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CDI > SEC Filings for CDI > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for CDI CORP


3-May-2013

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 Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included in Part I, Item 1 of this Form 10-Q Report.

Executive Overview
Business Overview
CDI is an integrated engineering and technology services organization providing differentiated, client-focused solutions in select global industries. The Company provides engineering and information technology ("IT") solutions and 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 primarily include the infrastructure, U.S. defense, transportation and financial services industries.
The Company operates through its three reporting segments: Global Engineering and Technology Solutions ("GETS"), Professional Services Staffing ("PSS"), and Management Recruiters International ("MRI"). GETS and PSS provide engineering and IT solutions and professional staffing services. MRI provides staffing services and generates franchising revenue through royalties and initial franchise fees.
The Company offers a full range of engineering and IT solutions. Engineering solutions include: feasibility studies, technology assessments, conceptual and front-end engineering design services and detailed design, procurement, construction management, validation, testing and operating and maintenance support. IT solutions include: assessments, business application services, web development, digital solutions, service management, IT security and risk management, and program management.
Professional staffing services include the sourcing and hiring of skilled technical, professional and managerial talent both on a contract staffing and direct hire basis. CDI also provides managed services, recruitment process outsourcing and staffing process consulting services to clients on a global basis.
The Company's strategic growth plan includes focusing on high-potential growth opportunities in a discrete number of priority industries and selective expansion of the Company's geographic footprint to meet the global needs of the Company's core clients. The priority industries are OGC, AIE and Hi-Tech. 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 uncertainty in some 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.
First Quarter 2013 Overview
Revenue during the first quarter of 2013 decreased by $11.2 million or 4.0% as compared to the first quarter of 2012, driven by decreases in all three segments. Gross profit decreased by $5.5 million or 9.9% and gross margin decreased to 18.6% from 19.8%, primarily reflecting the decrease in revenue and the shift in mix to lower margin business. Operating and administrative expenses decreased as a percentage of revenue to 16.8% from 17.2%. Operating profit was $4.9 million during the first quarter of 2013 as compared to $7.4 million during the first quarter of 2012 primarily due to lower revenue and gross margins partially offset by ongoing cost savings from cost containment efforts initiated during the second quarter of 2012. Net income attributable to CDI was $2.5 million during the first quarter of 2013 as compared to $3.8 million in the first quarter of 2012.


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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

Three months ended March 31, 2013 as compared to the three months ended March 31, 2012

Consolidated Discussion

The table that follows presents changes in revenue by segment along with
selected financial information and key metrics for the three months ended
March 31, 2013 and 2012:
                                             Three Months Ended
                                                  March 31,
                                      2013                        2012                       Change
                                          % of Total                  % of Total
                                 $          Revenue          $          Revenue          $            %

Revenue:
GETS                        $  78,037        29.0 %     $  81,275        29.0 %     $  (3,238 )      (4.0 )%
PSS                           177,108        65.7         181,733        64.8          (4,625 )      (2.5 )
MRI                            14,321         5.3          17,619         6.3          (3,298 )     (18.7 )
Total Revenue               $ 269,466       100.0       $ 280,627       100.0       $ (11,161 )      (4.0 )
Gross profit                $  50,151        18.6       $  55,685        19.8       $  (5,534 )      (9.9 )
Operating and
administrative expenses     $  45,238        16.8       $  48,296        17.2       $  (3,058 )      (6.3 )
Operating profit            $   4,913         1.8       $   7,389         2.6       $  (2,476 )     (33.5 )
Net income attributable to
CDI                         $   2,491         0.9       $   3,823         1.4       $  (1,332 )     (34.8 )
Cash flow used in
operations                  $ (21,620 )                 $ (14,837 )
Effective income tax rate        47.5 %                      46.8 %
Pre-tax return on net
assets (1)                       11.6 %                      10.0 %

(1) 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 decreased in all three segments for the first quarter of 2013 as compared to the first quarter of 2012. GETS' revenue decreased primarily due to reduced infrastructure and government services spending in the "Other" industry vertical partially offset by growth in the OGC vertical. PSS' revenue decreased primarily due to the completion of several projects in the "Other" industry vertical and reduced demand at existing clients in the Hi-Tech vertical partially offset by increased demand by existing clients in the OGC vertical. MRI's revenue decreased primarily due to reduced contract staffing revenue and a decline in royalties.
Gross profit dollars and gross profit margin decreased for the first quarter of 2013 as compared to the first quarter of 2012 primarily due to the reduction in revenue and shift in mix to lower margin business in all three segments. Operating profit decreased primarily due to the reduced gross profit in all three segments partially offset by the ongoing cost savings from cost containment efforts initiated during the second quarter of 2012. The effective income tax rates for both periods were unfavorably impacted by losses in foreign jurisdictions on which no tax benefit has been recognized and reductions to deferred tax assets for share-based compensation grants that expired with no corresponding tax benefit. Corporate
Corporate expenses consist of operating and administrative expenses that are not allocated to the reporting units under segment reporting. Corporate expenses decreased slightly for the first quarter of 2013 as compared to the first quarter of 2012 primarily due to lower personnel-related costs.


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                           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 Results of Operations

Global Engineering and Technology Solutions ("GETS ")

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 March 31, 2013 and 2012:
                                             Three Months Ended
                                                  March 31,
                                       2013                       2012                     Change
                                          % of Total                 % of Total
                                 $          Revenue         $          Revenue         $            %

Revenue:
Oil, Gas and Chemicals
("OGC")                      $ 29,650        38.0 %     $ 28,264        34.8 %     $  1,386         4.9  %
Aerospace and Industrial
Equipment ("AIE")              16,869        21.6         16,912        20.8            (43 )      (0.3 )
Hi-Tech                         7,621         9.8          8,065         9.9           (444 )      (5.5 )
Other                          23,897        30.6         28,034        34.5         (4,137 )     (14.8 )
Total revenue                  78,037       100.0         81,275       100.0         (3,238 )      (4.0 )
Cost of services               56,513        72.4         58,028        71.4         (1,515 )      (2.6 )
Gross profit                   21,524        27.6         23,247        28.6         (1,723 )      (7.4 )
Operating and administrative
expenses                       16,249        20.8         17,309        21.3         (1,060 )      (6.1 )
Operating profit             $  5,275         6.8       $  5,938         7.3       $   (663 )     (11.2 )

GETS' revenue decreased during the first quarter of 2013 as compared to the first quarter of 2012 primarily due to the reduction in revenue in the "Other" and Hi-Tech industry verticals partially offset by growth in the OGC industry vertical. The decrease in the "Other" industry vertical revenue was primarily due to continued weakness in state and local government spending on infrastructure engineering projects and reduced demand for government services. Hi-Tech revenue decreased primarily due to the completion of several projects partially offset by increased demand from existing clients. The increase in OGC revenue was driven by strong growth within existing clients in the oil refining and chemical industries partially offset by the loss of certain nonstrategic clients.

GETS' gross profit dollars and gross profit margin decreased for the first quarter of 2013 as compared to the first quarter of 2012 primarily due to the reduction in revenue and decline in higher margin infrastructure and government services business and increase in lower margin business in the OGC vertical.

GETS' operating and administrative expenses decreased during the first quarter of 2013 as compared to the first quarter of 2012 primarily due to the ongoing cost savings from cost containment efforts initiated during the second quarter of 2012.

GETS' operating profit decreased for the first quarter of 2013 as compared to the first quarter of 2012 primarily due to the reduction in revenue and the shift in mix to lower margin business partially offset by the ongoing cost savings from cost containment efforts initiated during the second quarter of 2012.


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                           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")

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 March 31, 2013 and 2012:
                                             Three Months Ended
                                                  March 31,
                                       2013                       2012                     Change
                                          % of Total                 % of Total
                                 $          Revenue         $          Revenue         $            %

Revenue:
Oil, Gas and Chemicals
("OGC")                      $ 33,342        18.8 %     $ 30,994        17.1 %     $  2,348         7.6  %
Aerospace and Industrial
Equipment ("AIE")              18,917        10.7         19,791        10.9           (874 )      (4.4 )
Hi-Tech                        71,994        40.6         74,307        40.9         (2,313 )      (3.1 )
Other                          52,855        29.8         56,641        31.2         (3,786 )      (6.7 )
Total revenue                 177,108       100.0        181,733       100.0         (4,625 )      (2.5 )
Cost of services              154,838        87.4        157,295        86.6         (2,457 )      (1.6 )
Gross profit                   22,270        12.6         24,438        13.4         (2,168 )      (8.9 )
Operating and administrative
expenses                       18,165        10.3         18,644        10.3           (479 )      (2.6 )
Operating profit             $  4,105         2.3       $  5,794         3.2       $ (1,689 )     (29.2 )

PSS' revenue decreased for the first quarter of 2013 as compared to the first quarter of 2012 due to the reduction in revenue in the "Other", Hi-Tech and AIE industry verticals partially offset by growth in the OGC industry vertical. Revenue in the "Other" industry verticals decreased primarily due to the impact of the completion of several projects for clients in the financial services and construction industries. Hi-Tech revenue declined primarily due to decreased demand at existing clients partially offset by the impact of new clients. AIE revenue decreased primarily due to the Company's election to exit low margin business partially offset by growth within existing clients. OGC revenue growth was primarily due to increased demand for pipeline-related inspection activities at existing clients and increased demand by clients in the chemical industry.

PSS' gross profit dollars and gross profit margin decreased for the first quarter of 2013 as compared to the first quarter of 2012 primarily due to the reduction in revenue and a shift in mix from higher margin retail staffing clients to lower margin program account clients.

PSS' operating and administrative expenses decreased during the first quarter of 2013 as compared to the first quarter of 2012 due primarily to the ongoing cost savings from cost containment efforts initiated during the second quarter of 2012.

PSS' operating profit decreased for the first quarter of 2013 as compared to the first quarter of 2012 primarily due to the reduction in revenue and the shift in mix to lower margin business partially offset by the ongoing cost savings from cost containment efforts initiated during the second quarter of 2012.


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)

Management Recruiters International ("MRI")

The following table presents changes in revenue by service type, cost of
services, gross profit, operating and administrative expenses and operating
profit for MRI for the three months ended March 31, 2013 and 2012:
                                             Three Months Ended
                                                  March 31,
                                       2013                       2012                     Change
                                          % of Total                 % of Total
                                 $          Revenue         $          Revenue         $            %

Revenue:
Contract Staffing            $ 11,236        78.5 %     $ 13,681        77.6 %     $ (2,445 )     (17.9 )%
Royalties and Franchise Fees    3,085        21.5          3,938        22.4           (853 )     (21.7 )
Total revenue                  14,321       100.0         17,619       100.0         (3,298 )     (18.7 )
Cost of services                7,964        55.6          9,619        54.6         (1,655 )     (17.2 )
Gross profit                    6,357        44.4          8,000        45.4         (1,643 )     (20.5 )
Operating and administrative
expenses                        4,480        31.3          5,747        32.6         (1,267 )     (22.0 )
Operating profit             $  1,877        13.1       $  2,253        12.8       $   (376 )     (16.7 )

MRI's revenue decreased for the first quarter of 2013 as compared to the first quarter of 2012 primarily due to lower contract staffing revenue and royalties. Contract staffing revenue decreased as demand for interim technical services weakened and royalty revenue decreased due to reduced permanent placements by MRI franchises.

MRI's gross profit dollars and gross profit margin decreased in the first quarter of 2013 as compared to the first quarter of 2012 primarily due to the decrease in contract staffing revenue and a shift toward lower margin contract staffing clients as well a decrease in royalties.

MRI's operating and administrative expenses decreased during the first quarter of 2013 as compared to the first quarter of 2012 due primarily to the ongoing cost savings from cost containment efforts initiated during the second quarter of 2012.
MRI's operating profit decreased for the first quarter of 2013 as compared to the first quarter of 2012 driven primarily due primarily to the decline in revenue partially offset by the ongoing cost savings from cost containment efforts initiated during the second quarter of 2012.


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)

Liquidity and Capital Resources

The Company's principal sources of liquidity are cash flows from operations and borrowings under our credit facilities. The Company's principal uses of cash are operating expenses, capital expenditures, working capital requirements, dividends, and debt service. Management expects that the Company's current cash balances, cash generated from operations and unused borrowing capacity will be sufficient to support the Company's planned operating and capital requirements for the foreseeable future and at least the next twelve months. On November 30, 2012, CDI Corp., its direct wholly-owned subsidiary, CDI Corporation, and its indirect subsidiary, CDI AndersElite Limited (each a "Borrower"), entered into a Credit Agreement (the "Credit Agreement") with Bank of America, N.A. (the "Bank"). The Credit Agreement established a $75.0 million revolving line of credit facility (including a $5.0 million UK overdraft facility), with a five-year term ending on November 29, 2017. Borrowings under this line of credit may be used by the Company and the other Borrowers for general business purposes or for letters of credit. See Note 7-Short-Term Borrowings, in the notes to the consolidated financial statements included in Item1 of this Form 10-Q Report for more information relating to the Credit Agreement.
At March 31, 2013, the Company had cash and cash equivalents of $18.4 million. As of March 31, 2013, there were no outstanding borrowings and $71.9 million available to borrow and $3.1 million of letters of credit outstanding under the Credit Agreement. The Company was in compliance with all financial covenants under the Credit Agreement as of March 31, 2013.
As of March 31, 2013, approximately 72% of the Company's cash and cash equivalents are held by certain non-U.S. subsidiaries, principally a Canadian entity, as well as being denominated in foreign currencies, principally Canadian dollars. The repatriation of cash and cash equivalent balances from non-U.S. subsidiaries could have adverse tax consequences; however, such cash and cash equivalent balances are generally available, without legal restrictions, to fund ordinary business operations at the local level. Deferred income taxes have not been provided on the unremitted earnings of such non-U.S. subsidiaries, because it is management's intention to reinvest such earnings in non-U.S. subsidiaries for the foreseeable future.
The following table summarizes the net cash provided by (used in) for the major captions from the Company's consolidated statements of cash flows for the indicated periods:

Three Months Ended
                             March 31,
                        2013          2012         Change

Operating Activities $ (21,620 )   $ (14,837 )   $ (6,783 )
Investing Activities    (1,059 )      (1,194 )        135
Financing Activities    (2,319 )      (4,438 )      2,119

Operating Activities
For the first three months of 2013, the Company used $21.6 million net cash from operating activities, which was a $6.8 million increase from the comparable period in 2012. Cash used in operating activities increased due to the decline in net income, after adjusting for non-cash items, and, to a lesser extent, an increase in net working capital requirements. Investing Activities
For the first three months of 2013, the Company used $1.1 million net cash in investing activities which is relatively consistent with the comparable period in 2012.
Financing Activities
For the first three months of 2013, the Company used $2.3 million net cash in financing activities or $2.1 million less cash as compared to the comparable period in 2012 primarily due to the acceleration of the payment of the first quarter 2013 cash dividend into December 2012.

Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts disclosed in this Form 10-Q Report. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from those estimates. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ from current judgments.


Table of Contents

The critical accounting estimates and assumptions identified in the Company's 2012 Annual Report on Form 10-K filed on March 1, 2013 with the Securities and Exchange Commission have not materially changed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to risks associated with foreign currency fluctuations and changes in interest rates.

Foreign Currency Risk
The Company's exposure to foreign currency fluctuations relates primarily to its operations denominated in Canadian dollars and British pounds sterling. Exchange rate fluctuations impact the U.S. dollar value of reported earnings derived from these foreign operations as well as the Company's investment in the net assets related to these operations. The Company utilizes derivative financial instruments from time to time to reduce its exposure to certain foreign currency fluctuations.

Interest Rate Risk
The interest rate risk associated with the Company's borrowing activities as of March 31, 2013 is not material in relation to its consolidated financial position, results of operations or cash flows. While it may do so in the future, the Company has not used derivative financial instruments to alter the interest rate characteristics of its debt instruments. At March 31, 2013 the Company had no outstanding borrowings.

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