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CDI > SEC Filings for CDI > Form 10-Q on 31-Oct-2012All Recent SEC Filings

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Form 10-Q for CDI CORP


31-Oct-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except per share amounts, unless otherwise indicated)

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Executive Overview
CDI is an integrated engineering and technology services organization providing differentiated, client-focused solutions in select global industries. The Company's three reportable segments are: Global Engineering and Technology Solutions ("GETS"), Professional Services Staffing ("PSS"), and Management Recruiters International, Inc. ("MRI"). GETS and PSS provide a range of integrated engineering and technology solutions and professional staffing services to clients in the Oil, Gas and Chemical ("OGC"), Aerospace and Industrial Equipment ("AIE"), and Hi-Tech industry verticals as well as in "Other" industry verticals that include the U.S. defense, infrastructure, transportation, financial services, and mining and extraction industries. MRI derives revenues by providing contract staffing services and generating royalty and franchise fee income. The Company's principal objectives are to grow the Company's solutions business, optimize the Company's professional staffing operations and prioritize the geographic markets and industries to which the Company will deliver engineering and technology solutions. The Company is focused on offering services through three geographic regions: the Americas; Europe, the Middle East and Africa ("EMEA"); and Asia Pacific ("APAC"). The Company's results of operations can be affected by economic conditions, including macroeconomic conditions, credit market conditions and levels of business confidence. There continues to be significant volatility in markets in the U.S. and around the world, as well as economic and geopolitical uncertainty in many of the markets where we operate, particularly in Europe. The Company will continue to monitor this volatility and uncertainty to position itself to respond to changing conditions.
In December 2011, the Company announced a strategic growth initiative and implemented a restructuring plan that reduced operating and administrative expenses during 2012.
Revenue during the third quarter ended September 30, 2012 increased by $6.9 million or 2.5% as compared to the third quarter of 2011, primarily due to growth in PSS. Gross profit decreased by $3.0 million and gross margin decreased to 19.6% from 21.2%, primarily reflecting higher growth in the lower margin PSS staffing business and a decrease in higher margin infrastructure engineering projects in GETS. Operating profit was $9.0 million during the third quarter of 2012 as compared to $4.4 million during the third quarter of 2011. The third quarter of 2011 operating profit included a charge of $0.6 million associated with the severance of certain senior-level executives. Operating profit improved primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011 and savings from additional cost containment efforts. Net income attributable to CDI was $5.3 million during the third quarter of 2012 as compared to $2.8 million in the third quarter of 2011. The third quarter of 2011 net income includes the benefit of a Hiring Incentives to Restore Employment (HIRE) Act Federal income tax credit of $0.3 million.


Table of Contents
                           CDI CORP. AND SUBSIDIARIES
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
  (Amounts in thousands, except per share amounts, unless otherwise indicated)

Results of Operations

Consolidated Discussion

Three months ended September 30, 2012 as compared to the three months ended
September 30, 2011

The table that follows presents changes in revenue by segment along with
selected financial information and key metrics for the three months ended
September 30, 2012 and 2011:
                                             Three Months Ended
                                                September 30,
                                      2012                        2011                 Increase (Decrease)
                                          % of Total                  % of Total
                                 $          Revenue          $          Revenue           $             %

Revenue:
GETS                        $  83,550        29.9 %     $  83,229        30.5 %     $       321         0.4  %
PSS                           178,372        63.8         171,539        63.0             6,833         4.0
MRI                            17,468         6.3          17,706         6.5              (238 )      (1.3 )
Total Revenue               $ 279,390       100.0       $ 272,474       100.0       $     6,916         2.5
Gross profit                $  54,720        19.6       $  57,742        21.2       $    (3,022 )      (5.2 )
Operating and
administrative expenses     $  45,711        16.4       $  53,321        19.6       $    (7,610 )     (14.3 )
Operating profit            $   9,009         3.2       $   4,421         1.6       $     4,588       103.8
Pre-tax profit              $   8,962         3.2       $   4,358         1.6       $     4,604       105.6
Net income attributable to
CDI                         $   5,349         1.9       $   2,814         1.0       $     2,535        90.1
Cash flow provided by (used
in) operations              $   9,014                   $  (1,681 )
Effective income tax rate        39.7 %                      34.3 %
After-tax return on CDI
shareholders' equity (1)          4.9 %                       0.2 %
Pre-tax return on net
assets (2)                        9.1 %                       3.9 %

(1) Net Income (loss) attributable to CDI divided by the average of the beginning and ending balances of CDI shareholder's equity for the prior 12 consecutive months.

(2) Income (loss) before income taxes for the year, divided by the average net assets at the beginning and end of the year for the prior 12 consecutive months. Net assets include total assets minus total liabilities excluding cash and cash equivalents, income tax accounts and debt.

Revenue increased for the third quarter of 2012 as compared to the third quarter of 2011 primarily due to growth in PSS. GETS and PSS increased revenues in each of the three strategic industry verticals. The increase in GETS revenue was predominantly offset by a decrease in the "Other" industry verticals due primarily to reduced spending by state and local governments on infrastructure engineering projects. The increase in PSS revenue was partially offset by a decrease in the "Other" industry verticals due primarily to the completion of several projects.
Gross profit dollars and gross profit margin decreased for the third quarter of 2012 as compared to the third quarter of 2011. The decrease was primarily due to the growth in lower margin PSS business and a decrease in higher margin infrastructure engineering projects in GETS.
Operating profit improved primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011 and savings from additional cost containment efforts.
The effective income tax rate for both periods was unfavorably impacted by losses in foreign jurisdictions on which no tax benefit has been recognized. The rate for the three months ended September 30, 2011 was favorably impacted by Federal income tax credits under the HIRE Act.


Table of Contents
                           CDI CORP. AND SUBSIDIARIES
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
  (Amounts in thousands, except per share amounts, unless otherwise indicated)

Consolidated Discussion - Continued

Nine months ended September 30, 2012 as compared to the nine months ended
September 30, 2011

The table that follows presents changes in revenue by segment along with
selected financial information and key metrics for the nine months ended
September 30, 2012 and 2011:
                                              Nine Months Ended
                                                September 30,
                                      2012                        2011                  Increase (Decrease)
                                          % of Total                  % of Total
                                 $          Revenue          $          Revenue           $              %

Revenue:
GETS                        $ 245,587        29.4 %     $ 242,395        30.6 %     $     3,192          1.3  %
PSS                           535,380        64.2         498,649        63.0            36,731          7.4
MRI                            53,448         6.4          50,805         6.4             2,643          5.2
Total Revenue               $ 834,415       100.0       $ 791,849       100.0       $    42,566          5.4
Gross profit                $ 165,933        19.9       $ 169,032        21.3       $    (3,099 )       (1.8 )
Operating and
administrative expenses (1) $ 141,671        17.0       $ 148,154        18.7       $    (6,483 )       (4.4 )
Operating profit            $  24,262         2.9       $  20,878         2.6       $     3,384         16.2
Pre-tax profit              $  24,097         2.9       $  20,656         2.6       $     3,441         16.7
Net income attributable to
CDI                         $  14,124         1.7       $  15,490         2.0       $    (1,366 )       (8.8 )
Cash flow provided by (used
in) operations              $   1,182                   $  (1,877 )
Effective income tax rate        40.3 %                      24.4 %

(1) In the second quarter of 2011, the Company's PSS segment recorded a $9.7 million benefit related to the successful legal appeal of the OFT matter.

Revenue increased for the first nine months of 2012 as compared to the first nine months of 2011 driven by growth in all segments, particularly PSS. The OGC industry vertical was the primary driver of growth in both PSS and GETS. These increases were partially offset by the declining revenues in the "Other" industry verticals due primarily to reduced spending by state and local governments on infrastructure engineering projects in GETS and the completion of several projects in PSS.
Gross profit dollars and gross profit margin decreased for the first nine months of 2012 as compared to the first nine months of 2011 due primarily to the decrease in higher margin infrastructure projects in GETS and the higher growth in lower margin business in PSS and MRI.
Operating profit for the first nine months of 2011 includes a benefit of $9.7 million related to the successful legal appeal of the United Kingdom's Office of Fair Trading ("OFT") matter. Excluding the impact of the OFT matter, operating profit improved primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011 and savings from additional cost containment efforts.
The effective income tax rate for both periods was unfavorably impacted by losses in foreign jurisdictions and reductions to deferred tax assets for stock-based compensation grants that expired with no corresponding tax benefit. In addition, the 2011 rate was favorably impacted by a reduction in the fine reserve for the OFT matter and Federal income tax credits under the HIRE Act.


Table of Contents
                           CDI CORP. AND SUBSIDIARIES
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
  (Amounts in thousands, except per share amounts, unless otherwise indicated)

Segment Discussion

Global Engineering and Technology Solutions ("GETS ")

Three months ended September 30, 2012 as compared to the three months ended
September 30, 2011

The following table presents changes in revenue by industry vertical, cost of
services, gross profit, operating and administrative expenses and operating
profit for GETS for the three months ended September 30, 2012 and 2011:
                                             Three Months Ended
                                                September 30,
                                       2012                       2011                Increase (Decrease)
                                          % of Total                 % of Total
                                 $          Revenue         $          Revenue           $             %

Revenue:
Oil, Gas and Chemicals
("OGC")                      $ 27,713        33.2 %     $ 26,026        31.3 %     $    1,687          6.5  %
Aerospace and Industrial
Equipment ("AIE")              19,500        23.3         18,094        21.7            1,406          7.8
Hi-Tech                         8,502        10.2          7,381         8.9            1,121         15.2
Other                          27,835        33.3         31,728        38.1           (3,893 )      (12.3 )
Total revenue                  83,550       100.0         83,229       100.0              321          0.4
Cost of services               59,309        71.0         58,643        70.5              666          1.1
Gross profit                   24,241        29.0         24,586        29.5             (345 )       (1.4 )
Operating and administrative
expenses                       16,726        20.0         18,818        22.6           (2,092 )      (11.1 )
Operating profit             $  7,515         9.0       $  5,768         6.9       $    1,747         30.3

GETS' revenue increased during the third quarter of 2012 as compared to the third quarter of 2011 due to the growth in the OGC, AIE and Hi-Tech industry verticals partially offset by a decrease in the "Other" industry verticals. The increase in OGC revenue was driven by strong growth within existing clients partially offset by the loss of certain non-strategic clients. AIE revenue growth was beneficially impacted by strong growth in commercial aviation business, partially offset by declines in government-related spending and defense-related projects. Hi-Tech revenue increased in the third quarter of 2012 as compared to the third quarter of 2011 due primarily to an increase in project revenue. The "Other" industry verticals experienced continued weakness in state and local government spending on infrastructure engineering projects partially offset by increased naval defense spending.

GETS' gross profit dollars and gross profit margin decreased for the third quarter of 2012 as compared to the third quarter of 2011 primarily due to the decline in higher margin infrastructure engineering projects.

GETS' operating and administrative expenses decreased during the third quarter of 2012 as compared to the third quarter of 2011 primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011 and savings from additional cost containment efforts.

GETS' operating profit increased for the third quarter of 2012 as compared to the third quarter of 2011 driven by lower operating and administrative expenses primarily due to the ongoing cost savings from the restructuring initiative and savings from additional cost containment efforts partially offset by the decline in higher margin infrastructure engineering projects.


Table of Contents
                           CDI CORP. AND SUBSIDIARIES
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
  (Amounts in thousands, except per share amounts, unless otherwise indicated)

Global Engineering and Technology Solutions - Continued

Nine months ended September 30, 2012 as compared to the nine months ended
September 30, 2011

The following table presents changes in revenue by industry vertical, cost of
services, gross profit, operating and administrative expenses and operating
profit for GETS for the nine months ended September 30, 2012 and 2011:
                                              Nine Months Ended
                                                September 30,
                                       2012                       2011                Increase (Decrease)
                                          % of Total                 % of Total
                                 $          Revenue         $          Revenue           $             %

Revenue:
Oil, Gas and Chemicals
("OGC")                      $ 83,908        34.2 %     $ 72,942        30.1 %     $    10,966        15.0  %
Aerospace and Industrial
Equipment ("AIE")              53,918        22.0         54,431        22.5              (513 )      (0.9 )
Hi-Tech                        24,653        10.0         22,163         9.1             2,490        11.2
Other                          83,108        33.8         92,859        38.3            (9,751 )     (10.5 )
Total revenue                 245,587       100.0        242,395       100.0             3,192         1.3
Cost of services              174,645        71.1        169,165        69.8             5,480         3.2
Gross profit                   70,942        28.9         73,230        30.2            (2,288 )      (3.1 )
Operating and administrative
expenses                       51,468        21.0         59,343        24.5            (7,875 )     (13.3 )
Operating profit             $ 19,474         7.9       $ 13,887         5.7       $     5,587        40.2

GETS' revenue increased during the first nine months of 2012 as compared to the first nine months of 2011 primarily due to the growth in the OGC and Hi-Tech industry verticals partially offset by a decrease in the "Other" industry verticals. The increase in OGC revenue was primarily driven by the growth within existing clients in the gas and chemical industries. Hi-Tech revenue increased in the first nine months of 2012 as compared to the first nine months of 2011 due primarily to the growth within existing clients. The "Other" industry verticals experienced continued weakness in state and local government spending on infrastructure engineering projects partially offset by increased naval defense spending.

GETS' gross profit dollars and gross profit margin decreased for the first nine months of 2012 as compared to the first nine months of 2011 primarily due to the decline in higher margin infrastructure engineering projects.

GETS' operating and administrative expenses decreased during the first nine months of 2012 as compared to the first nine months of 2011 primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011 and savings from additional cost containment efforts.

GETS' operating profit increased for the first nine months of 2012 as compared to the first nine months of 2011 driven by lower operating and administrative expenses primarily due to the ongoing cost savings from the restructuring plan and savings from additional cost containment efforts partially offset by the decline in higher margin infrastructure engineering projects.


Table of Contents
CDI CORP. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except per share amounts, unless otherwise indicated)

Professional Services Staffing ("PSS")

Three months ended September 30, 2012 as compared to the three months ended September 30, 2011

The following table presents changes in revenue by industry vertical, cost of services, gross profit, operating and administrative expenses and operating profit for PSS for the three months ended September 30, 2012 and 2011:

                                             Three Months Ended
                                                September 30,
                                       2012                       2011                Increase (Decrease)
                                          % of Total                 % of Total
                                 $          Revenue         $          Revenue           $             %

Revenue:
Oil, Gas and Chemicals
("OGC")                      $ 31,551        17.7 %     $ 22,855        13.3 %     $    8,696         38.0  %
Aerospace and Industrial
Equipment ("AIE")              21,555        12.1         16,351         9.5            5,204         31.8
Hi-Tech                        72,136        40.4         69,930        40.8            2,206          3.2
Other                          53,130        29.8         62,403        36.4           (9,273 )      (14.9 )
Total revenue                 178,372       100.0        171,539       100.0            6,833          4.0
Cost of services              155,693        87.3        146,664        85.5            9,029          6.2
Gross profit                   22,679        12.7         24,875        14.5           (2,196 )       (8.8 )
Operating and administrative
expenses                       18,154        10.2         20,750        12.1           (2,596 )      (12.5 )
Operating profit             $  4,525         2.5       $  4,125         2.4       $      400          9.7

PSS' revenue increased for the third quarter of 2012 as compared to the third quarter of 2011 driven by growth in the OGC, AIE and Hi-Tech industry verticals, partially offset by a decrease in revenue in the "Other" industry verticals. OGC revenue growth was primarily due to increased demand for pipeline-related inspection activities at existing clients. AIE revenue growth was primarily due to the impact of new clients. Hi-Tech revenue growth was primarily due to increased demand at existing clients and to lesser extent the impact of new clients. Revenue in the "Other" industry verticals decreased due primarily to the impact of the completion of several projects for clients in the financial services and construction industries.
PSS' gross profit dollars decreased for the third quarter of 2012 as compared to the third quarter of 2011. PSS' gross profit margin declined primarily due to a higher percentage of revenue being derived from lower margin business.

PSS' operating and administrative expenses decreased during the third quarter of 2012 as compared to the third quarter of 2011 primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011 and savings from additional cost containment efforts.

PSS' operating profit increased for the third quarter of 2012 as compared to the third quarter of 2011 driven by lower operating and administrative expenses primarily due to the ongoing cost savings from the restructuring initiative and savings from additional cost containment efforts partially offset by a higher percentage of revenue being derived from lower margin business.


Table of Contents
                           CDI CORP. AND SUBSIDIARIES
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
  (Amounts in thousands, except per share amounts, unless otherwise indicated)

Professional Services Staffing - Continued

Nine months ended September 30, 2012 as compared to the nine months ended
September 30, 2011
The following table presents changes in revenue by industry vertical, cost of
services, gross profit, operating and administrative expenses and operating
profit for PSS for the nine months ended September 30, 2012 and 2011:
                                              Nine Months Ended
                                                September 30,
                                       2012                       2011                Increase (Decrease)
                                          % of Total                 % of Total
                                 $          Revenue         $          Revenue           $             %

Revenue:
Oil, Gas and Chemicals
("OGC")                      $ 85,589        16.0 %     $ 56,508        11.3 %     $    29,081        51.5  %
Aerospace and Industrial
Equipment ("AIE")              62,743        11.7         46,264         9.3            16,479        35.6
Hi-Tech                       222,869        41.6        213,785        42.9             9,084         4.2
Other                         164,179        30.7        182,092        36.5           (17,913 )      (9.8 )
Total revenue                 535,380       100.0        498,649       100.0            36,731         7.4
Cost of services              464,502        86.8        427,163        85.7            37,339         8.7
Gross profit                   70,878        13.2         71,486        14.3              (608 )      (0.9 )
Operating and administrative
expenses (1)                   55,490        10.4         52,168        10.5             3,322         6.4
Operating profit             $ 15,388         2.9       $ 19,318         3.9       $    (3,930 )     (20.3 )

(1) In the second quarter of 2011, the Company's PSS segment recorded a $9.7 million benefit related to the successful legal appeal of the OFT matter.

PSS' revenue increased for the first nine months of 2012 as compared to the first nine months of 2011 driven by growth in the OGC, AIE and Hi-Tech industry verticals, partially offset by the revenue decrease in the "Other" industry verticals. OGC revenue growth was primarily due to increased demand for pipeline-related inspection activities. AIE revenue growth was primarily due to the impact of new clients. Hi-Tech revenue growth was primarily due to increased demand at existing clients. Revenue in the "Other" industry verticals decreased due primarily to the impact of the completion of several projects for clients in the financial services and construction industries.
PSS' gross profit dollars remained relatively flat in the first nine months of 2012 as compared to the first nine months of 2011. PSS' gross profit margin declined primarily due to a higher percentage of revenue being derived from lower margin business.

PSS's operating and administrative expenses for the first nine months of 2011 includes a benefit of $9.7 million related to the successful legal appeal of the OFT matter. Excluding the impact of the OFT matter, operating and administrative expenses decreased primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011 and savings from additional cost containment efforts.
Operating profit for the first nine months of 2011 includes a benefit of $9.7 million related to the successful legal appeal of the OFT matter. Without the impact of the OFT matter, operating profit improved primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011 and savings from additional cost containment efforts.


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