CDI CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-05519

CDI CORP.

(Exact name of Registrant as specified in its charter)


Pennsylvania		23-2394430

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1717 Arch Street, 35^th Floor, Philadelphia, PA 19103-2768

(Address of principal executive offices)


Registrant’s telephone number, including area code:		(215) 569-2200

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Section 12b-2 of the Exchange Act.)

Yes þ No o

Outstanding shares of each of the Registrant’s classes of common stock as of July 26, 2004 were:


Common stock, $.10 par value		19,699,105 shares
Class B common stock, $.10 par value		None

PART 1. FINANCIAL INFORMATION

Item 1.

CDI CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)


	June 30,			December 31,
	2004			2003
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	49,195			50,230
Accounts receivable, less allowance for doubtful accounts of $5,025 - June 30, 2004; $5,496- December 31, 2003		203,600			199,630
Short-term investments		29,857			22,606
Prepaid expenses		9,873			8,744
Deferred income taxes		7,186			8,484

Total current assets		299,711			289,694
Property and equipment, at cost:
Computers and systems		87,863			85,426
Equipment and furniture		26,639			26,256
Leasehold improvements		13,566			13,297

		128,068			124,979
Accumulated depreciation		(98,654	)		(93,858	)

Property and equipment, net		29,414			31,121
Deferred income taxes		6,418			7,133
Goodwill, net		68,211			68,211
Other assets		3,908			5,403

Total assets	$	407,662			401,562

See accompanying notes to consolidated financial statements.

CDI CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)


	June 30,			December 31,
	2004			2003
	(unaudited)
Liabilities and Shareholders’ Equity
Current liabilities:
Obligations not liquidated because of outstanding checks	$	3,561			5,848
Accounts payable		20,484			23,824
Withheld payroll taxes		4,435			2,596
Accrued compensation and related expenses		50,187			44,343
Other accrued expenses		12,656			18,191
Income taxes payable		1,217			464

Total current liabilities		92,540			95,266
Deferred compensation		7,606			8,945

Total liabilities		100,146			104,211

Shareholders’ equity:
Preferred stock, $.10 par value - authorized 1,000,000 shares; none issued		–			–
Common stock, $.10 par value - authorized 100,000,000 shares; issued 20,661,499 shares — June 30, 2004; 20,535,835 shares — December 31, 2003		2,066			2,054
Class B common stock, $.10 par value - authorized 3,174,891 shares; none issued		–			–
Additional paid-in capital		31,501			28,205
Retained earnings		293,079			286,466
Accumulated other comprehensive income		3,588			3,467
Unamortized value of restricted stock issued		(408	)		(544	)
Less common stock in treasury, at cost - 963,934 shares — June 30, 2004; 963,465 shares — December 31, 2003		(22,310	)		(22,297	)

Total shareholders’ equity		307,516			297,351

Total liabilities and shareholders’ equity	$	407,662			401,562

See accompanying notes to consolidated financial statements.

CDI CORP. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited) (In thousands, except per share data)


	Three months ended					Six months ended
	June 30,					June 30,
	2004			2003		2004			2003
Revenues	$	264,839			269,994		520,826			539,520
Cost of services		201,806			204,824		396,545			405,974

Gross profit		63,033			65,170		124,281			133,546
Operating and administrative expenses		56,781			56,452		110,633			116,466
Gain on sale of assets		(1,295	)		–		(1,295	)		–

Operating profit		7,547			8,718		14,943			17,080
Interest income, net and other		136			252		404			626

Earnings before income taxes		7,683			8,970		15,347			17,706
Income tax expense		2,474			2,867		5,202			6,143

Net earnings	$	5,209			6,103		10,145			11,563

Basic earnings per share	$	0.27			0.32		0.52			0.60
Diluted earning per share	$	0.26			0.31		0.51			0.59

See accompanying notes to consolidated financial statements.

CDI CORP. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited) (In thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Common stock
Beginning of period	$	2,058			2,034			2,054			2,031
Exercise of stock options		7			3			10			4
Stock purchase plans		1			2			2			4

End of period	$	2,066			2,039			2,066			2,039

Additional paid-in capital
Beginning of period	$	29,157			23,424			28,205			22,975
Exercise of stock options		1,833			579			2,542			703
Restricted stock — change in value		1			(1	)		(1	)		(3	)
Stock purchase plans		250			418			335			733
Tax benefit from stock plans		260			99			420			111

End of period	$	31,501			24,519			31,501			24,519

Retained earnings
Beginning of period	$	289,637			311,799			286,466			306,339
Net earnings		5,209			6,103			10,145			11,563
Dividends paid to shareholders		(1,767	)		–			(3,532	)		–

End of period	$	293,079			317,902			293,079			317,902

Accumulated other comprehensive income (loss)
Beginning of period	$	4,097			(810	)		3,467			(610	)
Foreign currency translation adjustment		(446	)		2,356			184			2,156
Unrealized loss on investments		(63	)		–			(63	)		–

End of period	$	3,588			1,546			3,588			1,546

Unamortized value of restricted stock issued
Beginning of period	$	(474	)		(737	)		(544	)		(800	)
Restricted stock – vesting/forfeiture		–			–			13			–
Restricted stock – change in value		(1	)		1			1			3
Restricted stock – amortization of value		67			68			122			129

End of period	$	(408	)		(668	)		(408	)		(668	)

Treasury stock
Beginning of period	$	(22,310	)		(22,134	)		(22,297	)		(22,134	)
Restricted stock – forfeiture		–			–			(13	)		–

End of period	$	(22,310	)		(22,134	)		(22,310	)		(22,134	)

Comprehensive income
Net earnings	$	5,209			6,103			10,145			11,563
Foreign currency translation adjustment		(446	)		2,356			184			2,156
Unrealized loss on investment		(63	)		–			(63	)		–

End of period	$	4,700			8,459			10,266			13,719

See accompanying notes to consolidated financial statements.

CDI CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited) (In thousands)


	Six months ended
	June 30,
	2004			2003
Operating activities:
Net earnings	$	10,145			11,563
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation		4,839			6,893
Deferred income tax expense		2,013			5,107
Gain on sale of assets		(1,295	)		–
Tax benefit from stock plans		420			111
Change in assets and liabilities, net of effects of divestitures:
Accounts receivable, net		(3,951	)		(13,280	)
Prepaid expenses		(3,151	)		(2,575	)
Accounts payable		(3,334	)		(3,489	)
Accrued expenses other current liabilities		4,072			(3,552	)
Other assets, long-term liabilities and other		552			1,057

Net cash flow provided by operating activities		10,310			1,835

Investing activities:
Purchases of property and equipment		(3,106	)		(7,786	)
Purchases of short-term investments		(7,251	)		(287	)
Proceeds from sale of assets		2,162			–
Proceeds from notes receivable		–			3,050
Other		(24	)		475

Net cash flow used in investing activities		(8,219	)		(4,548	)

Financing activities:
Dividends paid to shareholders		(3,532	)		–
Obligations not liquidated because of outstanding checks		(2,287	)		7,434
Proceeds from exercises of employee stock options		2,552			707

Net cash flow (used in) provided by financing activities		(3,267	)		8,141

Effect of exchange rate changes on cash		141			38

Net (decrease) increase in cash and cash equivalents		(1,035	)		5,466
Cash and cash equivalents, beginning of period		50,230			41,148

Cash and cash equivalents, end of period	$	49,195			46,614

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes, (net of refunds)	$	1,346			(3,887	)

See accompanying notes to consolidated financial statements.

CDI Corp.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
(unaudited)

1. Basis of Presentation

The accompanying consolidated financial statements of CDI Corp. (“CDI” or the “Company”) are unaudited. The balance sheet as of December 31, 2003 is derived from the audited balance sheet of the Company at that date. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto for the year ended December 31, 2003 reported in Form 10-K, filed March 12, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.

The consolidated financial statements for the unaudited interim periods presented include all adjustments (consisting of only normal, recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such interim periods. Certain amounts in prior periods have been reclassified to conform to the current period classification. In that regard, cash flow from operations, investing activities and financing activities for the six months ended June 30, 2003 were revised by $2.4 million, $3.1 million and $0.7 million, respectively, principally to reflect proceeds from a note receivable.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Results for the three and six month periods ended June 30, 2004 are not necessarily indicative of results that may be expected for the full year or any portion thereof.

2. Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments as of June 30, 2004 and December 31, 2003 were comprised of the following:


	June 30,		December 31,
	2004		2003
Cash	$	5,967		5,139
Cash equivalents		43,228		45,091

Total cash and cash equivalents		49,195		50,230
Short-term investments		29,857		22,606

Total cash, cash equivalents and short-term investments	$	79,052		72,836

Cash equivalents and short-term investments are in liquid, high quality debt securities with diversification among the investments based upon the Company’s guidelines. Amortized cost approximates fair value. Gains and losses during the three and six month periods ended June 30, 2004 were immaterial.

All of the Company’s short-term investments are held as available-for-sale securities, and reflect investments in corporate bonds, various government agencies and commercial paper. Available-for-sale securities as of June 30, 2004 of $29.9 million include $25.6 million for securities maturing in one year or less and $4.3 million for securities maturing in one to three years.

3. Restructuring

There were no restructuring charges during the first six months of 2004 and 2003.

The table presented below shows the current year activity related to previous restructurings from a balance sheet perspective:


	Net Accrual at					Net Accrual at
	December 31,					June 30,
	2003		Payments			2004
Severance	$	633		(573	)		60
Lease obligations		2,934		(1,631	)		1,303

	$	3,567		(2,204	)		1,363

The remaining liability for severance will be substantially paid during the balance of 2004. The Company anticipates that the remaining liability for the termination of operating leases will be substantially paid by December 31, 2005. The accrual for restructuring charges is included in other accrued expenses in the accompanying consolidated balance sheets.

4. Real Estate Exiting Costs

During the first half of 2004, the Company experienced continued declines in demand in its Life Sciences vertical within the Business Solutions segment. As a result, in the second quarter of 2004, management reorganized certain office space and determined that there was excess real estate capacity within the Life Sciences vertical. In addition, management also determined that there was excess real estate capacity in the MRI segment. Accordingly, certain real estate properties were permanently vacated resulting in the Company recording a pre-tax charge of approximately $1.0 million in the second quarter of 2004. This charge is included in operating and administrative expenses in the accompanying consolidated statements of earnings.

The table presented below shows the current year activity by reportable segments:


						Net Accrual
	Business					at June 30,
	Solutions		MRI			2004
Balance as of December 31, 2003	$	–		–			–
Charge for real estate exiting costs		834		164			998
Payments		–		(53	)		(53	)

Balance as of June 30, 2004	$	834		111			945

The future payments related to the above lease obligations are expected to extend through 2006. The accrual for vacant lease obligations is included in other accrued expenses in the accompanying consolidated balance sheets.

5. Earnings Per Share

Both basic and diluted earnings per share for all periods are calculated based on the reported earnings in the Company’s consolidated statements of earnings.

The number of common shares used to calculate basic and diluted earnings per share for three and six months ended June 30, 2004 and 2003 was determined as follows:


	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Basic
Average shares outstanding		19,648,123			19,400,900			19,619,615			19,383,796
Restricted shares issued not vested		(30,900	)		(45,000	)		(31,088	)		(45,187	)

		19,617,223			19,355,900			19,588,527			19,338,609

Diluted
Shares used for basic calculation		19,617,223			19,355,900			19,588,527			19,338,609
Dilutive effect of stock options		369,650			257,673			320,143			183,680
Dilutive effect of restricted shares issued not vested – time based		12,136			12,690			10,171			9,474
Dilutive effect of restricted shares issued not vested – performance based		250			250			188			188
Dilutive effect of units issuable under stock purchase plans		100,091			112,752			99,128			114,800

		20,099,350			19,739,265			20,018,157			19,646,751

6. Stock Based Plans

The Company uses the intrinsic value method of accounting for stock options and other forms of stock-based compensation granted to employees and directors, in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. No compensation cost has been recognized for grants of stock options because option exercise prices are not less than the fair market value of the underlying common stock at dates of grant. Compensation cost has been recognized for restricted stock issued and for units granted under the Stock Purchase Plan and Stock Unit Plan.

SFAS No. 123, “Accounting for Stock Based Compensation”, uses a fair value based method of accounting for stock-based compensation. The following table reflects the pro-forma effect on net earnings and earnings per share for the three and six month periods ended June 30, 2004 and 2


Part I:	FINANCIAL INFORMATION

	Item 1.	Consolidated Financial Statements

		Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003

		Consolidated Statements of Earnings for the three and six months ended June 30, 2004 and 2003 (unaudited)

		Consolidated Statements of Shareholders' Equity for the three and six months ended June 30, 2004 and 2003 (unaudited)

		Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)

		Notes to Consolidated Financial Statements (unaudited)

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

	Item 3.	Quantitative and Qualitative Disclosures about Market Risks

	Item 4.	Controls and Procedures

Part II:	OTHER INFORMATION

	Item 4.	Submission of Matters to a Vote of Security Holders

	Item 6.	Exhibits and Reports on Form 8-K

SIGNATURES

INDEX TO EXHIBITS
CERTIFICATION OF CEO PURSUANT TO SECTION 302
CERTIFICATION OF CFO PURSUANT TO SECTION 302
CERT. OF CEO AND CFO PURSUANT TO 18 U.S.C.

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