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CDI > SEC Filings for CDI > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for CDI CORP


2-Aug-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 as well as the Note About Forward-Looking Statements.

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, service desk support, 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.
Second Quarter 2013 Overview
Revenue during the second quarter of 2013 decreased by $11.0 million or 4.0% as compared to the second quarter of 2012, driven by decreases in all three segments. Gross profit decreased by $4.0 million or 7.2% primarily reflecting the decrease in revenue. Gross profit margin decreased to 19.6% from 20.2% primarily due to the shift in mix to lower margin business. Operating and administrative expenses decreased in total dollars but increased as a percentage of revenue. Operating profit was $5.2 million during the second quarter of 2013 as compared to $7.9 million during the second quarter of 2012 primarily due to lower revenue and gross profit margins partially offset by ongoing cost savings from cost containment efforts initiated during the second quarter of 2012. Net income attributable to CDI was $3.4 million during the second quarter of 2013 as compared to $5.0 million in 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)

Results of Operations

Consolidated Discussion

Three months ended June 30, 2013 as compared to the three months ended June 30,
2012

The table that follows presents changes in revenue by segment along with
selected financial information and key metrics for the three months ended
June 30, 2013 and 2012:
                                           Three Months Ended
                                                June 30,
                                     2013                       2012                     Change
                                         % of Total                 % of Total
                                $         Revenue          $         Revenue          $            %

Revenue:
GETS                       $  79,951       30.4 %     $  80,762       29.4 %     $    (811 )     (1.0 )%
PSS                          168,759       64.1         175,275       63.9          (6,516 )     (3.7 )
MRI                           14,653        5.6          18,361        6.7          (3,708 )    (20.2 )
Total Revenue              $ 263,363      100.0       $ 274,398      100.0       $ (11,035 )     (4.0 )
Gross profit               $  51,545       19.6       $  55,528       20.2       $  (3,983 )     (7.2 )
Operating and
administrative expenses    $  46,303       17.6       $  47,664       17.4       $  (1,361 )     (2.9 )
Operating profit           $   5,242        2.0       $   7,864        2.9       $  (2,622 )    (33.3 )
Net income attributable to
CDI                        $   3,438        1.3       $   4,952        1.8       $  (1,514 )    (30.6 )
Cash flow used in
operations                 $   9,613                  $   7,005
Effective income tax rate       32.5 %                     34.9 %
Pre-tax return on net
assets (1)                      10.7 %                      7.4 %

(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 second quarter of 2013 as compared to the second quarter of 2012. GETS' revenue decreased primarily due to reduced infrastructure and government services spending in the "Other" industry vertical substantially offset by growth in the OGC and AIE verticals. PSS' revenue decreased primarily due to reduced demand at existing clients in the Hi-Tech vertical, the completion of several projects in the "Other" industry vertical and exiting certain low margin AIE business, partially offset by increased demand by existing clients in the OGC vertical. MRI's revenue decreased due to lower contract staffing revenue and royalties.
Gross profit decreased for the second quarter of 2013 as compared to the second quarter of 2012 primarily due to the reduction in revenue in all three segments and a shift in mix to lower margin business. Gross profit margin decreased for the second quarter of 2013 as compared to the second quarter of 2012 primarily due to a shift in mix to lower margin business in GETS and PSS.
Operating profit decreased primarily due to the reduced gross profit in PSS and MRI 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 impacted by immaterial discrete items and the mix of domestic and foreign pre-tax income and losses with no tax benefit that had a significant impact on the effective income tax rates due to the levels of pre-tax income for both periods. As such, comparison of effective income tax rates for the second quarter of 2013 as compared to the second quarter of 2012 is not relevant.
Corporate
Corporate expenses consist of operating and administrative expenses that are not allocated to the reporting units under segment reporting. Corporate expenses increased slightly to $6.4 million for the second quarter of 2013 compared to $6.0 million for 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)

Consolidated Discussion - Continued

Six months ended June 30, 2013 as compared to the six months ended June 30, 2012

The table that follows presents changes in revenue by segment along with
selected financial information and key metrics for the six months ended June 30,
2013 and 2012:
                                            Six Months Ended
                                                June 30,
                                     2013                       2012                     Change
                                         % of Total                 % of Total
                                $         Revenue          $         Revenue          $            %

Revenue:
GETS                       $ 157,988       29.7 %     $ 162,037       29.2 %     $  (4,049 )     (2.5 )%
PSS                          345,867       64.9         357,008       64.3         (11,141 )     (3.1 )
MRI                           28,974        5.4          35,980        6.5          (7,006 )    (19.5 )
Total Revenue              $ 532,829      100.0       $ 555,025      100.0       $ (22,196 )     (4.0 )
Gross profit               $ 101,696       19.1       $ 111,213       20.0       $  (9,517 )     (8.6 )
Operating and
administrative expenses    $  91,541       17.2       $  95,960       17.3       $  (4,419 )     (4.6 )
Operating profit           $  10,155        1.9       $  15,253        2.7       $  (5,098 )    (33.4 )
Net income attributable to
CDI                        $   5,929        1.1       $   8,775        1.6       $  (2,846 )    (32.4 )
Cash flow used in
operations                 $ (12,007 )                $  (7,832 )
Effective income tax rate       39.8 %                     40.6 %

(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 six months of 2013 as compared to the first six months 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 reduced demand at existing clients in the Hi-Tech vertical, the completion of several projects in the "Other" industry vertical and exiting certain low margin AIE business partially offset by increased demand by existing clients in the OGC vertical. MRI's revenue decreased due to reduced contract staffing revenue and a decline in royalties.
Gross profit decreased for the first six months of 2013 as compared to the first six months of 2012 primarily due to the reduction in revenue in all three segments and a shift in mix to lower margin business. Gross profit margin decreased for the first six months of 2013 as compared to the first six months of 2012 primarily due to the shift in mix to lower margin business in GETS and PSS.
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 impacted by immaterial discrete items and the mix of domestic and foreign pre-tax income and losses with no tax benefit that had a significant impact on the effective income tax rates due to the levels of pre-tax income for both periods. As such, comparison of effective income tax rates for the first six months of 2013 as compared to the first six months of 2012 is not relevant. Corporate
Corporate expenses consist of operating and administrative expenses that are not allocated to the reporting units under segment reporting. Corporate expenses increased slightly to $12.8 million for the first six months of 2013 compared to $12.6 million for the first six months 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)

Segment Results of Operations

Global Engineering and Technology Solutions ("GETS ")

Three months ended June 30, 2013 as compared to the three months ended June 30, 2012

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 June 30, 2013 and 2012:

                                           Three Months Ended
                                                June 30,
                                     2013                       2012                     Change
                                         % of Total                 % of Total
                                $         Revenue          $         Revenue          $            %

Revenue:
Oil, Gas and Chemicals
("OGC")                    $  30,136       37.7 %     $  27,931       34.6 %     $   2,205        7.9  %
Aerospace and Industrial
Equipment ("AIE")             18,514       23.2          17,506       21.7           1,008        5.8
Hi-Tech                        7,524        9.4           8,086       10.0            (562 )     (7.0 )
Other                         23,777       29.7          27,239       33.7          (3,462 )    (12.7 )
Total revenue                 79,951      100.0          80,762      100.0            (811 )     (1.0 )
Cost of services              57,196       71.5          57,308       71.0            (112 )     (0.2 )
Gross profit                  22,755       28.5          23,454       29.0            (699 )     (3.0 )
Operating and
administrative expenses       16,747       20.9          17,433       21.6            (686 )     (3.9 )
Operating profit           $   6,008        7.5       $   6,021        7.5       $     (13 )     (0.2 )

Revenue decreased during the second quarter of 2013 as compared to the second 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 and AIE industry verticals. The decrease in the "Other" industry vertical revenue was primarily due to reduced demand for government services as a result of automatic reductions in U.S. Federal government spending that went into effect in the first quarter of 2013 and continued weakness in state and local government spending on infrastructure engineering projects. The increase in OGC revenue was driven by strong growth within existing clients in the oil refining and chemical industries partially offset by the completion of projects. The increase in AIE revenue was primarily due to growth in demand by commercial aviation clients partially offset by decreased demand in defense-related aerospace spending.

Gross profit decreased for the second quarter of 2013 as compared to the second quarter of 2012 primarily due to the shift in mix to lower margin business and to a lesser extent, reduced demand. Gross profit margin decreased for the second quarter of 2013 as compared to the second quarter of 2012 primarily due to a shift in mix from the higher margin infrastructure and government services business to the lower margin OGC and AIE verticals.

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

Operating profit was relatively flat for the second quarter of 2013 as compared to the second quarter of 2012 due to the decrease in gross profit offset by the reduction in operating and administrative expenses.


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

Six months ended June 30, 2013 as compared to the six months ended June 30, 2012

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 six months ended June 30, 2013 and 2012:
                                            Six Months Ended
                                                June 30,
                                     2013                       2012                     Change
                                         % of Total                 % of Total
                                $         Revenue          $         Revenue          $            %

Revenue:
Oil, Gas and Chemicals
("OGC")                    $  59,786       37.8 %     $  56,195       34.7 %     $   3,591        6.4  %
Aerospace and Industrial
Equipment ("AIE")             35,383       22.4          34,418       21.2             965        2.8
Hi-Tech                       15,145        9.6          16,151       10.0          (1,006 )     (6.2 )
Other                         47,674       30.2          55,273       34.1          (7,599 )    (13.7 )
Total revenue                157,988      100.0         162,037      100.0          (4,049 )     (2.5 )
Cost of services             113,709       72.0         115,336       71.2          (1,627 )     (1.4 )
Gross profit                  44,279       28.0          46,701       28.8          (2,422 )     (5.2 )
Operating and
administrative expenses       32,996       20.9          34,742       21.4          (1,746 )     (5.0 )
Operating profit           $  11,283        7.1       $  11,959        7.4       $    (676 )     (5.7 )

Revenue decreased during the first six months of 2013 as compared to the first six months of 2012 primarily due to the reduction in revenue in the "Other" and Hi-Tech industry verticals partially offset by growth in the OGC and AIE industry verticals. The decrease in the "Other" industry vertical revenue was primarily due to reduced demand for government services as a result of automatic reductions in U.S. Federal government spending that went into effect in the first quarter of 2013 continued weakness in state and local government spending on infrastructure engineering projects. 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. The increase in AIE revenue was primarily due to growth in demand by commercial aviation clients partially offset by decreased demand in defense-related aerospace spending.

Gross profit decreased for the first six months of 2013 as compared to the first six months of 2012 due to reduced demand and shift in mix to lower margin business. Gross profit margin decreased for the first six months of 2013 as compared to the first six months of 2012 primarily due to a shift in mix from the higher margin infrastructure and government services business to the lower margin OGC and AIE verticals.

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

Operating profit decreased for the first six months of 2013 as compared to the first six months of 2012 primarily due to decrease in gross profit partially offset by the reduction in operating and administrative expenses.


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 June 30, 2013 as compared to the three months ended June 30, 2012

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 June 30, 2013 and 2012:

                                           Three Months Ended
                                                June 30,
                                     2013                       2012                     Change
                                         % of Total                 % of Total
                                $         Revenue          $         Revenue          $            %

Revenue:
Oil, Gas and Chemicals
("OGC")                    $  27,021       16.0 %     $  23,044       13.1 %     $   3,977       17.3  %
Aerospace and Industrial
Equipment ("AIE")             19,363       11.5          21,397       12.2          (2,034 )     (9.5 )
Hi-Tech                       71,457       42.3          76,426       43.6          (4,969 )     (6.5 )
Other                         50,918       30.2          54,408       31.0          (3,490 )     (6.4 )
Total revenue                168,759      100.0         175,275      100.0          (6,516 )     (3.7 )
Cost of services             146,886       87.0         151,514       86.4          (4,628 )     (3.1 )
Gross profit                  21,873       13.0          23,761       13.6          (1,888 )     (7.9 )
Operating and
administrative expenses       18,479       10.9          18,692       10.7            (213 )     (1.1 )
Operating profit           $   3,394        2.0       $   5,069        2.9       $  (1,675 )    (33.0 )

Revenue decreased for the second quarter of 2013 as compared to the second quarter of 2012 due to the reduction in revenue in the Hi-Tech,"Other" and AIE industry verticals partially offset by growth in the OGC industry vertical. Hi-Tech revenue declined primarily due to decreased demand at existing clients. 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, a slowdown in non-program staffing offset by strong growth in program staffing. AIE revenue decreased primarily due to the Company's election to exit certain 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.

Gross profit decreased for the second quarter of 2013 as compared to the second quarter of 2012 primarily due to reduced demand and shift in mix to lower margin business. Gross profit margin decreased for the second quarter of 2013 as compared to the second quarter of 2012 primarily due to the shift in mix from higher margin non-program staffing clients to lower margin program staffing clients.

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

Operating profit decreased for the second quarter of 2013 as compared to the second quarter of 2012 primarily due to the decrease in gross profit partially offset by the reduction in operating and administrative expenses.


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

Six months ended June 30, 2013 as compared to the six months ended June 30, 2012

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 first six months ended June 30, 2013 and 2012:
                                            Six Months Ended
                                                June 30,
                                     2013                       2012                     Change
                                         % of Total                 % of Total
                                $         Revenue          $         Revenue          $            %

Revenue:
Oil, Gas and Chemicals
("OGC")                    $  60,363       17.5 %     $  54,038       15.1 %     $   6,325       11.7  %
Aerospace and Industrial
Equipment ("AIE")             38,280       11.1          41,188       11.5          (2,908 )     (7.1 )
Hi-Tech                      143,451       41.5         150,733       42.2          (7,282 )     (4.8 )
Other                        103,773       30.0         111,049       31.1          (7,276 )     (6.6 )
Total revenue                345,867      100.0         357,008      100.0         (11,141 )     (3.1 )
Cost of services             301,724       87.2         308,809       86.5          (7,085 )     (2.3 )
Gross profit                  44,143       12.8          48,199       13.5          (4,056 )     (8.4 )
Operating and
administrative expenses       36,644       10.6          37,336       10.5            (692 )     (1.9 )
Operating profit           $   7,499        2.2       $  10,863        3.0       $  (3,364 )    (31.0 )

Revenue decreased for the first six months of 2013 as compared to the first six months of 2012 due to the reduction in revenue in the Hi-Tech, "Other" and AIE industry verticals partially offset by growth in the OGC industry vertical. Hi-Tech revenue declined primarily due to decreased demand at existing clients partially offset by the impact of new clients. 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, a slowdown in non-program staffing partially offset by strong growth in program staffing. AIE revenue decreased primarily due to the Company's election to exit certain low margin business partially offset by growth within existing clients. OGC revenue growth was primarily due to increased demand for pipeline-related . . .

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