
exercises.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents include short-term deposits with original maturities of three months or
less. We had $118.1 million and $62.7 million in cash and cash equivalents as at January 31, 2015 and
January 31, 2014, respectively. All cash and cash equivalents were held in interest-bearing bank
accounts or certificates of deposit, primarily with major Canadian, US and European banks.
Debt facility. As of January 31, 2015, all amounts previously borrowed under the revolving debt facility
have been repaid and no amounts remain owing. We are in compliance with the covenants of the
revolving debt facility as of January 31, 2015. On May 28 2014, we amended our revolving debt facility,
increasing the borrowing limit from $50.0 million to $77.0 million. The amended facility is comprised of a
$75.0 million revolving facility, with drawn amounts 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 on drawn amounts 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 on advances at a rate of either i) Canada prime rate or US
base rate plus 0% to 1.5%; or ii) LIBOR plus 1.5% to 3%. Undrawn amounts are charged a standby fee
of between 0.3% and 0.5%. Interest is payable monthly in arrears under both facilities. Standby fees
are payable quarterly in arrears. The revolving debt facility contains certain customary representations,
warranties and guarantees, and covenants.
Short-form base shelf prospectus. On April 16, 2014, we filed a final short-form base shelf
prospectus, allowing us to offer and issue the following securities: (i) common shares; (ii) preferred
shares; (iii) senior or subordinated unsecured debt securities; (iv) subscription receipts; (v) warrants;
and (vi) securities comprised of more than one of the common shares, preferred shares, debt securities,
subscription receipts and/ or warrants offered together as a unit. These securities may be offered
separately or together, in separate series, in amounts, at prices and on terms to be set forth in one or
more shelf prospectus supplements. The aggregate initial offering price of securities that may be sold by
us (or certain of our current or future shareholders) pursuant to our base shelf prospectus during the
25-month period that our base shelf prospectus, including any amendments thereto, remains valid is
limited to $250 million.
On July 2, 2014, we completed a public offering of common shares in the United States and Canada at a
price of $13.50 per common share pursuant to the short-form base shelf prospectus and related
19
prospectus supplement filed in connection with the offering. The total offering of 10,925,000 Common
Shares included the exercise in full by the underwriters of the 15% overallotment option for aggregate
gross proceeds to Descartes of $147.5 million. Net proceeds to Descartes were approximately $142.1
million once expenses associated with the offering were deducted inclusive of the related deferred tax
benefit on share issuance costs. Excluding share issuance costs payable and the deferred tax benefit on
issuance costs, the net cash proceeds to Descartes were approximately $140.7 million.
Working capital. As at January 31, 2015, our working capital (current assets less current liabilities)
was $116.6 million. Current assets primarily include $118.1 million of cash and cash equivalents, $22.6
million of current trade receivables and $8.7 million of deferred tax assets. Current liabilities primarily
include $16.7 million of accrued liabilities, $15.3 million of deferred revenue and $4.6 million of accounts
payable. Our working capital has increased since January 31, 2014 by $50.7 million, primarily due to
cash provided by operating activities and cash received from the public offering, which was partially
offset by repayment of the revolving debt facility and cash used in the acquisitions of Computer
Management, Customs Info, Airclic, e-customs and Pentant.
Historically, we have financed our operations and met our capital expenditure requirements primarily
through cash flows provided from operations, issuances of common shares and proceeds from debt. We
anticipate that, considering the above, we have sufficient liquidity to fund our current cash requirements
for working capital, contractual commitments, capital expenditures and other operating needs. 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 to 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 further financing
transactions, including draws on our revolving debt facility or equity offerings, 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 $118.1 million of cash and cash equivalents as at January 31, 2015,
$109.1 million was held by our foreign subsidiaries, most significantly in the United States with lesser
amounts held in 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.
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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 borrowing on debt facility
Payment of debt issuance costs
Repayments of debt
Issuance of common shares, net of issuance costs
Settlement of stock options
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
2015
49.5
(2.7)
-
(82.2)
20.0
(0.4)
(63.3)
140.7
January 31, January 31, January 31,
2013
30.3
(3.5)
(0.6)
(54.1)
-
-
(0.1)
0.7
(1.5)
0.9
(27.9)
65.5
37.6
2014
42.6
(2.4)
-
(58.7)
46.3
(0.7)
(3.7)
3.6
(1.4)
(0.5)
25.1
37.6
62.7
(0.4)
(5.8)
55.4
62.7
118.1
Cash provided by operating activities was $49.5 million, $42.6 million and $30.3 million for 2015,
2014 and 2013, respectively. For 2015, the $49.5 million of cash provided by operating activities
resulted from $15.1 million of net income, plus adjustments for $30.5 million of non-cash items included
in net income and plus $3.9 million of cash generated from changes in our operating assets and
liabilities. For 2014, the $42.6 million of cash provided by operating activities resulted from $9.6 million
of net income, plus adjustments for $26.3 million of non-cash items included in net income and plus
$6.7 million of cash generated from changes in our operating assets and liabilities. For 2013, the $30.3
million of cash provided by operating activities resulted from $16.0 million of net income, plus
adjustments for $17.7 million of non-cash items included in net income and less $3.4 million of cash
used from changes in our operating assets and liabilities. Cash provided by operating activities increased
in 2015 compared to 2014, primarily due to net income adjusted for non-cash expenses which increased
$9.7 million.
The increase in cash provided by operating activities in 2014 compared to 2013 was primarily
attributable to decreased net operating assets which generated $10.1 million of cash in 2014. This
decrease was primarily related to collection of trade and other receivables as well as increased accrued
liabilities.
Additions to capital assets were $2.7 million, $2.4 million and $3.5 million in 2015, 2014 and 2013,
respectively. Additions to capital assets were greater in 2013 as compared to 2014 and 2015 primarily
due to investments in the phased implementation of a new ERP system.
Settlement of acquisition earn-out of $0.6 million in 2013 reflects a partial payout of the earn-out
adjustment in respect of our 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 was $82.2 million, $58.7 million and $54.1 million
in 2015, 2014 and 2013, respectively. In 2015, the $82.2 million was related to the acquisitions of
Computer Management, Customs Info, Airclic, e-customs and Pentant. In 2014, the $58.7 million was
related to the acquisitions of KSD, Compudata and Impatex. For 2013, the $54.1 million was related to
the acquisitions of Infodis, IES and Exentra.
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Proceeds from borrowing on debt facility of $20.0 million, $46.3 million and nil in 2015, 2014 and
2013, respectively, were a result of borrowing on our revolving debt facility to finance our 2014
acquisitions of KSD, Compudata and Impatex and 2015 acquisition of Customs Info.
Payment of debt issuance costs of $0.4 million, $0.7 million and nil in 2015, 2014 and 2013,
respectively, relate to costs paid in establishing and amending the terms of the revolving debt facility.
Repayments of debt of $63.3 million, $3.7 million and $0.1 million in 2015, 2014 and 2013,
respectively, relate to principle repayments on our revolving debt facility and repayment of debt
acquired from the acquisitions of KSD and Customs Info.
Issuance of common shares, net of issuance costs of $140.7 million, $3.6 million and $0.7 million
in 2015, 2014 and 2013, respectively. The increase in 2015 was primarily a result of the public share
offering. The $3.7 million in 2014 and $0.7 million in 2013 was a result of the exercise of employee
stock options.
Settlement of stock options of $0.4 million, $1.4 million and $1.5 million in 2015, 2014 and 2013,
respectively, was a result of the settlement of tandem stock appreciation rights exercised upon the
surrender of stock options.
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
4.8
0.3
5.1
5.2
0.2
5.4
1.4
-
1.4
-
-
-
Total
11.4
0.5
11.9
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 2018. The future
minimum amounts payable under these lease agreements are outlined in the table above.
Other Obligations
Deferred Share Unit and Cash-Settled Restricted Share Unit Plans
As described in Note 2 to these consolidated financial statements, we maintain DSU and CRSU plans for
our directors and employees. Any payments made pursuant to these plans are settled in cash. For DSUs
and 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 $0.7 million for which no liability was
recorded on our consolidated balance sheet at January 31, 2015, in accordance with ASC Topic 718,
“Compensation – Stock Compensation”. As at January 31, 2015 there were no unvested DSUs. The
ultimate liability for any payment of DSUs and CRSUs is dependent on the trading price of our common
shares.
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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 in our consolidated financial statements.
Business combination agreements
In respect of our acquisition of Customs Info in the second quarter of fiscal 2015, up to $3.9 million in
cash may have become payable had certain revenue performance targets been met by Customs Info
during the calendar year 2014. The revenue performance targets were not met during the performance
period and as a result no amount is payable related to the contingent consideration.
In respect of our acquisition of e-customs in the fourth quarter of fiscal 2015, up to approximately $1.2
million (GBP 0.8 million) in cash may become payable if certain revenue performance targets are met by
e-customs during 2016.
In respect of our acquisition of Pentant in the fourth quarter of fiscal 2015, up to approximately $0.4
million (GBP 0.3 million) in cash may become payable if certain revenue performance targets are met by
Pentant during 2016.
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
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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 5, 2015, we had
75,480,492 common shares issued and outstanding.
On July 2, 2014, we completed a public offering of common shares in the United States and Canada at a
price of $13.50 per common share pursuant to the short-form base shelf prospectus and related
prospectus supplement filed in connection with the offering. The total offering of 10,925,000 common
shares included the exercise in full by the underwriters of the 15% over-allotment option, for aggregate
gross proceeds to Descartes of $147.5 million. Net proceeds to Descartes were approximately $142.1
million once expenses associated with the offering were deducted inclusive of the related deferred tax
benefit on share issuance costs. Excluding share issuance costs payable and the deferred tax benefit on
issuance costs, the net cash proceeds to Descartes were approximately $140.7 million.
As of March 5, 2015, there were 953,264 options issued and outstanding, and 217,264 remaining
available for grant under all stock option plans. As of March 5, 2015, there were 174,258 performance
share units (“PSUs”) and 175,592 restricted share units (“RSUs”) issued and outstanding, and 438,289
remaining available for grant under all performance and restricted share unit plans.
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 May 29, 2014, 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 2017
unless its continued existence is ratified by the shareholders before such expiration. We understand that
the Rights Plan is similar to plans adopted by other Canadian companies and approved by their
shareholders.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements included herein and accompanying notes are prepared in
accordance with GAAP. Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These
estimates and assumptions are affected by management’s application of accounting policies. Estimates
are deemed critical when a different estimate could have reasonably been used or where changes in the
estimates are reasonably likely to occur from period to period and would materially impact our financial
condition or results of operations. Our significant accounting policies are discussed in Note 2 to the fiscal
2015 consolidated financial statements.
24
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 2015 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.
Impairment of long-lived assets
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. 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.
Goodwill
We test for impairment of goodwill at least annually during our third quarter 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. Our operations are analyzed by management and our chief
operating decision maker as being part of a single industry segment providing logistics technology
solutions. Accordingly, our goodwill impairment assessment is based on the allocation of goodwill to a
single reporting unit.
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.
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.
Stock-based compensation plans
Stock Options
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
25
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.
The fair value of employee stock option grants that are ultimately expected to vest are 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 & Restricted Share Units
We maintain a performance and restricted share unit plan effective pursuant to which certain of our
employees are eligible to receive grants of performance share units and restricted share units.
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.
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 an 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.
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 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.
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 CRSUs,
26
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 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.
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.
CHANGE IN / INITIAL ADOPTION OF ACCOUNTING POLICIES
Recently adopted accounting pronouncements
In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update
2013-05, “Foreign Currency Matters” (“ASU 2013-05”). ASU 2013-05 provides clarification on the
accounting treatment of currency translation adjustment for entities that cease to have a controlling
financial interest in a foreign subsidiary. ASU 2013-05 is effective for interim and annual periods
27
beginning after December 15, 2013, which is our fiscal year that commenced on February 1, 2014. The
adoption of this amendment has not had a material impact on our results of operations or disclosures.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes” (“ASU 2013-11”). ASU 2013-11 provides
clarification on the presentation of unrecognized tax benefits when a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for quarterly and annual
periods beginning after December 15, 2013, which is our fiscal year that commenced on February 1,
2014. The adoption of this amendment has not had a material impact on our results of operations or
disclosures.
Recently issued accounting pronouncements
In May 2014, the FASB issued Accounting Standard Update 2014-09, “Revenue from Contracts with
Customers” (“ASU 2014-09”). ASU 2014-09 amends the number of requirements that an entity must
consider in recognizing revenue and requires improved disclosures to help readers of financial
statements better understand the nature, amount, timing and uncertainty of revenue recognized. ASU
2014-09 is effective for interim and annual periods beginning after December 15, 2016, which will be
our fiscal year beginning February 1, 2017. Early adoption is not permitted. The Company will adopt this
guidance in the first quarter of fiscal 2018 and is currently evaluating the impact that the adoption will
have on its results of operations, financial position and disclosures.
In August 2014, the FASB issued Accounting Standard Update 2014-15, “Presentation of Financial
Statements – Going Concern (Subtopic 2015-40)” (“ASU 2014-15”). ASU 2014-15 requires an entity’s
management to evaluate whether there are conditions or events that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after the date that the financial
statements are issued. ASU 2014-15 is effective for condensed and annual periods beginning after
December 15, 2016, which will be our fiscal year beginning February 1, 2017. Early adoption is
permitted. The Company will adopt this guidance in the first quarter of fiscal 2018. The adoption of this
amendment is not expected to have a material impact on our results of operations or disclosures.
In February 2015, the FASB issued Accounting Standard Update 2015-02, “Consolidation (Topic 810):
Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 amends the analysis that an
entity must perform to determine whether it should consolidate certain types of legal entities. ASU
2015-02 is effective for condensed and annual periods beginning after December 15, 2015, which will be
our fiscal year beginning February 1, 2016. Early adoption is permitted. The Company will adopt this
guidance in the first quarter of fiscal 2017 and is currently evaluating the impact that the adoption will
have on its results of operations, financial position and 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, 2015. 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, 2015, based on criteria established in “Internal Control –
Integrated Framework (2013), 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, 2015, our internal control over financial reporting was effective.
28
During the fiscal year ended January 31, 2015, 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.
TRENDS / BUSINESS OUTLOOK
This section discusses our outlook for fiscal 2016 and in general as of the date of this MD&A, and
contains forward-looking statements.
Our business may be impacted from time to time by the general cyclical and seasonal nature of
particular modes of transportation and the freight market in general, as well as the industries that such
markets serve. Factors which may create cyclical fluctuations in such modes of transportation, or the
freight market in general, include: legal and regulatory requirements; timing of contract renewals
between our customers and their own customers; seasonal-based tariffs; vacation periods applicable to
particular shipping or receiving nations; weather-related events or natural disasters that impact shipping
in particular geographies; availability of credit to support shipping operations; economic downturns; and
amendments to international trade agreements. As many of our services are sold on a “per shipment”
basis, we anticipate that our business will continue to reflect the general cyclical and seasonal nature of
shipment volumes with our third quarter being the strongest quarter for shipment volumes, compared to
our first quarter being the weakest quarter for shipment volumes. Historically, in our second fiscal
quarter, we have seen an increase in ocean services revenues as ocean carriers are in the midst of their
customer contract negotiation period.
In 2015, our services revenues comprised 93% of our total revenues, with the balance being license
revenues. We expect that our focus in 2016 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
2015, based on our historic experience, we anticipate that over a one-year period we may lose
approximately 4% to 6% of our aggregate recurring revenues in the ordinary course. There can be no
assurance that we will be able to replace such lost revenue with new revenue from new customer
relationships or from existing customers.
We internally measure and manage our “baseline calibration,” a non-GAAP financial measure, which we
define as the difference between our “baseline revenues” and “baseline operating expenses”. We define
our “baseline revenues,” a non-GAAP financial measure, as our visible, recurring and contracted
revenues. Baseline revenues are not a projection of anticipated total revenues for a period as they
exclude any anticipated or expected new sales for a period beyond the date that the baseline revenues
are measured. We define our “baseline operating expenses,” a non-GAAP financial measure, as our total
expenses less interest, taxes, depreciation and amortization, stock-based compensation (for which we
include related costs and taxes), 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
29
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,
2016, using foreign exchange rates of $0.80 to CAD $1.00, $1.13 to EUR 1.00 and $1.54 to £1.00, we
estimated that our baseline revenues for the first quarter of 2016 are approximately $42.0 million and
our baseline operating expenses are approximately $31.5 million. We consider this to be our baseline
calibration of approximately $10.5 million for the first quarter of 2016, or approximately 25% of our
baseline revenues as at February 1, 2016.
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 2015, we incurred $0.8 million in restructuring charges and we expect to incur $0.3
million in additional charges pursuant to established restructuring and integration plans in 2016.
We estimate that amortization expense for existing intangible assets will be $21.7 million for 2016,
$20.3 million for 2017, $15.5 million for 2018, $13.3 million for 2019, $12.7 million for 2020, $9.8
million for 2021 and $21.8 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 2016 will be approximately $0.9 million to $1.1
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, “Intangibles –
Goodwill and Other” (“ASC Topic 350”), during our third quarter of 2015 and determined that there was
no evidence of impairment. We are currently scheduled to perform our next annual impairment test
during the third quarter of fiscal 2016. 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 such adjustment is identified.
In 2015, capital expenditures were $2.7 million or 2% of revenues, as we continue to invest in
computing equipment and software to support our network and build out our infrastructure. We
anticipate that we will incur up to $4.0 million in capital expenditures in 2016 primarily related to
investments in our network infrastructure.
We conduct business in a variety of foreign currencies and, as a result, our foreign operations are
subject to foreign exchange fluctuations. Our businesses 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
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
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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, 50% of our revenues in 2015 were in US dollars, 22% in euro, 9% in
Canadian dollars, and the balance in mixed currencies, while 35% of our operating expenses were in US
dollars, 23% in Canadian dollars, 23% in euro, and the balance in mixed currencies.
As at March 5, 2015, we had 209,727 outstanding DSUs and 96,123 outstanding CRSUs. 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 non-executive 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 CRSUs and DSUs, the
amount of any expense or recovery is based on the number of vested units outstanding and our stock
price. 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.
In 2015, we recorded a net deferred income tax expense of $4.0 million primarily as a result of income
that is sheltered by loss carry-forwards and other tax attributes. 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.
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
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
31
deem immaterial, may also impair our business operations. This report is qualified in its entirety by
these risk factors.
If any of the 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.
We may have difficulties identifying, successfully integrating or maintaining or growing our
acquired businesses.
Businesses that we acquire may sell products or operate services that we have limited experience
operating or managing. We may experience unanticipated challenges or difficulties identifying suitable
acquisition candidates, integrating their businesses into our company, maintaining these businesses at
their current levels or growing these businesses. Factors that may impair our ability to identify,
successfully integrate, maintain or grow acquired businesses may include, but are not limited to:
• Challenges identifying suitable businesses to buy and negotiating the acquisition of those
businesses on acceptable terms;
• Challenges completing the acquisitions within our expected time frames and budgets;
• 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.
We may fail to properly respond to any of these risks, which may have a material adverse effect on our
business results.
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
2015 we acquired Computer Management, Customs Info and Airclic. In 2014 we acquired KSD,
Compudata and Impatex. In 2013 we acquired Infodis, IES and Exentra. We are unable to predict
whether or when we will be able to identify any appropriate products, technologies or businesses for
acquisition, or the likelihood that any potential acquisition will be available on terms acceptable to us or
will be completed. 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 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 shareholder base by issuing additional shares. Furthermore, for acquisitions, there is a risk that our
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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.
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, and we may be
unable to attract new customers.
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, such as our contract to operate the U.S.
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
we are unable to attract new customers, 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, the cost of our products and services as compared to the cost of products
and services offered by our competitors, our ability to attract, hire and maintain qualified personnel to
meet customer needs, consolidating activities in the market, 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
revenue losses. In addition, loss of one or more of our key customers could adversely impact our
competitive position in the marketplace and hurt our credibility and ability to attract new customers.
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 on which we rely as part of our own product offerings could result in
the inability of our customers to receive our products for an indeterminate period of time. Our ability to
deliver our products and services depends on the development and maintenance of internet
infrastructure by third parties. This includes maintenance of reliable networks with the necessary
security, speed, data capacity and bandwidth. While our services are designed to operate without
interruption, we have experienced, and may in the future experience, interruptions and delays in
services and availability from time to time. In the event of a catastrophic event with respect to one or
more of our systems, we may experience an extended period of system unavailability, which could
negatively impact our relationship with customers. 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;
• Software errors, failures and crashes;
•
• Virus proliferation;
• Communications failures;
•
•
Information or infrastructure security breaches;
Insufficient investment in infrastructure;
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• Earthquakes, fires, floods, natural disasters, or other force majeure events outside our
control; and
• Acts of war, cyber-attacks, denial-of-service attacks and/or terrorism.
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. 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. Such issues
could have a material adverse effect on our business, results of operations and financial condition.
Changes in the value of the U.S. dollar, as compared to the currencies of other countries
where we transact business, could harm our operating results and financial condition.
Historically, the largest percentage of our revenues has been denominated in U.S. dollars. However, the
majority of our international expenses, including the wages of our non-U.S. employees and certain key
supply agreements, have been denominated in Canadian dollars, euros and other foreign currencies.
Therefore, changes in the value of the U.S. dollar as compared to the Canadian dollar, the euro and
other foreign currencies 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.
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 changes in the government agency responsible for such requirements could adversely impact our
business, results of operations and financial condition.
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 or proper reporting, whether as a result of labor disputes, weather or natural
disaster, or caused by terrorists, political instability, or security activities, contagious illness outbreaks,
or otherwise, then the traffic volume on our Global Logistics Network will be impacted and our revenues
will be adversely affected. As these types of freight disruptions are generally unpredictable, there can be
no assurance that our business, results of operations and financial condition will not be adversely
affected by such events.
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 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
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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.
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 regard as key individuals to our
business. We do not maintain life insurance policies on any of our employees that list Descartes as a loss
payee. Our success is highly dependent on our ability to identify, hire, train, motivate, promote, and
retain key individuals. Significant competition exists for management and skilled personnel. 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, retain or
establish an effective succession planning program for key individuals it could have a material adverse
effect on our business, results of operations, financial condition and the price of our common shares.
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 any such 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
common shares.
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 and currently has tax audits open in a
number of jurisdictions in which we operate. On a quarterly basis we assess the status of these audits
and the potential for adverse outcomes to determine whether a provision for income and other taxes is
appropriate. The timing of the resolution of income tax audits is highly uncertain, and the amounts
ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from any
amounts that we accrue from time to time. The actual amount of any change could vary significantly
depending on the ultimate timing and nature of any settlements. We cannot currently provide an
estimate of the range of possible outcomes.
The determination of our worldwide provision for income taxes and other tax liabilities requires
significant judgment. In the ordinary course of a global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Any audit of our tax filings 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 based on a number of
assumptions. 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.
Changes to earnings resulting from past acquisitions may adversely affect our operating
results.
Under ASC Topic 805, “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
35
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; and
• 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, acquisition-related costs and restructuring charges. Acquisition-related costs primarily include
advisory services, brokerage services and administrative costs with respect to completed and
prospective acquisitions.
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.
Our success depends on our ability to continue to innovate and to create new solutions and
enhancements to our existing products
We may not be able to develop and introduce new solutions and enhancements to our existing products
that respond to new technologies or shipment regulations on a timely basis. If we are unable to develop
and sell new products and new features for our existing products that keep pace with rapid technological
and regulatory change as well as developments in the transportation logistics industry, our business,
results of operations and financial condition could be adversely affected. We intend to continue to invest
significant resources in research and development to enhance our existing products and services and
introduce new high-quality products that customers will want. If we are unable to predict or quickly
react to user preferences or changes in the transportation logistics industry, or its regulatory
requirements, or if we are unable to modify our products and services on a timely basis or to effectively
bring new products to market, our sales may suffer.
In addition, we may experience difficulties with software or hardware development, design, integration
with third-party software or hardware, or marketing that could delay or prevent our introduction,
deployment or implementation of new solutions and enhancements. The introduction of new solutions by
competitors, the emergence of new industry standards or the development of entirely new technologies
to replace existing offerings could render our existing or future solutions obsolete.
We may not have sufficient resources to make the necessary investments in software development and
our technical infrastructure, and we may experience difficulties that could delay or prevent the
successful development, introduction or marketing of new products or enhancements. In addition, our
products or enhancements may not meet increasingly complex customer requirements or achieve
market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately
to technological advancements, customer requirements and changing industry standards, or any
significant delays in the development, introduction or availability of new products or enhancements,
could undermine our current market position and negatively impact our business, results of operations
or financial condition.
36
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 headquarters are in Canada, we currently have direct operations in the U.S., 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 Europe, Middle-East and Africa
region and the Asia Pacific region;
• 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;
Increased management, travel, infrastructure and legal compliance costs associated with
having international operations;
•
• 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 in areas such as
employment, tax, privacy and data protection;
• Trade restrictions;
• Enhanced security procedures and requirements relating to certain jurisdictions;
• The need to consider characteristics unique to technology systems used internationally;
• Economic or political instability in some markets; and
• Other risk factors set out herein.
We are dependent on certain key vendors for our inventory of telematics 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. If our relationships with any of these unit vendors were to terminate, there is no guarantee
that our remaining unit vendors would be able to handle the increased equipment supply required to
maintain and grow our expansive networks at our desired rates. There is also no guarantee that
business relationships with other key unit vendors could be entered into on terms desirable or favorable
to us, if at all. Fewer key vendors might mean that existing or potential customers are unable to
meaningfully communicate using our Global Logistics Network, which may cause existing and potential
customers to move to competitors’ products. Such equipment supply issues could adversely affect our
business, results of operations and financial condition.
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 Global Logistics Network and our
corresponding network revenues.
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If we need additional capital in the future and are unable to obtain it 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, the sale
of our equity securities and borrowing under our revolving debt facility. In addition to our current cash
and cash equivalents and available debt facilities, 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, 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. Our current revolving debt facility contains, and any
debt financing secured by us in the future could contain 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 or at all, 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
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 U.S. 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 U.S., or any other jurisdiction we
conduct our business in, could adversely affect our operations and financial results.
The general cyclical and seasonal nature of the freight market 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
38
of transportation may adversely affect our revenues. Declines in shipment volumes in the U.S. 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. Litigation may 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 our reputation and 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. A claim brought against us that is uninsured or underinsured could result
in unanticipated costs, thereby harming our operating results and leading analysts or potential investors
to lower their expectations of our performance, which could reduce the trading price of our common
shares.
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 market 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; or
•
Longer operating history; and/or greater name recognition.
Lower cost structure and more profitable operations;
39
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 that perform logistics services on a global scale
or within a particular geographic region, or we may fail to develop or maintain acceptable services and
products to address new market conditions, governmental regulations 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, 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 will also not be able to
protect our intellectual property if we are unable to enforce our rights or if we do not detect
unauthorized use of our intellectual property. Despite our precautions, it may be possible for
unauthorized third parties to copy our products and use information that we regard as proprietary to
create products and services that compete with ours. 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 will
have adequate remedies for any breach, or that our patents, copyrights, trademarks or trade secrets will
not otherwise become known. 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.
Moreover, the laws of some countries do not protect proprietary intellectual property rights as effectively
as do the laws of the U.S. and Canada. Protecting and defending our intellectual property rights could be
costly regardless of venue. In order to protect our intellectual property rights, we may be required to
spend significant resources to monitor and protect these rights. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity
and scope of the intellectual property rights of others or to defend against claims of infringement or
invalidity. Litigation brought to protect and enforce our intellectual property rights could be costly, time
consuming and distracting to management and could result in the impairment or loss of portions of our
intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met
with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual
property rights. Our inability to protect our proprietary technology against unauthorized copying or use,
as well as any costly litigation or diversion of our management’s attention and resources, could delay
further sales or the implementation of our solutions, impair the functionality of our solutions, delay
introductions of new solutions, result in our substituting inferior or more costly technologies into our
solutions, or injure our reputation.
40
infringe third-party proprietary rights could trigger
Claims that we
indemnification
obligations and result in significant expenses or restrictions on our ability to provide our
products or services.
Competitors and other third parties have claimed, and in the future may claim, that our current or future
services or products infringe their proprietary rights or assert other claims against us. Many of our
competitors have obtained patents covering products and services generally related to our products and
services, and they may assert these patents against us. Such claims, whether with or without merit,
could be time consuming and expensive to litigate or settle and could divert management attention from
focusing on our core business.
As a result of such a dispute, we may have to pay damages, incur substantial legal fees, suspend the
sale or deployment of our services and products, develop costly non-infringing technology, if possible, or
enter into license agreements, which may not be available on terms acceptable to us, if at all. Any of
these results would increase our expenses and could decrease the functionality of our services and
products, which would make our services and products less attractive to our current and/or potential
customers. We have agreed in some of our agreements, and may agree in the future, to indemnify other
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, such
payments could have a material adverse effect on our business, results of operations and financial
condition.
Our results of operations may vary significantly from quarter to quarter and therefore may be
difficult to predict or may fail to meet investment community expectations.
Our results of operations may vary from quarter to quarter in the future due to a variety of factors,
many of which are outside of our control. Such factors include, but are not limited to:
• Volatility or fluctuations in foreign currency exchange rates;
• Timing of acquisitions and related costs;
• Timing of restructuring activities;
• The introduction of enhanced products and services from competitors;
• Our ability to introduce new products and updates to our existing products on a timely basis;
• 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. If this occurs, the trading price of our common shares
may fall substantially.
Any failure to offer high-quality customer services may adversely affect our relationships
with our customers and our financial results.
Our customers depend on our customer service organization to resolve issues relating to our solutions
and to train them to use our platform. High-quality customer services are important for the successful
marketing and sale of our products and for the retention of existing customers and to sell additional
add-on applications to our existing customers. If we do not help our customers quickly resolve issues
41
and provide effective ongoing support, our ability to sell additional products to existing customers would
suffer and our reputation with existing or potential customers would be harmed. In addition, our sales
process
is highly dependent on our applications and business reputation and on positive
recommendations from our existing customers. Any failure to maintain high-quality customer services,
or a market perception that we do not maintain high-quality customer services, could adversely affect
our reputation, our ability to sell our solutions to existing and prospective customers, and our business,
results of operations and financial condition.
Privacy laws and regulations are extensive, open to various interpretations, complex to
implement and may reduce demand for our products, and failure to comply may impose
significant liabilities.
Our customers can use our products to collect, use, process and store information regarding their
shipments. Federal, state and foreign government bodies and agencies may adopt laws and regulations
regarding the collection, use, processing, storage and disclosure of such information obtained from
consumers and individuals. In addition to government regulatory activity, privacy advocacy groups and
the technology industry and other industries may consider various new, additional or different self-
regulatory standards that may place additional burdens directly on our customers and target customers,
and indirectly on us. Our products are expected to be capable of use by our customers in compliance
with such laws and regulations. The functional and operational requirements and costs of compliance
with such laws and regulations may adversely impact our business, and failure to enable our products to
comply with such laws and regulations could lead to significant fines and penalties imposed by
regulators, as well as claims by our customers or third parties. Additionally, all of these domestic and
international legislative and regulatory initiatives could adversely affect our customers’ ability or desire
to collect, use, process and store shipment logistics information, which could reduce demand for our
products.
The price of our common shares 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;
•
Introduction of new products or significant customer wins or losses by us or by our
competitors;
• Developments with respect to our intellectual property rights or those of our competitors;
•
Fluctuations in the share prices of other companies in the technology and emerging growth
sectors;
• General market conditions; and
• Other risk factors set out in this report.
If the market price of our common shares drops significantly, shareholders could institute securities
class action lawsuits against us, regardless of the merits of such claims. Such a lawsuit could cause us to
incur substantial costs and could divert the time and attention of our management and other resources
from our business.
42
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, “Intangibles – Goodwill and Other”, which
among other things, requires that goodwill be tested for impairment at least annually. We have
designated the third quarter for our annual impairment test. 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.
We have a substantial accumulated deficit and a history of losses and may incur losses in the
future.
As at January 31, 2015, our accumulated deficit was $282.9 million, which has been accumulated from
2005 and prior fiscal periods. There can be no assurance that we will not incur losses again in the future.
If we fail to maintain profitability, the market price of our common shares may decline.
43
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 generally accepted accounting principles (“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, 2015, based on criteria established in “Internal Control – Integrated
Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission”.
Based on the assessment, management concluded that, as of January 31, 2015, our internal control
over financial reporting was effective.
Management’s internal control over financial reporting as of January 31, 2015, has been audited by
Deloitte LLP, Independent Registered Public Accounting Firm, who also audited our Consolidated
Financial Statements for the year ended January 31, 2015, as stated in the Report of Independent
Registered Public Accounting Firm, 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, 2015, 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.
‘Edward J. Ryan’
Edward J. Ryan
Chief Executive Officer
Waterloo, Ontario
‘Allan Brett’
Allan Brett
Chief Financial Officer
Waterloo, Ontario
44
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
We have audited the accompanying consolidated financial statements of The Descartes Systems Group Inc. and subsidiaries (the
“Company”), which comprise the consolidated balance sheets as at January 31, 2015 and January 31, 2014, and the consolidated statements
of operations, comprehensive income/(loss), shareholders' equity, and cash flows for each of the years in the three-year period ended
January 31, 2015, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or
error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of The Descartes Systems
Group Inc. and subsidiaries as at January 31, 2015 and January 31, 2014, and the results of their operations and cash flows for each of the
years in the three-year period ended January 31, 2015 in accordance with accounting principles generally accepted in the United States of
America.
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of January 31, 2014, based on the criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5,
2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Independent Registered Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
March 5, 2015
45
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
We have audited the internal control over financial reporting of The Descartes Systems Group Inc. and its subsidiaries (the “Company”) as
of January 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Financial Statements and Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015,
based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 31, 2015 of the
Company and our report dated March 5, 2015 expressed an unqualified opinion on those financial statements.
Independent Registered Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
March 5, 2015
46
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS; US GAAP)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable (net)
Trade (Note 4)
Other (Note 5)
Prepaid expenses and other
Inventory (Note 6)
Deferred income taxes (Note 16)
CAPITAL ASSETS, NET (Note 7)
DEFERRED INCOME TAXES (Note 16)
INTANGIBLE ASSETS, NET (Note 8)
GOODWILL (Note 9)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued liabilities (Note 10)
Income taxes payable (Note 16)
Current portion of debt (Note 11)
Deferred revenue
DEBT (Note 11)
INCOME TAX LIABILITY (Note 16)
DEFERRED INCOME TAXES (Note 16)
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 12)
SHAREHOLDERS’ EQUITY
Common shares – unlimited shares authorized; Shares issued and outstanding totaled
75,480,492 at January 31, 2015 (January 31, 2014 – 63,660,953) (Note 13)
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board:
January 31,
January 31,
2015
2014
118,053
62,705
22,613
20,558
3,257
4,327
474
8,572
8,445
3,663
1,350
13,508
157,296
110,229
7,829
16,510
115,126
147,440
444,201
8,792
19,628
94,649
111,179
344,477
4,620
16,695
4,112
-
15,309
40,736
-
3,450
9,630
53,816
7,027
16,757
2,671
8,618
9,217
44,290
31,787
4,418
13,822
94,317
247,839
450,623
97,779
451,394
(25,212)
(1,089)
(282,865)
(297,924)
390,385
444,201
250,160
344,477
‘Eric A. Demirian’
Eric A. Demirian
Director
‘Edward J. Ryan’
Edward J. Ryan
Chief Executive Officer
47
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 17)
Amortization of intangible assets
INCOME FROM OPERATIONS
INTEREST EXPENSE
INVESTMENT INCOME
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE (RECOVERY) (Note 16)
Current
Deferred
NET INCOME
EARNINGS PER SHARE (Note 14)
Basic
Diluted
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)
Basic
Diluted
January 31,
January 31,
January 31,
2015
2014
2013
170,860
151,294
126,883
54,879
49,043
42,399
115,981
102,251
84,484
20,404
28,077
20,333
2,876
21,715
93,405
22,576
(1,088)
333
16,681
25,881
20,509
6,512
17,999
87,582
14,669
(993)
57
13,765
21,269
15,691
2,364
14,202
67,291
17,193
(45)
73
21,821
13,733
17,221
2,784
3,978
6,762
15,059
1,768
2,353
4,121
9,612
2,078
(853)
1,225
15,996
0.21
0.21
0.15
0.15
0.26
0.25
70,559
71,584
62,841
64,370
62,556
63,860
The accompanying notes are an integral part of these consolidated financial statements.
48
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(US DOLLARS IN THOUSANDS; US GAAP)
January 31, January 31, January 31,
2013
2015
2014
Comprehensive (loss) income
Net income
Other comprehensive (loss) income:
15,059
9,612
15,996
Foreign currency translation adjustment, net of income tax (expense)
(24,123)
(2,958)
1,932
recovery of ($445) for the year ended January 31, 2015 (January 31, 2014 –
($562); January 31, 2013 – $310)
Total other comprehensive (loss) income
Comprehensive (loss) income
(24,123)
(2,958)
(9,064)
6,654
1,932
17,928
The accompanying notes are an integral part of these consolidated financial statements.
49
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 and share units exercised
Issuance of common shares, net of issuance costs (Note 13)
Acquisitions (Note 3)
Balance, end of year
Additional paid-in capital
Balance, beginning of year
Stock-based compensation expense (Note 15)
Stock options and share units exercised
Settlement of stock options (Note 15)
Stock option income tax benefits
Balance, end of year
Accumulated other comprehensive (loss) income
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,
2013
2015
2014
97,779
92,472
90,924
2,626
142,052
5,382
247,839
5,307
-
-
1,548
-
-
97,779
92,472
451,394
1,543
(1,670)
(733)
89
450,623
451,434
2,523
(1,525)
(1,510)
472
451,394
452,424
1,278
(348)
(2,021)
101
451,434
(1,089)
(24,123)
(25,212)
1,869
(2,958)
(1,089)
(63)
1,932
1,869
(297,924)
15,059
(307,536)
9,612
(323,532)
15,996
(282,865)
(297,924)
(307,536)
Total Shareholders’ Equity
390,385
250,160
238,239
The accompanying notes are an integral part of these consolidated financial statements.
50
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
Stock-based compensation expense (Note 15)
Deferred tax expense
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
Additions to capital assets
Settlement of acquisition earn-out (Note 3)
Acquisition of subsidiaries, net of cash acquired and bank indebtedness
assumed (Note 3)
Cash used in investing activities
FINANCING ACTIVITIES
Proceeds from borrowing on the debt facility
Payment of debt issuance costs
Repayments of debt and other financial liabilities
Issuance of common shares for cash, net of issuance costs
Settlement of stock options (Note 15)
Cash provided by (used in) financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Increase (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,
2015
2014
2013
15,059
9,612
15,996
3,295
21,715
1,543
3,978
3,396
17,999
2,523
2,353
2,877
14,202
1,278
(657)
3,999
4,869
141
859
(3,121)
(294)
(73)
3,650
2,164
91
(535)
146
2,051
596
(1,697)
(183)
(379)
(343)
873
(736)
451
(2,492)
(1,432)
(1,342)
49,478
42,614
30,340
(2,679)
(2,385)
(3,496)
-
-
(590)
(82,152)
(58,737)
(54,155)
(84,831)
(61,122)
(58,241)
20,000
46,262
(386)
(692)
(63,305)
(3,722)
140,724
3,633
-
-
(77)
704
(405)
(1,361)
(1,525)
96,628
44,120
(5,927)
(545)
55,348
62,705
118,053
25,067
37,638
62,705
(898)
890
(27,909)
65,547
37,638
692
2,983
406
1,762
46
1,149
The accompanying notes are an integral part of these consolidated financial statements.
51
THE DESCARTES SYSTEMS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE INDICATED;
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, 2015, is referred to as the “current fiscal year,” “fiscal 2015,”
“2015” or using similar words. Our fiscal year, which ended January 31, 2014, is referred to as the
“previous fiscal year,” “fiscal 2014,” “2014” or using similar words. Other fiscal years are referenced by
the applicable year during which the fiscal year ends. For example, “2016” refers to the annual period
ending January 31, 2016 and the “fourth quarter of 2016” refers to the quarter ending January 31,
2016.
We have reclassified certain immaterial items in the consolidated financial statements and the notes to
conform to the current presentation.
Basis of consolidation
The consolidated financial statements include the financial statements of Descartes and our wholly-
owned subsidiaries. We do not have any variable interests in variable interest entities. All intercompany
accounts and transactions have been eliminated during consolidation.
Financial instruments
Fair value of financial instruments
Financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities, income taxes payable and debt. The estimated fair values of cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities and income taxes payable are approximate to
their book values due to the short-term nature of these instruments. The estimated fair value of debt is
approximate to its book value as the interest rates offered under our revolving debt facility are close to
market rates for debt of the same remaining maturities.
52
Foreign exchange risk
We are exposed to foreign exchange risk because a higher proportion of our revenues are denominated in
US dollars relative to expenditures. Accordingly, our results are affected, and may be affected in the future,
by exchange rate fluctuations of the US dollar relative to the Canadian dollar, euro and various other
foreign currencies.
Interest rate risk
We are exposed to interest rate fluctuations to the extent that we borrow on our revolving debt facility,
which depending on the type of advance under the available facilities, interest will be charged based on
either i) Canada prime rate or US base rate; or ii) LIBOR. As of January 31, 2015, all amounts previously
borrowed under the revolving debt facility have been repaid and no amounts remain owing.
We are also 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
The US dollar is the presentation currency of the Company. Assets and liabilities are translated into US
dollars at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated
into US dollars using daily exchange rates. Translation adjustments resulting from this process are
accumulated in other comprehensive income (loss) as a separate component of shareholders’ equity. On
substantial liquidation of a foreign operation, the component of other comprehensive income relating to
that particular foreign operation is recognized in the consolidated statements of operations.
The functional currency of each of our entities is the local currency in which they operate. Transactions
incurred in currencies other than the local currency of an entity are converted to the local currency at
the transaction date. Monetary assets and liabilities denominated in foreign currencies are re-measured
into the local currency at the exchange rate in effect at the balance sheet date. All foreign currency re-
measurement gains and losses are included in net income. For the year ended January 31, 2015, foreign
currency re-measurement gains of $1.4 million were included in net income (January 31, 2014 – loss of
$0.2 million; January 31, 2013 – loss of $0.2 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 allocations of the purchase price and the fair
value of net assets acquired in business combination transactions, useful lives of intangible assets and
capital assets, allowance for doubtful accounts, collectability of other receivables, provisions for excess
or obsolete inventory, restructuring accruals, revenue related estimates including vendor-specific
objective evidence (“VSOE”) of selling price and best estimate of selling price (“BESP”), fair value of
stock-based compensation, assumptions embodied in the valuation of assets for impairment
assessment, valuation allowances for deferred income tax assets, uncertain tax positions and recognition
of contingencies.
53
Cash and cash equivalents
Cash and cash equivalents include highly liquid 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 the inability of
customers to make their required payments. Specifically, we consider the age of the receivables,
customers’ payment history, 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.
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 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. No impairment of long-lived assets has been identified or recorded in our consolidated
statements of operations for any of the fiscal years presented.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of net
tangible and intangible assets acquired. Goodwill is not subject to amortization.
We test for impairment of goodwill at least annually during our third quarter 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. Our operations are analyzed by management and our chief
operating decision maker as being part of a single industry segment providing logistics technology
solutions. Accordingly, our goodwill impairment assessment is based on the allocation of goodwill to a
single reporting unit. Our annual goodwill impairment testing during our third quarter of 2015 indicated
no evidence of impairment and the fair value of our reporting unit was in excess of its carrying value. As
a result, no impairment of goodwill was recorded in fiscal 2015.
We 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 perform a goodwill
impairment test between the annual dates. Any impairment adjustment is 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.
54
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 three to twenty years
Straight-line over two to twelve years
Straight-line over three to twelve 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
Fully depreciated capital assets are removed from the balance sheet when they are no longer in use.
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. All revenue is recognized net of any related sales taxes. 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 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 hardware is shipped.
License Revenues - License revenues are derived from perpetual licenses granted to our customers to
use our software products.
We enter into arrangements from time to time that may consist of multiple deliverables which may
include any combination of services 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 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 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 Accounting Standard Codification (“ASC”) Subtopic 985-605 “Software:
55
Revenue Recognition”. 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.
Research and development costs
To date, we have not capitalized any costs related to research and development of our computer
software products. Costs incurred between the dates that the product is considered to be technologically
feasible and is considered to be ready for general release to customers have historically been expensed
as they have not been significant.
Stock-based compensation plans
Stock Options
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.
The fair value of employee stock option grants that are ultimately expected to vest are 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 & Restricted Share Units
We maintain a performance and restricted share unit plan effective pursuant to which certain of our
employees are eligible to receive grants of performance share units (“PSUs”) and restricted share units
(“RSUs”).
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.
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 an RSU.
56
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.
Deferred Share Unit Plan
Our board of directors adopted a deferred share unit plan effective as of June 28, 2004, pursuant to
which non-employee directors are eligible to receive grants of deferred share units (“DSUs”), each of
which has an initial value equal to the weighted-average closing price of our common shares for the five
trading days preceding the grant date. The plan allows each director to choose to receive, in the form of
DSUs, all, none or a percentage of the eligible director’s fees which would otherwise be payable in cash.
If a director has invested less than the minimum amount of equity in Descartes, as prescribed from time
to time by the board of directors then the director must take at least 50% of the base annual fee for
serving as a director 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.
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 (“CRSUs”), 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 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.
Income taxes
We use the liability method of income tax allocation to account for income taxes. Deferred tax assets
and liabilities arise from temporary differences between the tax bases of assets and liabilities and their
reported amounts in the consolidated financial statements that will result in taxable or deductible
amounts in future years. These temporary differences are measured using enacted tax rates. A valuation
allowance is recorded to reduce deferred tax assets to the extent that we consider it is more likely than
not that a deferred tax asset will not be realized. In determining the valuation allowance, we consider
factors such as the reversal of deferred income tax liabilities, projected taxable income, our history of
losses for tax purposes, and the character of income tax assets and tax planning strategies. A change to
these factors could impact the estimated valuation allowance and income tax expense.
We evaluate our uncertain tax positions by using a two-step approach to recognizing and measuring
uncertain tax positions and provisions for income taxes. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is more likely than not, based
solely on the technical merits, that the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the appropriate amount of the
benefit to recognize. The amount of benefit to recognize is measured as the maximum amount which is
more likely than not to be realized. The tax position is derecognized when it is no longer more likely
than not that the position will be sustained on audit. We continually assess the likelihood and amount of
potential adjustments and adjust the income tax provisions, income taxes payable and deferred income
taxes in the period in which the facts that give rise to a revision become known.
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
57
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 March 2013, the FASB issued Accounting Standard Update 2013-05, “Foreign Currency Matters”
(“ASU 2013-05”). ASU 2013-05 provides clarification on the accounting treatment of currency
translation adjustment for entities that cease to have a controlling financial interest in a foreign
subsidiary. ASU 2013-05 is effective for interim and annual periods beginning after December 15, 2013,
which is our fiscal year that commenced on February 1, 2014. The adoption of this amendment has not
had a material impact on our results of operations or disclosures.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes” (“ASU 2013-11”). ASU 2013-11 provides
clarification on the presentation of unrecognized tax benefits when a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for quarterly and annual
periods beginning after December 15, 2013, which is our fiscal year that commenced on February 1,
2014. The adoption of this amendment has not had a material impact on our results of operations or
disclosures.
Recently issued accounting pronouncements
In May 2014, the FASB issued Accounting Standard Update 2014-09, “Revenue from Contracts with
Customers” (“ASU 2014-09”). ASU 2014-09 amends the number of requirements that an entity must
consider in recognizing revenue and requires improved disclosures to help readers of financial
statements better understand the nature, amount, timing and uncertainty of revenue recognized. ASU
2014-09 is effective for interim and annual periods beginning after December 15, 2016, which will be
our fiscal year beginning February 1, 2017. Early adoption is not permitted. The Company will adopt this
guidance in the first quarter of fiscal 2018 and is currently evaluating the impact that the adoption will
have on its results of operations, financial position and disclosures.
In August 2014, the FASB issued Accounting Standard Update 2014-15, “Presentation of Financial
Statements – Going Concern (Subtopic 2015-40)” (“ASU 2014-15”). ASU 2014-15 requires an entity’s
management to evaluate whether there are conditions or events that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after the date that the financial
statements are issued. ASU 2014-15 is effective for condensed and annual periods beginning after
December 15, 2016, which will be our fiscal year beginning February 1, 2017. Early adoption is
permitted. The Company will adopt this guidance in the first quarter of fiscal 2018. The adoption of this
amendment is not expected to have a material impact on our results of operations or disclosures.
In February 2015, the FASB issued Accounting Standard Update 2015-02, “Consolidation (Topic 810):
Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 amends the analysis that an
entity must perform to determine whether it should consolidate certain types of legal entities. ASU
2015-02 is effective for condensed and annual periods beginning after December 15, 2015, which will be
our fiscal year beginning February 1, 2016. Early adoption is permitted. The Company will adopt this
guidance in the first quarter of fiscal 2017 and is currently evaluating the impact that the adoption will
have on its results of operations, financial position and disclosures.
58
Note 3 - Acquisitions
On December 5, 2014, we acquired all outstanding shares of privately-held Pentant Limited (“Pentant”),
a leading UK-based Community System Provider offering customs connectivity and import/export
inventory control solutions for ocean, truck and air cargo. Pentant provides its shipper and logistics
service provider customers with a reliable and secure connection to both CHIEF (the central UK Revenue
& Customs system) and ICS (the European Union Import Control System) to streamline declaration,
cargo security and clearance processes. The total purchase price for the acquisition was $2.1 million, net
of cash acquired, which was funded with cash on hand. Additional contingent consideration of up to $0.4
million in cash is payable if certain revenue performance targets are met by Pentant during 2016. The
fair value of the contingent consideration is nil at January 31, 2015. We incurred acquisition-related
costs, primarily for advisory services, of $0.2 million included in other charges in our consolidated
statements of operations. The gross contractual amount of trade receivables acquired was $0.1 million
with a fair value of $0.1 million at the date of acquisition. Our acquisition date estimate of contractual
cash flows not expected to be collected was nil. We have recognized $0.1 million of revenues and nil of
net income from Pentant since the date of acquisition in our consolidated statements of operations for
2015.
On December 5, 2014, we acquired all outstanding shares of privately-held e-customs Inc. (“e-
customs”), a leading provider of electronic security and fiscal customs filing solutions in the UK. e-
customs' cloud-based solution, Webdecs, provides both shippers and logistics service providers with a
wide range of customs capabilities to cost effectively comply with UK fiscal filing and security filing
requirements. The total purchase price for the acquisition was $9.6 million, net of cash acquired, which
was funded with cash on hand. Additional contingent consideration of up to $1.2 million in cash is
payable if certain revenue performance targets are met by e-customs during 2016. The fair value of the
contingent consideration is nil at January 31, 2015. We incurred acquisition-related costs, primarily for
advisory services, of $0.2 million included in other charges in our consolidated statements of operations.
The gross contractual amount of trade receivables 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 was nil. We have recognized $0.4 million of revenues and less than $0.1 million of net
income from e-customs since the date of acquisition in our consolidated statements of operations for
2015.
On November 19, 2014, we acquired all outstanding shares of privately-held Airclic Inc. (“Airclic”), a
leading US-based provider of mobile solutions that help companies reduce the cost of delivering goods
by automating traditional paper-based processes. Airclic's cloud-based mobile solutions help streamline
and automate complex 'last mile' logistics processes. The total purchase price for the acquisition was
$29.6 million, net of cash acquired, which was funded with cash on hand. We incurred acquisition-
related costs, primarily for advisory services, of $0.4 million included in other charges in our
consolidated statements of operations. The gross contractual amount of trade receivables acquired was
$4.5 million with a fair value of $4.5 million at the date of acquisition. Our acquisition date estimate of
contractual cash flows not expected to be collected was nil. We have recognized $2.7 million of revenues
and $0.3 million of net loss from Airclic since the date of acquisition in our consolidated statements of
operations for 2015.
On May 30, 2014 we acquired all outstanding membership interests of privately-held Customs Info, LLC
(“Customs Info”), a leading US-based provider of trade data content to power Global Trade Management
(GTM) systems and streamline global trade automation. Customs Info provides comprehensive trade
data and related research tools to multi-national shippers to help them reduce operating costs, improve
customs compliance, and accelerate supply chain speed. The total purchase price for the acquisition was
$39.5 million, net of cash acquired, which was funded by $34.1 million in cash and approximately 0.4
million Descartes common shares valued at $5.4 million. As part of completing the acquisition $20.0
million of the $39.5 million purchase price was funded by drawing on our revolving debt facility, which
has been subsequently repaid. Additional contingent consideration of up to $3.9 million in cash may
have become payable had certain revenue performance targets been met by Customs Info during the
59
calendar year 2014. The fair value of the contingent consideration was valued at nil at the acquisition
date and the performance targets were not met. We incurred acquisition-related costs, primarily for
advisory services, of $0.4 million included in other charges in our consolidated statements of operations.
The gross contractual amount of trade receivables acquired was $1.8 million with a fair value of $1.7
million at the date of acquisition. Our acquisition date estimate of contractual cash flows not expected to
be collected was $0.1 million. We have recognized $6.3 million of revenues and less than $0.1 million of
net income from Customs Info since the date of acquisition in our consolidated statements of operations
for 2015.
On April 1, 2014, we acquired all outstanding shares of privately-held Computer Management USA, Inc.
and Computer Management NA, Inc. (collectively, “Computer Management”), a US-based provider of
security filing solutions and air cargo management solutions for airlines and their partners. The total
purchase price for the acquisition was $6.7 million, net of cash acquired, which was funded with cash on
hand. We incurred acquisition-related costs, primarily for advisory services, of $0.3 million included in
other charges in our consolidated statements of operations. The gross contractual amount of trade
receivables 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 was nil. We have
recognized $1.4 million of revenues and $0.4 million of net income from Computer Management since
the date of acquisition in our consolidated statements of operations for 2015.
The preliminary purchase price allocation for businesses acquired during fiscal 2015, which have not
been finalized, is as follows:
Computer
Management
Customs
Info
Airclic e-customs Pentant
Total
Purchase price consideration:
Cash, excluding cash acquired
related to Computer Management
($112), Customs Info (nil), Airclic
($117), e-customs ($1,983) and
Pentant ($21)
Common shares issued
Net working capital adjustments
(receivable) / payable
Allocated to:
Current assets, excluding cash
acquired
Capital assets
Current liabilities
Deferred revenue
Deferred income tax liability
Debt
Net tangible assets (liabilities)
assumed
Finite life intangible assets acquired:
Customer agreements and
relationships
Existing technology
Trade names
Non-compete covenants
Goodwill
6,689
-
3
6,692
211
65
(10)
(8)
-
-
258
3,256
1,840
-
-
1,338
6,692
60
34,121
5,382
29,597
-
9,611
-
2,134
-
82,152
5,382
(813)
38,690
(318)
29,279
(41)
9,570
(13)
2,121
(1,182)
86,352
1,754
-
(556)
(3,147)
-
(927)
(2,876)
4,990
440
(2,656)
(6,930)
-
-
(4,156)
1,190
7
(399)
(19)
(1,053)
-
(274)
142
-
(658)
8,287
512
(4,279)
(38) (10,142)
(1,368)
(927)
(7,917)
(315)
-
(869)
8,650
5,708
682
391
26,135
38,690
7,802
13,786
-
177
11,670
29,279
2,318
2,807
-
138
4,581
9,570
1,336
595
-
-
1,059
2,121
23,362
24,736
682
706
44,783
86,352
No in-process research and development was acquired in these transactions.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Computer
Management
Customs
Info
Airclic
e-customs
Pentant
Customer agreements
and relationships
Existing technology
Trade names
Non-compete covenants
9 years
6 years
N/A
N/A
9 years
3 years
15 years
12 years
9 years
8 years
N/A
12 years
10 years
6 years
N/A
12 years
9 years
6 years
N/A
N/A
The goodwill on the Pentant, e-customs, Airclic, Customs Info and Computer Management acquisitions
arose as a result of the value of the combined strategic value to our growth plan. The goodwill arising
from the Pentant and e-customs acquisitions is not deductible for tax purposes. The goodwill arising
from the Airclic, Customs Info and Computer Management acquisitions is deductible for tax purposes.
On December 23, 2013, we acquired all outstanding shares of privately-held Impatex Freight Software
Limited (“Impatex”), a leading UK-based provider of electronic customs filing and freight forwarding
solutions. The total purchase price for the acquisition was $8.2 million, net of cash acquired, which was
funded by drawing on our revolving debt facility. We incurred acquisition-related costs, primarily for
advisory services, of $0.3 million included in other charges in our consolidated statements of operations
in 2014. The gross contractual amount of trade receivables acquired was $0.3 million with a fair value of
$0.3 million at the date of acquisition. Our acquisition date estimate of contractual cash flows not
expected to be collected was nil.
On December 20, 2013, we acquired all outstanding shares of privately-held Compudata, a leading
provider of business-to-business supply chain integration and e-invoicing solutions in Switzerland. The
total purchase price for the acquisition was $18.1 million, net of cash acquired, which was funded by
drawing on our revolving debt facility. We incurred acquisition-related costs, primarily for advisory
services, of $0.3 million included in other charges in our consolidated statements of operations in 2014.
The gross contractual amount of trade receivables acquired was $0.6 million with a fair value of $0.5
million at the date of acquisition. Our acquisition date estimate of contractual cash flows not expected to
be collected was $0.1 million.
On May 2, 2013 we acquired all outstanding shares of privately-held KSD Software Norway AS (“KSD”),
a leading Scandinavian-based provider of electronic customs filing solutions for the European Union
(“EU”). KSD’s software helps customers manage the complexities of EU customs compliance. The total
purchase price for the acquisition was $32.4 million, net of cash acquired. As part of completing the
acquisition $19.8 million of the $32.4 million purchase price was funded by drawing on our revolving
debt facility, with the remainder funded with cash on hand. We incurred acquisition-related costs,
primarily for advisory services, of $0.7 million included in other charges in our consolidated statements
of operations in 2014. The gross contractual amount of trade receivables acquired was $3.1 million with
a fair value of $2.6 million at the date of acquisition. Our acquisition date estimate of contractual cash
flows not expected to be collected was $0.5 million.
In 2015, the preliminary purchase price allocation for KSD was adjusted due to changes made to net
working capital adjustments receivable estimates made upon close of the acquisition. The purchase price
allocation adjustments were to increase goodwill $0.7 million from $13.1 million to $13.8 million and
decrease net working capital adjustments receivable $0.7 million from $2.9 million to $2.2 million.
61
The final purchase price allocations for businesses we acquired during fiscal 2014 are as follows:
Impatex Compudata
KSD
Total
Purchase price consideration:
Cash, less cash acquired related to
Impatex ($200), Compudata ($166) and KSD
($199)
Net working capital adjustments receivable
Allocated to:
Current assets, excluding cash acquired
Capital assets
Deferred income tax assets
Current liabilities
Deferred revenue
Deferred income tax liability
Debt
Net tangible liabilities assumed
Finite life intangible assets acquired:
Customer agreements and relationships
Existing technology
Non-compete covenants
Goodwill
8,175
(209)
7,966
18,143
(71)
18,072
32,419
(2,213)
30,206
58,737
(2,493)
56,244
524
109
11
(300)
(441)
(1,140)
-
(1,237)
2,495
3,207
-
3,501
7,966
1,793
24
-
(934)
(21)
(2,924)
-
(2,062)
4,174
67
863
(3,904)
(3,004)
(6,720)
(894)
(9,418)
6,491
200
874
(5,138)
(3,466)
(10,784)
(894)
(12,717)
11,910
-
23
8,201
18,072
17,500
8,300
-
13,824
30,206
31,905
11,507
23
25,526
56,244
No in-process research and development was acquired in the Impatex, Compudata or KSD acquisitions.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Customer agreements and relationships
Non-compete covenants
Existing technology
Impatex Compudata
9 years
10 years
3 years
N/A
N/A
8 years
KSD
12 years
N/A
8 years
The goodwill on the Impatex, Compudata and KSD acquisitions arose as a result of the value of their
assembled workforces and the combined strategic value to our growth plan. The goodwill arising from
these acquisitions is not deductible for tax purposes.
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.
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
62
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.
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.
The final purchase price allocations for businesses we acquired during fiscal 2013 are as follows:
Purchase price consideration:
Cash, less cash acquired related to
Infodis ($375), IES (nil) and Exentra ($663)
Net working capital adjustments receivable
Allocated to:
Current assets, excluding cash acquired
Capital assets
Deferred income tax assets
Current liabilities
Deferred revenue
Deferred income tax liability
Net tangible (liabilities) assets 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
No in-process research and development was acquired in these transactions.
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 is not deductible for tax purposes. The goodwill arising
from the IES acquisition is deductible for tax purposes.
63
The above transactions were accounted for using the acquisition method in accordance with ASC Topic
805, “Business Combinations”. The purchase price allocation in the tables above represents 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 have engaged third-party
valuation specialists. The valuation of the acquired net assets is 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 will be completed within one year from the acquisition date.
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 Airclic, Customs Info, Impatex, Compudata and
KSD as of the beginning of each of the periods presented. The pro forma results of operations for the
Pentant, e-customs, Computer Management, Exentra and Infodis 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 acquisitions of Airclic, Customs
Info, Impatex, Compudata and KSD occurred at the beginning of the period indicated, or to project our
results of operations for any future period.
Pro forma results of operations
Year Ended
Revenues
Net income
Earnings per share
Basic
Diluted
January 31,
2015
187,601
January 31, January 31,
2013
175,225
184,837
2014
16,524
9,490
16,036
0.23
0.23
0.15
0.15
0.26
0.25
During fiscal 2013 $0.6 million was paid relating to the earn-out adjustment from the fiscal 2008
acquisition of Global Freight Exchange Limited. No such amounts were paid during fiscal 2014 and 2015.
Note 4 - Trade Receivables
Trade receivables
Less: Allowance for doubtful accounts
January 31, January 31,
2014
2015
23,714
(1,101)
22,613
21,442
(884)
20,558
Bad debt expense was $0.4 million, $0.3 million and $0.3 million for the years ended January 31, 2015,
January 31, 2014 and January 31, 2013, respectively.
64
Note 5 - Other Receivables
Net working capital adjustments receivable from acquisitions
Other receivables
January 31, January 31,
2014
2015
372
2,885
3,257
4,005
4,440
8,445
As at January 31, 2015, $0.4 million ($3.7 million as at January 31, 2014) of the net working capital
adjustments receivable from acquisitions is recoverable from amounts held in escrow related to the
respective acquisitions.
Note 6 –Inventory
At January 31, 2015 and January 31, 2014, inventory is entirely comprised of finished goods inventory.
Finished goods inventory consists of hardware and related parts for mobile asset units held for sale. A
provision for excess or obsolete inventories has been recorded in cost of revenues of $0.3 million, nil
and nil for the years ended January 31, 2015, January 31, 2014 and January 31, 2013, respectively.
Note 7 - 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,
2014
2015
27,218
1,117
466
-
28,801
19,881
919
172
20,972
7,829
29,460
1,369
1,386
157
32,372
21,472
1,129
979
23,580
8,792
65
Note 8 - Intangible Assets
Cost
Customer agreements and relationships
Existing technology
Trade names
Non-compete covenants
Accumulated amortization
Customer agreements and relationships
Existing technology
Trade names
Non-compete covenants
January 31,
2015
January 31,
2014
97,344
93,911
4,349
2,407
81,951
76,442
4,093
1,884
198,011
164,370
37,956
40,326
3,130
1,473
82,885
115,126
32,101
32,796
3,392
1,432
69,721
94,649
Intangible assets related to our acquisitions are recorded at their fair value at the acquisition date.
During 2015, additions to intangible assets primarily consisted of the acquisitions of Computer
Management, Customs Info, Airclic, e-customs and Pentant, described in Note 3 to these consolidated
financial statements. The balance of the change in intangible assets is due to foreign currency
translation and amortization.
Intangible assets with a finite life are amortized into income over their useful lives. Amortization
expense for existing intangible assets is expected to be $115.1 million over the following periods: $21.7
million for 2016, $20.3 million for 2017, $15.5 million for 2018, $13.3 million for 2019, $12.7 million for
2020, $9.8 million for 2021 and $21.8 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 periods presented.
Note 9 - Goodwill
Balance at January 31, 2014
Acquisition of Impatex
Acquisition of Compudata
Acquisition of KSD
Acquisition of Computer Management
Acquisition of Customs Info
Acquisition of Airclic
Acquisition of e-customs
Acquisition of Pentant
Adjustments on account of foreign exchange
Balance at January 31, 2015
66
January 31, January 31,
2014
88,297
3,501
8,201
13,110
-
-
-
-
-
(1,930)
111,179
2015
111,179
-
-
714
1,338
26,135
11,670
4,581
1,059
(9,236)
147,440
The business acquisitions of Impatex, Compudata, KSD, Computer Management, Customs Info, Airclic,
e-customs and Pentant are described in Note 3 to these consolidated financial statements.
Note 10 - Accrued Liabilities
Accrued compensation and benefits
Accrued professional fees
Other accrued liabilities
Note 11 - Debt
January 31,
2015
9,017
1,137
6,541
16,695
January 31,
2014
8,346
1,780
6,631
16,757
As of January 31, 2015, all amounts previously borrowed under the revolving debt facility have been
repaid and no amounts remain owing. We are in compliance with the covenants of the revolving debt
facility as of January 31, 2015. On May 28 2014, we amended our revolving debt facility, increasing the
borrowing limit from $50.0 million to $77.0 million. The amended facility is comprised of a $75.0 million
revolving facility, with drawn amounts 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 on
drawn amounts 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 on advances at a rate of either i) Canada prime rate or US base rate
plus 0% to 1.5%; or ii) LIBOR plus 1.5% to 3%. Undrawn amounts are charged a standby fee of
between 0.3% and 0.5%. Interest is payable monthly in arrears under both facilities. Standby fees are
payable quarterly in arrears. The revolving debt facility contains certain customary representations,
warranties and guarantees, and covenants.
As at January 31, 2015 we have outstanding letters of credit of approximately $0.4 million (EUR 0.1
million and NOK 2.0 million) primarily related to our leased premises ($0.5 million as at January 31,
2014).
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,
2016
2017
2018
2019
2020
Operating
Leases
4,845
3,189
2,026
1,181
215
11,456
Capital
Leases
271
134
66
-
-
471
Total
5,116
3,323
2,092
1,181
215
11,927
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 2018. The future
minimum amounts payable under these lease agreements are outlined in the chart above. The $0.5
million balance of the capital lease obligation outstanding at January 31, 2015 is included in accrued
67
liabilities in the consolidated balance sheet. Rental expense from operating leases was $5.2 million, $4.8
million and $3.7 million for the years ended January 31, 2015, January 31, 2014 and January 31, 2013,
respectively.
Other Obligations
Deferred Share Unit and Cash-Settled Restricted Share Unit Plans
As described in Note 2 to these consolidated financial statements, we maintain DSU and CRSU plans for
our directors and employees. Any payments made pursuant to these plans are settled in cash. For DSUs
and 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 $0.7 million for which no liability was
recorded on our consolidated balance sheet at January 31, 2015, in accordance with ASC Topic 718,
“Compensation – Stock Compensation”. As at January 31, 2015 there were no unvested DSUs. 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 in our consolidated financial statements.
Business combination agreements
In respect of our acquisition of Customs Info in the second quarter of fiscal 2015, up to $3.9 million in
cash may have become payable had certain revenue performance targets been met by Customs Info
during the calendar year 2014. The revenue performance targets were not met during the performance
period and as a result no amount is payable related to the contingent consideration.
In respect of our acquisition of e-customs in the fourth quarter of fiscal 2015, up to approximately $1.2
million (GBP 0.8 million) in cash may become payable if certain revenue performance targets are met by
e-customs during 2016.
In respect of our acquisition of Pentant in the fourth quarter of fiscal 2015, up to approximately $0.4
million (GBP 0.3 million) in cash may become payable if certain revenue performance targets are met by
Pentant during 2016.
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 agreement with our customer, which license terms
68
are typically perpetual. To date, we have not encountered material costs as a result of such
indemnifications.
Other indemnification agreements
In the normal course of operations, we enter into various agreements that provide general
indemnifications. These indemnifications typically occur in connection with purchases and sales of
assets, securities offerings or buy-backs, service contracts, administration of employee benefit plans,
retention of officers and directors, membership agreements and leasing transactions. These
indemnifications that we provide require us, in certain circumstances, to compensate the counterparties
for various costs resulting from breaches of representations or obligations under such arrangements, or
as a result of third party claims that may be suffered by the counterparty as a consequence of the
transaction. We believe that the likelihood that we could incur significant liability under these obligations
is remote. Historically, we have not made any significant payments under such indemnifications.
In evaluating estimated losses for the guarantees or indemnities described above, we consider such
factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. We are unable to make a reasonable estimate of the maximum potential
amount payable under such guarantees or indemnities as many of these arrangements do not specify a
maximum potential dollar exposure or time limitation. The amount also depends on the outcome of
future events and conditions, which cannot be predicted. Given the foregoing, to date, we have not
accrued any liability in our financial statements for the guarantees or indemnities described above.
Note 13 - Share Capital
On July 2, 2014, we completed a public offering of common shares in the United States and Canada at a
price of $13.50 per common share pursuant to the short-form base shelf prospectus and related
prospectus supplement filed in connection with the offering. The total offering of 10,925,000 common
shares included the exercise in full by the underwriters of the 15% over-allotment option, for aggregate
gross proceeds to Descartes of $147.5 million. Net proceeds to Descartes were approximately $142.1
million once expenses associated with the offering were deducted inclusive of the related deferred tax
benefit on share issuance costs.
Cash flows provided from stock options and share units exercised during 2015, 2014 and 2013 was
approximately $0.9 million, $3.6 million and $0.7 million, respectively.
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.
January 31, January 31, January 31,
2013
62,433
2015
63,661
2014
62,654
478
10,925
416
75,480
1,007
-
-
63,661
221
-
-
62,654
(thousands of shares)
Balance, beginning of year
Shares issued:
Stock options and share units exercised
Issuance of common shares
Acquisitions (Note 3)
Balance, end of year
69
Note 14 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) (number
of shares in thousands):
Year Ended
January 31,
2015
January 31,
2014
January 31,
2013
Net income for purposes of calculating basic and diluted
earnings per share
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
15,059
9,612
15,996
70,559
665
360
62,841
1,258
271
62,556
1,279
25
71,584
64,370
63,860
0.21
0.21
0.15
0.15
0.26
0.25
For the years ended January 31, 2015, 2014 and 2013, respectively, nil, nil and 40,000 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 2015, 2014 and 2013, respectively, the application of the
treasury stock method excluded 215,000, nil and 7,500 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
Total estimated stock-based compensation expense recognized in our consolidated statement of
operations was as follows:
Year Ended
Cost of revenues
Sales and marketing
Research and development
General and administrative
Other charges
Effect on net income
January 31,
2015
45
70
2
1,426
-
1,543
January 31,
2014
54
538
12
1,138
781
2,523
January 31,
2013
56
412
44
766
-
1,278
For the year ended January 31, 2014 other charges includes stock-based compensation expense of $0.3
million related to a modification of certain PSU grants. 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 $0.1 million ($0.2 million at January 31, 2014) recognized in the United States. For the
year ended January 31, 2015, we realized a tax benefit of $0.1 million in connection with stock options
exercised ($0.2 million in 2014, less than $0.1 million in 2013).
70
Stock Options
During 2013, we amended our stock option plan agreements to allow for stock options to be
surrendered to the Company upon the exercise of tandem stock appreciate rights and settled for cash
and/or shares at the option of the Company. 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 and applicable
employee withholding taxes. For the year ended January 31, 2015, the Company settled 175,000
options, respectively, for $0.4 million in cash related to payment of applicable employee withholding
taxes and $0.3 million of common shares issued from treasury. For the year ended January 31, 2014,
300,000 options were settled for $1.4 million in cash and $0.1 million of common shares were issued
from treasury. 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, 2015, we had 778,264 stock options granted and outstanding under our shareholder-
approved stock option plan and 217,264 remained available for grant. In addition, we had 175,000 stock
options outstanding not approved by shareholders.
As of January 31, 2015, $0.7 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 1.9
years. The total fair value of stock options vested during 2015 was $0.1 million.
The total number of options granted during 2015, 2014 and 2013 was 215,000, nil and 40,000,
respectively.
The weighted-average fair value of options and weighted-average assumptions were as follows:
Year Ended
Expected dividend yield (%)
Expected volatility (%)
Risk-free rate (%)
Expected option life (years)
January
31, 2015
-
25.4
1.5
5
January
31, 2014
N/A
N/A
N/A
N/A
January
31, 2013
-
33.2
1.2
5
A summary of option activity under all of our plans is presented as follows:
Number of
Stock Options
Outstanding
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
Balance at January 31, 2014
Granted
Exercised
Net Settled for Shares
Forfeited
Balance at January 31, 2015
1,139,853
215,000
(220,138)
(175,000)
(6,451)
953,264
$4.39
$13.77
$3.49
$4.53
$5.72
$6.33
Vested or expected to vest at January 31,
2015
913,514
$6.23
Exercisable at January 31, 2015
654,410
$3.87
71
2.5
10.6
2.4
1.1
10.2
8.9
The weighted average grant-date fair value of options granted during 2015, 2014 and 2013 was $3.47,
nil and $2.73 per option, respectively. The total intrinsic value of options exercised during 2015, 2014
and 2013 was approximately $2.4 million, $9.4 million and $0.7 million, respectively. The total intrinsic
value of options settled during 2015, 2014 and 2013 was approximately $1.6 million, $1.5 million and
$2.0 million, respectively.
Options outstanding and options exercisable as at January 31, 2015 by range of exercise price are as
follows:
Range of Exercise Prices
$3.02 – $3.46
$5.67 – $5.82
$6.44 – $8.03
$13.60 – $13.79
Options Outstanding
Weighted
Average
Exercise
Price
Number of
Stock
Options
$3.03
$5.69
$7.78
$13.77
$6.33
461,875
228,889
47,500
215,000
953,264
Weighted
Average
Remaining
Contractual
Life (years)
0.4
2.7
4.2
6.4
2.5
Options Exercisable
Number of
Stock
Options
Weighted
Average
Exercise
Price
$303
$5.68
$7.60
-
$3.87
461,875
170,535
22,000
-
654,410
A summary of the status of our unvested stock options under our shareholder-approved stock option
plan as of January 31, 2015 is presented as follows:
Balance at January 31, 2014
Granted
Vested
Forfeited
Balance at January 31, 2015
Number of
Stock Options
Outstanding
164,145
40,000
(73,840)
(6,451)
123,854
Weighted-
Average Grant-
Date Fair Value
per Share
$2.21
$3.43
$1.97
$1.96
$2.56
72
Performance Share Units
A summary of PSU activity is as follows:
Number of
PSUs
Outstanding
Weighted-
Average
Grant Date
Fair Value
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
Balance at January 31, 2014
Granted
Exercised
Forfeited
Balance at January 31, 2015
211,428
51,752
(83,984)
(4,938)
174,258
$11.69
$16.67
$10.88
$10.93
$12.61
Vested or expected to vest at January 31,
2015
174,258
$12.61
Exercisable at January 31, 2015
69,980
$10.86
7.9
3.0
7.9
7.0
3.0
1.2
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, 2015) that would have been
received by PSU holders if all PSUs had been vested on January 31, 2015.
As of January 31, 2015, $0.8 million of total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of 1.5 years. The total fair value of
PSUs vested during 2015 was $0.9 million.
Restricted Share Units
A summary of RSU activity is as follows:
Number of
RSUs
Outstanding
Weighted-
Average
Grant Date
Fair Value
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
Balance at January 31, 2014
Granted
Exercised
Forfeited
Balance at January 31, 2015
214,076
51,752
(85,298)
(4,938)
175,592
$8.96
$13.79
$8.36
$8.59
$9.94
Vested or expected to vest at January 31,
2015
175,592
$9.94
Exercisable at January 31, 2015
123,581
$9.04
7.9
3.1
7.9
7.6
3.1
2.2
73
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, 2015) that would have been
received by RSU holders if all RSUs had been vested on January 31, 2015.
As of January 31, 2015, $0.6 million of total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of 1.7 years. The total fair value of
RSUs vested during 2015 was $0.6 million.
Deferred Share Unit Plan
As at January 31, 2015, the total number of DSUs held by participating directors was 209,727 (145,303
at January 31, 2014), representing an aggregate accrued liability of $3.2 million ($2.1 million at January
31, 2014). A total of 64,424 DSUs were granted to directors during 2015. As at January 31, 2015, the
unrecognized aggregate liability for unvested DSUs was nil (nil at January 31, 2014). 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 $1.5 million, $1.1 million and $0.1 million for 2015, 2014 and 2013, respectively.
Cash-Settled Restricted Share Unit Plan
A summary of activity under our CRSU plan is as follows:
Balance at January 31, 2014
Granted
Vested and settled in cash
Forfeited
Balance at January 31, 2015
Vested at January 31, 2015
Unvested at January 31, 2015
Number of
CRSUs
Outstanding
Weighted-
Average
Remaining
Contractual Life
(years)
152,794
68,439
(106,910)
(467)
113,856
660
113,196
1.5
-
1.5
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, 2015 ($1.2
million at January 31, 2014). As at January 31, 2015, the unrecognized aggregate liability for the non-
vested CRSUs was $0.7 million ($1.0 million at January 31, 2014). 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 $0.6
million, $1.2 million and $1.3 million for 2015, 2014 and 2013, respectively.
74
Note 16 - Income Taxes
Income (loss) before income taxes is earned in the following tax jurisdictions:
Year Ended
Canada
United States
Other countries
January 31, January 31, January 31,
2013
2015
2014
14,489
6,300
1,032
21,821
6,922
7,841
(1,030)
13,733
14,908
1,529
784
17,221
Income tax expense (recovery) is incurred in the following jurisdictions:
Year Ended
Current income tax expense
Canada
United States
Other countries
Deferred income tax expense (recovery)
Canada
United States
Other countries
January 31, January 31, January 31,
2013
2015
2014
568
1,060
1,156
2,784
3,741
2,144
(1,907)
3,978
6,762
61
605
1,102
1,768
3,827
2,804
(4,278)
2,353
4,121
478
446
1,154
2,078
5,177
(833)
(5,197)
(853)
1,225
Income tax expense for 2015, 2014 and 2013 was 31%, 30% and 7% of income before income taxes,
respectively, with current income tax expense being 13%, 13% and 12% of income before income
taxes, respectively. Deferred income tax expense increased in 2015 compared to 2014 primarily due to
a release of valuation allowance which decreased tax expense by $2.7 million in 2014, while only $1.2
million of valuation allowance was released in 2015. Deferred income tax expense increased in 2014
compared to 2013 primarily due to a release of valuation allowance which decreased income tax
expense by $4.0 million in 2013, while only $2.7 million of valuation allowance was released in 2014.
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 were 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.
75
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
January 31, January 31,
2014
2015
4,238
22,617
1,710
7,031
-
2,792
1,508
39,896
(9,232)
(530)
(9,762)
30,134
(14,681)
15,453
8,572
16,510
(9,629)
15,453
4,312
27,486
1,535
9,005
1,003
5,091
76
48,508
(12,975)
(727)
(13,702)
34,806
(15,492)
19,314
13,508
19,628
(13,822)
19,314
As at January 31, 2015, we had not accrued for foreign withholding taxes and Canadian income taxes
applicable to approximately $86.4 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. If we decide
to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we
determined that the earnings will no longer be indefinitely invested outside Canada.
76
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
Net income before taxes
January 31, January 31, January 31,
2013
17,221
2014
13,733
21,821
2015
Combined basic Canadian statutory rates
26.5%
26.5%
26.5%
5,783
3,639
4,564
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 changes on current year timing differences
Adjustments in respect to income tax of previous periods
Increases (decrease) in tax reserves
Valuation allowance
Stock compensation
Other
Income tax expense
We have income tax loss carryforwards which expire as follows:
800
1,007
-
9
(41)
(1,195)
86
313
6,762
1,078
663
321
355
239
(2,707)
481
52
4,121
Expiry year
2016
2017
2018
2019
2020
Thereafter
Canada
-
-
-
-
256
256
United
States
-
-
575
2,957
-
5,553
9,085
EMEA Asia Pacific
342
173
-
-
37
7,732
8,284
666
-
298
476
203
75,215
76,858
562
165
(156)
(503)
565
(4,070)
102
(4)
1,225
Total
1,008
173
873
3,433
240
88,756
94,483
The following is a tabular reconciliation of the total estimated liability associated with uncertain tax
positions taken:
Liability, beginning of year
Gross increases – current period
Lapsing of statutes of limitations
Liability, end of year
2015
January 31, January 31, January 31,
2013
4,857
1,389
(607)
5,639
2014
5,639
981
(409)
6,211
(1,315)
5,721
6,211
825
We have identified provisions equating to $5.7 million with respect to uncertain tax positions as at
January 31, 2015. It is possible that these uncertain tax positions will not be realized in which case up
to $4.4 million of the recorded liability will decrease the effective tax rate in future years when this
liability is reversed.
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, 2015 and January
31, 2014, the unrecognized tax positions have resulted in no material liability for estimated interest and
penalties.
77
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
Norway
Netherlands
Belgium
Note 17 - Other Charges
Years No Longer Subject to
Audit
2011 and prior
2010 and prior
2011 and prior
2009 and prior
2012 and prior
2009 and prior
2011 and prior
Other charges are comprised of executive departure charges, restructuring initiatives which have been
undertaken from time to time under various restructuring plans, and acquisition-related costs.
Acquisition-related costs primarily include advisory services, brokerage services and administrative
costs, and relate to completed and prospective acquisitions.
Other charges included in our consolidated statements of operations are as follows:
Executive departure charges
Acquisition-related costs
Fiscal 2015 restructuring plan
Fiscal 2014 restructuring plan
Prior years’ restructuring plans
January 31,
2015
396
1,666
715
100
(1)
2,876
January 31,
2014
3,313
1,308
-
1,904
(13)
6,512
January 31,
2013
-
1,405
-
-
959
2,364
Executive Departure Charges
In the fourth quarter of 2014, the Company incurred charges related to the departure of the former
Chairman and CEO. In the second quarter of 2015, the Company incurred charges related to the
departure of the former CFO. To date $3.7 million has been recorded within other charges in conjunction
with executive departure charges. At January 31, 2015, $0.9 million remains payable relating to this
charge ($2.0 million at January 31, 2014).
Fiscal 2015 Restructuring Plan
In the fourth quarter of 2015, management approved and began to implement the fiscal 2015
restructuring plan to reduce operating expenses and increase operating margins. To date, $0.7 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 other costs. This plan has expected
remaining office and other costs of $0.3 million to be expensed in 2016.
78
The following table shows the changes in the restructuring provision for the fiscal 2015 restructuring
plan.
Balance at January 31, 2014
Accruals and adjustments
Cash draw downs
Foreign exchange
Balance at January 31, 2015
Workforce
Reduction
-
464
(238)
-
226
Office Closure
Costs
-
224
(4)
-
220
Other Costs
-
27
(27)
-
-
Total
-
715
(269)
-
446
Fiscal 2014 Restructuring Plan
In the second quarter of 2014, management approved and began to implement the fiscal 2014
restructuring plan to reduce operating expenses and increase operating margins. To date, $2.0 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.
The following table shows the changes in the restructuring provision for the fiscal 2014 restructuring
plan.
Balance at January 31, 2014
Accruals and adjustments
Cash draw downs
Foreign exchange
Balance at January 31, 2015
Workforce
Reduction
52
64
(116)
-
-
Office Closure
Costs
96
36
(99)
(8)
25
Total
148
100
(215)
(8)
25
Prior Years’ Restructuring Plans
In prior years, management approved and began to implement certain restructuring plans to reduce
operating expenses and increase operating margins. As at January 31, 2015, a balance of less than $0.1
million remains payable related to workforce reduction charges.
79
Note 18 - 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
Netherlands
EMEA, excluding Belgium and Netherlands
Asia Pacific
Year Ended
Revenues
Services
Licenses
January 31, January 31, January 31,
2013
2015
2014
72,837
15,187
973
13,959
14,876
44,065
8,963
170,860
68,877
14,388
1,028
14,961
14,475
33,095
4,470
151,294
60,420
14,212
1,052
15,668
12,370
16,916
6,245
126,883
January 31, January 31, January 31,
2013
2015
2014
159,050
11,810
170,860
137,795
13,499
151,294
116,822
10,061
126,883
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, which include 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
Netherlands
EMEA, excluding Belgium and Netherlands
80
January 31, January 31,
2014
2015
141,981
14,745
19,936
10,483
83,250
270,395
67,843
18,437
28,048
14,802
85,490
214,620
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
Brookfield Place
181 Bay Street
Suite 1400
Toronto, Ontario M5J 2V1
Phone: (416) 601-6180
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