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CDI > SEC Filings for CDI > Form 10-K on 6-Mar-2014All Recent SEC Filings

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Form 10-K for CDI CORP


6-Mar-2014

Annual Report


Item 7. 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 II, Item 8 of this Form 10-K 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 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 provides engineering and information technology solutions for its clients that involve the production of deliverable work products or services performed at a CDI facility or at a client's facility under the supervision of CDI personnel. PSS provides skilled technical and professional personnel to its clients for discrete periods of time to augment the client's workforce in times of project, seasonal, peak period or business cycle needs. MRI is a global franchisor that provides the use of its trademarks, business systems and training and support services to its franchisees who engage in the search and recruitment of executive, technical, professional and managerial personnel for employment by their clients. The Company's strategic growth plan includes focusing on high-potential growth opportunities in the strategic industry verticals and selective expansion of the Company's geographic footprint to meet the global needs of the Company's core clients.
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 economic uncertainty in some of the markets where we operate. The Company will continue to monitor this uncertainty to position itself to respond to changing conditions. Fiscal Year 2013 Overview

Revenue in 2013 decreased by $17.1 million or 1.5% as compared to 2012 due to decreases in all three segments, primarily MRI. Gross profit decreased by $12.8 million and gross profit margin decreased to 19.0%, primarily due to a shift in mix to lower margin business within GETS and PSS and a decrease in MRI business. Operating profit in 2013 was $20.9 million as compared to $32.3 million in 2012, primarily reflecting the decrease in gross profit. Net income attributable to CDI was $12.9 million in 2013 as compared to $19.1 million in 2012. In December 2013, the Company announced that it will undertake a corporate realignment in the first quarter of 2014 (the "2013 Restructuring Plan") to improve operational effectiveness and further optimize the Company's cost structure. In the fourth quarter of 2013, the Company recorded a charge of $5.7 million to "Restructuring and other related costs" in the consolidated statement of operations. Implementation of the 2013 Restructuring Plan is expected to be completed during 2014 and include additional charges of approximately $1 million to $3 million in 2014 related to the consolidation of facilities.


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
Fiscal Year 2013 versus 2012

Consolidated Results of Operations

The table that follows presents changes in revenue by segment along with selected financial information and key metrics for 2013 and 2012:

                                       2013                          2012                  Increase (Decrease)
                                            % of Total                    % of Total
                                  $           Revenue           $           Revenue           $             %

Revenue:
GETS                        $   321,289        29.5 %     $   325,046        29.4 %     $    (3,757 )      (1.2 )%
PSS                             708,598        65.1           710,268        64.3            (1,670 )      (0.2 )
MRI                              57,972         5.3            69,644         6.3           (11,672 )     (16.8 )
Total Revenue               $ 1,087,859       100.0       $ 1,104,958       100.0       $   (17,099 )      (1.5 )
Gross profit                $   206,641        19.0       $   219,409        19.9       $   (12,768 )      (5.8 )
Operating and
administrative expenses
(1), (2)                    $   180,009        16.5       $   187,143        16.9       $    (7,134 )      (3.8 )
Restructuring and other
related costs (3)           $     5,716         0.5       $         -           -       $     5,716          NM
Operating profit            $    20,916         1.9       $    32,266         2.9       $   (11,350 )     (35.2 )
Net income attributable to
CDI                         $    12,884         1.2       $    19,116         1.7       $    (6,232 )     (32.6 )
Cash flow provided by
operations                  $    16,100                   $    37,137                   $   (21,037 )     (56.6 )
Effective income tax rate          37.3 %                        39.3 %
Pre-tax return on net
assets (4)                          8.8 %                        13.8 %

(1) In 2013, the Company's GETS segment recorded a $3.3 million benefit related to the settlement of legal claims pursued by the Company.

(2) In 2013, the Company's GETS segment recorded a $1.8 million benefit related to the reduction of an acquisition-related earnout liability.

(3) In 2013, the Company recorded a $5.7 million charge related to the 2013 Restructuring Plan announced in the fourth quarter of 2013.

(4) Income 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.

NM-Not meaningful.
Revenue decreased in all three segments in 2013 as compared to 2012, primarily MRI. MRI revenue decreased due primarily to a decline in contract staffing revenue. The revenue decline in GETS was predominantly attributable to reduced spending by the Federal Government due to the sequestration and reduced spending by state and local governments on infrastructure engineering activities in the "Other" industry verticals, partially offset by strong growth in the OGC industry vertical. PSS revenue declined slightly, primarily due to decreased demand by a large client in the Hi-Tech industry vertical that is attributed to a reduction in their business, decreases in AIE and the "Other" industry verticals, partially offset by strong growth in the OGC industry vertical. Gross profit dollars decreased in 2013 as compared to 2012 due primarily to the decrease in higher margin business in GETS as a result of reduced Federal, state and local government spending, a shift in mix to lower margin business in PSS and lower contract staffing and permanent placement revenue in MRI. Gross margin decreased primarily due to the shift in mix to lower margin business within GETS and PSS and the higher rate of decline in MRI business.
Excluding the impact of the 2013 Restructuring Plan and settlement of legal claims, operating profit decreased in 2013 primarily due to reduced gross profit partially offset by a reduction in variable operating expenses. The effective income tax rate for both periods was unfavorably impacted by losses in foreign jurisdictions for which no tax benefit had been recognized and reductions to deferred tax assets for stock-based compensation grants that expired with no corresponding tax benefit. The 2013 rate was favorably impacted by federal employer tax credits and a reduction in the reserve for uncertain tax positions.
Corporate
Corporate expenses consist of operating and administrative expenses that are not allocated to the reporting units under segment reporting. Corporate expenses increased to $25.4 million for 2013 from $24.2 million for 2012. Corporate expenses in 2013 included $1.0 million related to the 2013 Restructuring Plan. Excluding the impact of the 2013 Restructuring Plan, corporate expenses increased slightly in 2013 as compared to 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)

The following table presents changes in revenue by industry vertical, cost of
services, gross profit, operating and administrative expenses and operating
profit for GETS in 2013 and 2012:
                                       2013                        2012                 Increase (Decrease)
                                           % of Total                  % of Total
                                  $          Revenue          $          Revenue           $             %

Revenue:
Oil, Gas and Chemicals (OGC) $ 122,478        38.1 %     $ 110,931        34.1 %     $    11,547        10.4  %
Aerospace and Industrial
Equipment (AIE)                 74,729        23.3          72,349        22.3             2,380         3.3
Hi-Tech                         30,409         9.5          32,829        10.1            (2,420 )      (7.4 )
Other                           93,673        29.2         108,937        33.5           (15,264 )     (14.0 )
Total revenue                  321,289       100.0         325,046       100.0            (3,757 )      (1.2 )
Cost of services               231,488        72.0         231,328        71.2               160         0.1
Gross profit                    89,801        28.0          93,718        28.8            (3,917 )      (4.2 )
Operating and administrative
expenses (1), (2)               62,519        19.5          67,993        20.9            (5,474 )      (8.1 )
Restructuring and other
related costs (3)                2,132         0.7               -           -             2,132          NM
Operating profit             $  25,150         7.8       $  25,725         7.9       $      (575 )      (2.2 )

(1) In 2013, the Company's GETS segment recorded a $3.3 million benefit related to the settlement of legal claims pursued by the Company.

(2) In 2013, the Company's GETS segment recorded a $1.8 million benefit related to the reduction of an acquisition-related earnout liability.

(3) In 2013, the Company's GETS segment recorded a $2.1 million charge related to the 2013 Restructuring Plan announced in the fourth quarter of 2013.

NM-Not meaningful.

Revenue decreased in 2013 as compared to 2012 primarily due to the decrease in "Other" industry verticals offset partially by growth in the OGC industry vertical. Revenue in the "Other" industry verticals decreased primarily due to reduced spending by the Federal Government due to the sequestration and reduced spending by state and local governments on infrastructure engineering activities. The increase in OGC revenue was driven by increased demand from existing refinery and transportation clients. AIE revenue growth was primarily due to growth in the commercial aviation industry, partially offset by reduced government agency and defense spending. Hi-Tech revenue decreased in 2013 as compared to 2012 due primarily to decreased demand from existing clients.

Gross profit dollars and margin decreased primarily due to the decline in higher margin data acquisition and analysis solutions, infrastructure engineering activities and Federal Government activities.

Excluding the impact of the reduction of the earnout liability and the settlement of legal claims, operating and administrative expenses decreased slightly in 2013 as compared to 2012.

Excluding the impact of the claims settlement, 2013 Restructuring Plan and earnout liability reduction, the decrease in operating profit in 2013 compared to 2012 was primarily due to the decline in gross profit.


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)
The following table presents changes in revenue by industry vertical, cost of
services, gross profit, operating and administrative expenses and operating
profit for PSS in 2013 and 2012:
                                       2013                        2012                 Increase (Decrease)
                                           % of Total                  % of Total
                                  $          Revenue          $          Revenue           $             %

Revenue:
Oil, Gas and Chemicals (OGC) $ 144,411        20.4 %     $ 117,240        16.5 %     $    27,171        23.2  %
Aerospace and Industrial
Equipment (AIE)                 74,784        10.6          84,235        11.9            (9,451 )     (11.2 )
Hi-Tech                        277,782        39.2         291,839        41.1           (14,057 )      (4.8 )
Other                          211,621        29.9         216,954        30.5            (5,333 )      (2.5 )
Total revenue                  708,598       100.0         710,268       100.0            (1,670 )      (0.2 )
Cost of services               619,052        87.4         616,083        86.7             2,969         0.5
Gross profit                    89,546        12.6          94,185        13.3            (4,639 )      (4.9 )
Operating and administrative
expenses                        74,531        10.5          73,657        10.4               874         1.2
Restructuring and other
related costs (1)                2,394         0.3               -           -             2,394          NM
Operating profit             $  12,621         1.8       $  20,528         2.9       $    (7,907 )     (38.5 )

(1) In 2013, the Company's PSS segment recorded a $2.4 million charge related to the 2013 Restructuring Plan announced in the fourth quarter of 2013.

NM-Not meaningful.

Revenue decreased in 2013 as compared to 2012 driven by a decline in the Hi-Tech, AIE and "Other" industry verticals, partially offset by an increase in the OGC industry vertical. The decline in Hi-Tech revenue was primarily due to decreased demand by a large client that is attributed to a reduction in their business. AIE revenue declined primarily due to the termination of an existing client contract. Revenue in "Other" industry verticals decreased due primarily to the impact of the completion of a long-term project for a client in the financial services industry. OGC revenue growth was primarily due to increased demand for pipeline-related inspection, maintenance and site services.

Gross profit dollars and margin decreased in 2013 as compared to 2012 primarily due to a shift in mix to lower margin business and a reduction of permanent placement revenues. The shift in mix to lower margin business primarily relates to a shift in mix from higher margin non-program staffing clients to lower margin program staffing clients.

Operating and administrative expenses increased slightly during 2013 as compared to 2012.

Excluding the impact of the 2013 Restructuring Plan, operating profit declined primarily due to the decline in gross profit.


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 in 2013 and 2012:
                                       2013                       2012                Increase (Decrease)
                                          % of Total                 % of Total
                                 $          Revenue         $          Revenue           $             %

Revenue:
Contract Staffing            $ 44,328        76.5 %     $ 53,646        77.0 %     $    (9,318 )     (17.4 )%
Royalties and Franchise Fees   13,644        23.5         15,998        23.0            (2,354 )     (14.7 )
Total revenue                  57,972       100.0         69,644       100.0           (11,672 )     (16.8 )
Cost of services               30,678        52.9         38,138        54.8            (7,460 )     (19.6 )
Gross profit                   27,294        47.1         31,506        45.2            (4,212 )     (13.4 )
Operating and administrative
expenses                       18,530        32.0         21,305        30.6            (2,775 )     (13.0 )
Restructuring and other
related costs (1)                 215         0.4              -           -               215          NM
Operating profit             $  8,549        14.7       $ 10,201        14.6       $    (1,652 )     (16.2 )

(1) In 2013, the Company's MRI segment recorded a $0.2 million charge related to the 2013 Restructuring Plan announced in the fourth quarter of 2013.

NM-Not meaningful.
Revenue decreased in 2013 as compared to 2012 due primarily to a decline in contract staffing revenue and to a lesser extent, a reduction in permanent placement royalty revenue.
Gross profit dollars decreased in 2013 as compared to 2012 due to lower contract staffing revenue and lower permanent placement royalty revenue. MRI's gross profit margin increased in 2013 as compared to 2012 due to a change in the revenue mix as a result of the significant decline in contract staffing revenue as compared to a less significant decline in permanent placement royalty revenue.
Operating and administrative expenses decreased in 2013 as compared to 2012 primarily due to reduced commissions associated with the decline in contract staffing revenue.
Operating profit decreased in 2013 as compared to 2012 primarily due to the decline in gross profit partially offset by lower 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)

Fiscal Year 2012 versus 2011

Consolidated Results of Operations

The table that follows presents changes in revenue by segment along with
selected financial information and key metrics for 2012 and 2011:
                                       2012                          2011                   Increase (Decrease)
                                            % of Total                    % of Total
                                  $           Revenue           $           Revenue           $              %

Revenue:
GETS                        $   325,046        29.4 %     $   323,546        30.5 %     $     1,500          0.5  %
PSS                             710,268        64.3           667,662        63.0            42,606          6.4
MRI                              69,644         6.3            68,595         6.5             1,049          1.5
Total Revenue               $ 1,104,958       100.0       $ 1,059,803       100.0       $    45,155          4.3
Gross profit                $   219,409        19.9       $   225,301        21.3       $    (5,892 )       (2.6 )
Restructuring and other
related costs               $         -           -       $     8,100         0.8       $    (8,100 )         NM
Operating and
administrative expenses (1) $   187,143        16.9       $   196,826        18.6       $    (9,683 )       (4.9 )
Operating profit            $    32,266         2.9       $    20,375         1.9       $    11,891         58.4
Net income attributable to
CDI                         $    19,116         1.7       $    14,833         1.4       $     4,283         28.9
Cash flow used in
operations                  $    37,137                   $    28,002                   $     9,135         32.6
Effective income tax rate          39.3 %                        25.5 %
Pre-tax return on net
assets (2)                         13.8 %                         8.7 %

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

(2) Income 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.

NM-Not meaningful.

Revenue increased in 2012 as compared to 2011 in all three segments, particularly PSS. GETS and PSS grew revenue in each of the three key industry verticals with OGC increasing the most in total dollars and percentage growth. These increases were partially offset by declining revenue in the "Other" industry verticals due primarily to reduced spending by state and local governments on infrastructure engineering activities in GETS and the completion of a long-term project in PSS.
Gross profit dollars and gross profit margin decreased in 2012 as compared to 2011 due primarily to the decrease in higher margin infrastructure engineering activities in GETS as a result of reduced state and local government spending, a shift in mix to lower margin business in PSS and lower permanent placement revenue in MRI.
Operating profit in 2011 included a benefit of $9.7 million related to the successful legal appeal of the fine imposed by the United Kingdom Office of Fair Trade (the "OFT matter"), partially offset by an $8.1 million charge related to the restructuring plan announced in the fourth quarter of 2011. Excluding the 2011 impact of the OFT matter and restructuring charge, operating profit increased in 2012 primarily due to the ongoing cost savings from the 2011 restructuring plan and savings from additional cost reduction efforts. The effective income tax rate for both periods was unfavorably impacted by losses in foreign jurisdictions for which no tax benefit had been recognized and reductions to deferred tax assets for stock-based compensation grants that expired with no corresponding tax benefit. The 2011 rate was favorably impacted by a reduction in the reserve for the OFT matter and federal income tax credits under the Hiring Incentives to Restore Employment (HIRE) Act. Corporate
Corporate expenses consist of operating and administrative expenses that are not allocated to the reporting units under segment reporting. Corporate expenses in 2011 included $0.6 million related to the restructuring plan announced in the fourth quarter of 2011. Corporate expenses decreased to $24.2 million for 2012 from $26.3 million for 2011. Excluding the 2011 impact of the 2011 restructuring plan, corporate expenses decreased primarily due to the ongoing cost savings from the restructuring plan implemented in the fourth quarter of 2011, savings from additional cost reduction efforts, and a reduction in consulting and personnel-related costs incurred during 2011 as the Company made investments to develop its new business strategy.


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)

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 2012 and 2011:
                                       2012                        2011                Increase (Decrease)
                                           % of Total                 % of Total
                                  $          Revenue         $          Revenue           $             %

Revenue:
Oil, Gas and Chemicals (OGC) $ 110,931        34.1 %     $ 99,352        30.7 %     $    11,579        11.7  %
Aerospace and Industrial
Equipment (AIE)                 72,349        22.3         71,815        22.2               534         0.7
Hi-Tech                         32,829        10.1         29,639         9.2             3,190        10.8
Other                          108,937        33.5        122,740        37.9           (13,803 )     (11.2 )
Total revenue                  325,046       100.0        323,546       100.0             1,500         0.5
Cost of services               231,328        71.2        226,738        70.1             4,590         2.0
Gross profit                    93,718        28.8         96,808        29.9            (3,090 )      (3.2 )
Operating and administrative
expenses (1)                    67,993        20.9         81,829        25.3           (13,836 )     (16.9 )
Operating profit             $  25,725         7.9       $ 14,979         4.6       $    10,746        71.7

(1) The year ended December 31, 2011 included a $4.5 million restructuring charge.

Revenue increased in 2012 as compared to 2011 primarily due to the growth in OGC and Hi-Tech industry verticals substantially offset by a decrease in "Other" industry verticals. The increase in OGC revenue was driven by increased demand from existing clients in the chemical industry. AIE revenue was relatively flat as revenue growth from the commercial aviation industry was significantly offset by reduced government agency and defense funding. Hi-Tech revenue increased in 2012 as compared to 2011 due primarily to increased demand from existing clients. Revenue in "Other" industry verticals decreased primarily due to reduced spending by state and local governments on infrastructure engineering activities partially offset by increased naval defense spending.

Gross profit dollars and gross profit margin decreased in 2012 as compared to 2011 primarily due to the decline in higher margin infrastructure engineering activities.

Operating and administrative expenses in 2011 included a $4.5 million restructuring charge. Excluding the 2011 impact of the restructuring charge, operating and administrative expenses decreased in 2012 primarily due to the ongoing cost savings from the restructuring plan announced in the fourth quarter of 2011 and savings from additional cost reduction efforts.

Excluding the impact of the 2011 restructuring charge, GETS operating profit . . .

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