CDI CORP - FORM 10-Q - November 5, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-Q
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2015
or
¨
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
(State of incorporation)
23-2394430
(I.R.S. Employer Identification Number)
 
 
1717 Arch Street, 35th Floor,
Philadelphia, PA 19103-2768
(Address of principal executive offices) (Zip Code)
 
 
(215) 569-2200
(Registrant's telephone number, including area code)

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. x YES ¨ NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). x YES ¨ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
x
Non-accelerated filer 
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ YES x NO   
The number of shares outstanding of each of the registrant's classes of common stock as of November 2, 2015 was as follows:
Common stock, $0.10 par value:
Class B common stock, $0.10 par value:
19,700,534 Shares
None

 



CDI CORP.
Form 10-Q
For the Quarterly Period Ended September 30, 2015

TABLE OF CONTENTS

 
 
 
Page No.
Part I:
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
Part II:
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.


1



Note About Forward-Looking Statements
 
This quarterly report on Form 10-Q (including Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that address expectations or projections about the future, including, but not limited to, statements about our plans, strategies, adequacy of resources and future financial results (such as revenue, gross profit, operating profit, cash flow, and tax rate), are forward-looking statements. Some of the forward-looking statements can be identified by words like “anticipates,” “believes,” “expects,” “may,” “will,” “could,” “should,” “intends,” “plans,” “estimates” and similar references to future periods. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Important factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to: weakness in general economic conditions and levels of capital spending by customers in the industries we serve; weakness or volatility in the financial and capital markets, which may result in the postponement or cancellation of our customers' capital projects or the inability of our customers to pay our fees; the termination of a major customer contract or project; the failure to achieve the anticipated benefits of acquisitions, and difficulties in integrating acquired businesses with CDI; delays or reductions in U.S. government spending; credit risks associated with our customers; competitive market pressures; the availability and cost of qualified labor; our level of success in attracting, training, and retaining qualified management personnel and other staff employees; changes in tax laws and other government regulations, including the impact of health care reform laws and regulations; the possibility of incurring liability for our business activities, including, but not limited to, the activities of our temporary employees; our performance on customer contracts; negative outcome of pending and future claims and litigation; and government policies, legislation or judicial decisions adverse to our businesses. More detailed information about these and other risks and uncertainties may be found in our filings with the SEC, particularly in the “Risk Factors” section in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except as required by law.
Unless the context otherwise requires, all references herein to “CDI,” the "Registrant,” the "Company,” “we,” “us” or “our” are to CDI Corp. and its consolidated subsidiaries.


2



PART 1. FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS (Unaudited)

CDI CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
(Unaudited)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
26,433

 
$
36,324

Accounts receivable, net of allowances of $1,986 and $1,950
226,519

 
219,578

Prepaid expenses and other current assets
12,822

 
8,302

Prepaid income taxes
2,980

 
753

Deferred income taxes
2,170

 
4,138

Total current assets
270,924

 
269,095

Property and equipment, net of accumulated depreciation of $84,591 and $86,813
18,857

 
20,350

Deferred income taxes
10,214

 
9,203

Goodwill
29,410

 
50,630

Other intangible assets, net
11,509

 
12,424

Other non-current assets
8,850

 
10,518

Total assets
$
349,764

 
$
372,220

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
3,017

 
$
1,250

Accounts payable
25,122

 
30,071

Accrued compensation and related expenses
51,804

 
36,005

Other accrued expenses and other current liabilities
14,805

 
14,502

Income taxes payable
373

 
1,015

Total current liabilities
95,121

 
82,843

Deferred compensation
7,324

 
9,094

Deferred income tax
960

 
1,034

Other non-current liabilities
4,379

 
4,896

Total liabilities
107,784

 
97,867

Commitments and contingencies

 

Equity:
 
 
 
Preferred stock, $0.10 par value - authorized 1,000 shares; none issued
—

 
—

Common stock, $0.10 par value - authorized 100,000 shares; issued 22,163 and 22,084 shares
2,216

 
2,208

Class B common stock, $0.10 par value - authorized 3,175 shares; none issued
—

 
—

Additional paid-in-capital
74,049

 
72,023

Retained earnings
230,549

 
258,113

Accumulated other comprehensive loss
(12,347
)
 
(6,207
)
Common stock in treasury, at cost - 2,463 shares
(52,487
)
 
(52,487
)
Total CDI shareholders' equity
241,980

 
273,650

Noncontrolling interest
—

 
703

Total equity
241,980

 
274,353

Total liabilities and equity
$
349,764

 
$
372,220


See accompanying notes to consolidated financial statements.

3
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue
$
244,662

 
$
295,732

 
$
748,941

 
$
856,286

Cost of services
197,835

 
241,244

 
608,697

 
698,238

Gross profit
46,827

 
54,488

 
140,244

 
158,048

Operating and administrative expenses
46,853

 
46,006

 
137,570

 
137,821

Restructuring and other related costs
566

 
—

 
613

 
72

Impairment
21,537

 
—

 
21,537

 
—

Loss on disposition
—

 
—

 
310

 
—

Operating profit (loss)
(22,129
)
 
8,482

 
(19,786
)
 
20,155

Other income (expense), net
683

 
(133
)
 
599

 
(207
)
Income (loss) before income taxes
(21,446
)
 
8,349

 
(19,187
)
 
19,948

Income tax expense (benefit)
(1,244
)
 
2,908

 
785

 
8,014

Net income (loss)
(20,202
)
 
5,441

 
(19,972
)
 
11,934

Less: Income (loss) attributable to noncontrolling interests
—

 
41

 
(83
)
 
70

Net income (loss) attributable to CDI
$
(20,202
)
 
$
5,400

 
$
(19,889
)
 
$
11,864

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
(1.03
)
 
$
0.28

 
$
(1.01
)
 
$
0.61

Diluted
$
(1.03
)
 
$
0.27

 
$
(1.01
)
 
$
0.60



See accompanying notes to consolidated financial statements.

4
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income (loss)
$
(20,202
)
 
$
5,441

 
$
(19,972
)
 
$
11,934

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(3,266
)
 
(3,526
)
 
(6,404
)
 
(2,776
)
Reclassification of foreign currency translation adjustment
—

 
—

 
362

 
—

Total comprehensive income (loss)
(23,468
)
 
1,915

 
(26,014
)
 
9,158

Comprehensive income attributable to noncontrolling interests
—

 
18

 
15

 
47

Total comprehensive income (loss) attributable to CDI
$
(23,468
)
 
$
1,897

 
$
(26,029
)
 
$
9,111

 

See accompanying notes to consolidated financial statements.

5
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)


 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
 
 
 
Operating activities:
 
 
 
Net income (loss)
$
(19,972
)
 
$
11,934

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
6,396

 
6,947

Amortization
915

 
1,123

Deferred income taxes
873

 
1,820

Share-based compensation
1,703

 
1,661

Impairment
21,537

 
—

Loss on disposition
310

 
—

(Gain)/loss on disposal of assets, net
(779
)
 
(20
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(14,368
)
 
(5,083
)
Prepaid expenses and other current assets
(4,108
)
 
(2,999
)
Accounts payable
(3,031
)
 
(5,218
)
Accrued expenses and other current liabilities
17,045

 
4,162

Income taxes prepaid/payable
(3,369
)
 
2,347

Other non-current assets
(42
)
 
233

Other non-current liabilities
(684
)
 
(458
)
Net cash provided by operating activities
2,426

 
16,449

 
 
 
 
Investing activities:
 
 
 
Additions to property and equipment
(6,482
)
 
(7,825
)
Proceeds from disposition
360

 
—

Proceeds from sale of assets
1,220

 
66

Net cash used in investing activities
(4,902
)
 
(7,759
)
 
 
 
 
Financing activities:
 
 
 
Dividends paid to shareholders
(7,675
)
 
(7,625
)
Borrowings on credit facility
19,768

 
109,061

Repayments on credit facility
(17,981
)
 
(109,874
)
Common shares withheld for taxes
(301
)
 
(544
)
Payment of acquisition related earn out
—

 
(187
)
Change in book overdraft
—

 
(1,709
)
Excess tax benefit from share-based compensation awards
52

 
144

Net cash used in financing activities
(6,137
)
 
(10,734
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1,278
)
 
(357
)
Net decrease in cash and cash equivalents
(9,891
)
 
(2,401
)
Cash and cash equivalents at beginning of period
36,324

 
45,479

Cash and cash equivalents at end of period
$
26,433

 
$
43,078

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
114

 
$
106

Cash paid for income taxes, net
$
3,163

 
$
3,515


See accompanying notes to consolidated financial statements.

6
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Equity
(in thousands, except per share amounts)
(Unaudited)


 
Common Stock
 
Treasury Stock
 
Additional Paid-In-Capital
 
Retained Earnings
 
Accum-ulated Other Compre-hensive Loss
 
Total CDI Share-holders' Equity
 
Non-Controlling Interest
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
21,958

 
$
2,196

 
$
(52,487
)
 
$
70,104

 
$
265,207

 
$
(712
)
 
$
284,308

 
$
866

 
$
285,174

Net income
—

 
—

 
—

 
—

 
11,864

 
—

 
11,864

 
70

 
11,934

Translation adjustments
—

 
—

 
—

 
—

 
—

 
(2,753
)
 
(2,753
)
 
(23
)
 
(2,776
)
Share-based compensation expense
—

 
—

 
—

 
1,661

 
—

 
—

 
1,661

 
—

 
1,661

Reclassification of equity awards from liabilities, net
—

 
—

 
—

 
226

 
—

 
—

 
226

 
—

 
226

Vesting and exercise of equity awards
154

 
15

 
—

 
(15
)
 
—

 
—

 
—

 
—

 
—

Common shares withheld for taxes
(29
)
 
(3
)
 
—

 
(486
)
 
—

 
—

 
(489
)
 
—

 
(489
)
Cash dividends declared ($0.39 per common share)
—

 
—

 
—

 
—

 
(7,625
)
 
—

 
(7,625
)
 
—

 
(7,625
)
September 30, 2014
22,083
 
$
2,208

 
$
(52,487
)
 
$
71,490

 
$
269,446

 
$
(3,465
)
 
$
287,192

 
$
913

 
$
288,105

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
22,084

 
$
2,208

 
$
(52,487
)
 
$
72,023

 
$
258,113

 
$
(6,207
)
 
$
273,650

 
$
703

 
$
274,353

Net loss
—

 
—

 
—

 
—

 
(19,889
)
 
—

 
(19,889
)
 
(83
)
 
(19,972
)
Translation adjustments
—

 
—

 
—

 
—

 
—

 
(6,140
)
 
(6,140
)
 
98

 
(6,042
)
Share-based compensation expense
—

 
—

 
—

 
1,703

 
—

 
—

 
1,703

 
—

 
1,703

Reclassification of equity awards from liabilities, net
—

 
—

 
—

 
632

 
—

 
—

 
632

 
—

 
632

Vesting and exercise of equity awards
98

 
10

 
—

 
(10
)
 
—

 
—

 
—

 
—

 
—

Common shares withheld for taxes
(19
)
 
(2
)
 
—

 
(299
)
 
—

 
—

 
(301
)
 
—

 
(301
)
Disposition of controlling interest
—

 
—

 
—

 
—

 
—

 

 
—

 
(718
)
 
(718
)
Cash dividends declared ($0.39 per common share)
—

 
—

 
 
 
—

 
(7,675
)
 
—

 
(7,675
)
 
—

 
(7,675
)
September 30, 2015
22,163
 
$
2,216

 
$
(52,487
)
 
$
74,049

 
$
230,549

 
$
(12,347
)
 
$
241,980

 
$
—

 
$
241,980

 

See accompanying notes to consolidated financial statements.

7
CDI CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts, unless otherwise indicated)
(Unaudited)


1.
Business

CDI Corp. and its subsidiaries (the “Company” or “CDI”) provide engineering, information technology and staffing solutions. The Company's customers operate in a variety of industries, ranging from Oil, Gas and Chemicals to Aerospace and Industrial Equipment, and High Technology, and include corporate, federal, state and municipal entities.  The Company serves customers through offices and delivery centers in the United States (U.S.), Canada and the United Kingdom (UK).  The Company also provides staffing services through its global MRINetwork® of franchisees.

On October 6, 2015, the Company acquired EdgeRock Technologies, LLC, a provider of enterprise resource planning (ERP) and specialist information technology (IT) staffing talent, including business intelligence and data analytics (see Note 13—Subsequent Events).

2.
Principles of Consolidation and Basis of Presentation

Principles of Consolidation - The consolidated financial statements include the accounts of CDI Corp. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Basis of Presentation - The accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America (GAAP), the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (SEC) for interim financial reporting. These statements should be read in conjunction with the Company's Form 10-K filed with the SEC on March 5, 2015. Results for the nine months ended September 30, 2015 are not necessarily indicative of results that may be expected for the full year.

3.
Summary of Significant Accounting Policies

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts disclosed in the financial statements and accompanying notes. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from those estimates.

Significant estimates inherent in the preparation of the accompanying consolidated financial statements include the assumptions used in the determination of the allowance for doubtful accounts receivable, impairment assessment of goodwill, determination of the recoverability of long-lived assets, assessment of legal contingencies and calculation of income taxes.

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 (Topic 606) Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue guidance in addition to some cost guidance. ASU 2014-09 establishes a five-step model under the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company may apply this guidance using either a full retrospective approach, subject to certain practical expedients, or a modified retrospective approach with a cumulative effect adjustment as of the date of initial application. On July 9, 2015, the FASB approved a one-year deferral of the effective date that allows the Company to defer the effective date to January 1, 2018 but still permit the Company to adopt the standard as of the original January 1, 2017 effective date. The Company has not yet selected a transition method nor has it determined the impact that adoption of this guidance will have on its consolidated financial statements or determined if it will utilize the original or deferred effective date.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02). The standard changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for the Company beginning January 1, 2017. Early adoption is permitted. The Company is evaluating the impact that adoption of this guidance will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and is effective for the Company beginning January 1, 2016. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.


8


CDI CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts, unless otherwise indicated)
(Unaudited)

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Subtopic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. The guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted and the Company intends to early adopt in 2015. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

4.
Fair Value Disclosures

The Company maintains a non-qualified Deferred Compensation Plan for highly compensated employees. The assets of the plan are held in the name of CDI at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in publicly traded mutual funds. The fair value of the plan assets is calculated using the market price of the mutual funds as of the end of the period.

The following tables summarize the assets and liabilities measured at fair value on a recurring basis by level of the fair value hierarchy for the indicated periods:
 
 
 
 
Fair Value Measurements as of September 30, 2015 Using
 
 
Fair Value Measurements at September 30, 2015
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
Mutual funds:
 
 
 
 
 
 
 
 
Bond
 
$
1,765

 
$
1,765

 
$
—

 
$
—

Large cap
 
2,368

 
2,368

 
—

 
—

International
 
1,361

 
1,361

 
—

 
—

Mid cap
 
514

 
514

 
—

 
—

Small cap
 
418

 
418

 
—

 
—

Balanced
 
433

 
433

 
—

 
—

Money market funds
 
1,006

 
1,006

 
—

 
—

Total assets (1)
 
$
7,865

 
$
7,865

 
$
—

 
$
—

 
(1) 
As of September 30, 2015, $0.9 million and $7.0 million are included in “Prepaid expenses and other current assets” (liability offset in “Other accrued expenses and other current liabilities”) and “Other non-current assets” (liability offset in “Deferred compensation”), respectively, in the consolidated balance sheets reflecting the non-qualified Deferred Compensation Plan assets.

9


CDI CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts, unless otherwise indicated)
(Unaudited)

 
 
 
 
Fair Value Measurements as of December 31, 2014 Using
 
 
Fair Value Measurements at December 31, 2014
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
Mutual funds:
 
 
 
 
 
 
 
 
Bond
 
$
1,879

 
$
1,879

 
$
—

 
$
—

Large cap
 
2,852

 
2,852

 
—

 
—

International
 
1,405

 
1,405

 
—

 
—

Mid cap
 
606

 
606

 
—

 
—

Small cap
 
470

 
470

 
—

 
—

Balanced
 
339

 
339

 
—

 
—

Money market funds
 
1,235

 
1,235

 
—

 
—

Total assets (1)
 
$
8,786

 
$
8,786

 
$
—

 
$
—

 
(1) 
As of December 31, 2014, $0.7 million and $8.1 million are included in “Prepaid expenses and other current assets” (liability offset in “Other accrued expenses and other current liabilities”) and “Other non-current assets” (liability offset in “Deferred compensation”), respectively, in the consolidated balance sheets reflecting the non-qualified Deferred Compensation Plan assets.

5.
Goodwill and Other Intangible Assets

The following table summarizes the changes in the Company's carrying value of goodwill by reporting segment for the indicated periods:
 
December 31, 2014
 
 
 
 
 
September 30, 2015
 
Gross
Balance
 
Accumulated Impairment Losses
 
Impairment
 
Translation and Other Adjustments
 
Gross
Balance
 
Accumulated Impairment Losses
 
 
 
 
 
 
 
 
 
 
 
 
GETS
$
35,713

 
$
(11,051
)
 
$
(10,380
)
 
$
—

 
$
35,713

 
$
(21,431
)
PSS
44,298

 
(27,904
)
 
(10,654
)
 
(117
)
 
41,266

 
(35,643
)
MRI
16,240

 
(6,666
)
 
—

 
(69
)
 
15,978

 
(6,473
)
Total goodwill
$
96,251

 
$
(45,621
)
 
$
(21,034
)
 
$
(186
)
 
$
92,957

 
$
(63,547
)

The Company performs its annual assessment for impairment of goodwill and other indefinite-lived intangible assets using a measurement date of July 1 of each fiscal year. The Company performs an assessment for impairment of goodwill and other indefinite-lived intangible assets whenever events or circumstances indicate that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is below its carrying value.

The Company performed its annual assessment as of July 1, 2015 and determined that the carrying values of the Company's PSS EMEA (AndersElite) and GETS Aerospace and Industrial Equipment (GETS AIE) reporting units exceeded their fair values.
The Company estimated the fair values of all reporting units using a discounted cash flow model based on significant unobservable inputs or level 3 inputs of the fair value hierarchy. The key assumption used to determine the fair values was management's estimate of future earnings. Based on the results of these estimations, the Company estimated the fair value of the assets and liabilities for the two reporting units with the assistance of a third-party valuation specialist in order to determine the implied fair values of goodwill. The Company compared the implied fair values of goodwill to the carrying values of goodwill for the two reporting units and recorded an aggregate goodwill impairment charge of $21.0 million to Impairment in the consolidated statements of operations, comprised of $10.7 million and $10.4 million in PSS EMEA and GETS AIE, respectively. The Company did not identify any other reporting units with fair values that were not substantially in excess of their carrying values.

The Company believes it has made reasonable estimates and used reasonable assumptions to calculate the fair value of its reporting units and indefinite-lived intangible assets. If actual future results are not consistent with management's estimates and assumptions, the Company may have to take additional impairment charges in the future.


10


CDI CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts, unless otherwise indicated)
(Unaudited)

The following tables summarize the changes in the Company's carrying value of other intangible assets during the indicated periods:
 
December 31, 2014
 
 
 
 
 
September 30, 2015
 
Gross
Balance
 
Accumulated Amortization
 
Additions
 
Amortization
 
Gross
Balance
 
Accumulated Amortization
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
10,300

 
$
(5,047
)
 
$
—

 
$
(572
)
 
$
10,300

 
$
(5,619
)
Trademarks
5,100

 
(680
)
 
—

 
(255
)
 
5,100

 
(935
)
Non-compete
150

 
(135
)
 
—

 
(15
)
 
150

 
(150
)
Reacquired franchise rights
972

 
(401
)
 
—

 
(73
)
 
972

 
(474
)
Total intangible assets subject to amortization
16,522

 
(6,263
)
 
—

 
(915
)
 
16,522

 
(7,178
)
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trademarks
2,165

 
—

 
—

 
—

 
2,165

 
—

Total other intangible assets
$
18,687

 
$
(6,263
)
 
$
—

 
$
(915
)
 
$
18,687

 
$
(7,178
)


6.
Restructuring and Other Related Costs

In December 2014, the Company approved a restructuring plan (the “2014 Restructuring Plan”) to optimize its operations and facility footprint. The 2014 Restructuring Plan included a workforce reduction and the consolidation of facilities and is expected to be substantially complete during 2015. Substantially all remaining payments are expected to be made during 2015 with certain payments related to the consolidation of facilities expected through 2019.

In December 2013, the Company announced that it would undertake a corporate restructuring in the first quarter of 2014 (the “2013 Restructuring Plan”) to improve operational effectiveness and further optimize the Company's cost structure. The 2013 Restructuring Plan included a workforce reduction and the consolidation of facilities and was substantially completed by June 30, 2014. Substantially all payments were made in 2014, with certain payments related to the consolidation of facilities expected through 2019.

The following table summarizes the provision, activity and balances related to the Restructuring Plans by cost type for the indicated periods:
 
Employee severance and related costs
 
Real estate exit and related costs
 
Asset
write-offs
 
Accrued restructuring liability
 
 
 
 
 
 
 
 
Balance as of December 31, 2013
$
4,568

 
$
769

 
$
—

 
$
5,337

Cash payments
(2,650
)
 
(485
)
 
—

 
 
Charges
37

 
734

 
30

 
 
Non-cash
—

 
—

 
(30
)
 
 
Adjustments
(729
)
 
—

 
—

 
 
Balance as of September 30, 2014
$
1,226

 
$
1,018

 
$
—

 
$
2,244

 
 
 
 
 
 
 
 
Balance as of December 31, 2014
$
2,031

 
$
2,600

 
$
—

 
$
4,631

Cash payments
(1,455
)
 
(1,060
)
 
—

 
 
Charges
—

 
599

 
14

 
 
Non-cash
—

 
—

 
(14
)
 
 
   Adjustments
(30
)
 
30

 
—

 
 
Balance as of September 30, 2015
$
546

 
$
2,169

 
$
—

 
$
2,715


The consolidated balance sheets as of September 30, 2015 and December 31, 2014 include $1.9 million and $3.4 million in “Other accrued expenses and other current liabilities”, and $0.8 million and $1.2 million in "Other non-current liabilities", respectively.


11


CDI CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts, unless otherwise indicated)
(Unaudited)

7.
Disposition

On March 20, 2015, the Company completed the sale of its 67% interest in CDI-Pycopsa Ingeniería y Construcción, S. de R.L. de C.V. (“CDI-Pycopsa”), a Mexico-based engineering design company in the GETS reporting segment. CDI-Pycopsa does not meet the criteria to be reported as a discontinued operation under ASU 2014-08, which was adopted by the Company on January 1, 2015. Accordingly, CDI-Pycopsa's results are reflected in the Consolidated Statements of Operations within continuing operations. Excluding the $0.3 million loss on disposition, CDI-Pycopsa's pretax results attributable to CDI were not material for nine months ended September 30, 2015 and 2014, respectively. During the nine months ended September 30, 2015, the Company received $0.4 million proceeds related to the sale.

8.
Short-Term Borrowings

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) that expires on November 29, 2017. The Company intends to repay outstanding borrowings under the Credit Agreement as of September 30, 2015 during the next twelve months and as a result has recorded these borrowings in "Short-term borrowings" in the consolidated balance sheets. 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.
 
As of September 30, 2015, the Company had outstanding borrowings of $3.0 million and letters of credit outstanding of $3.2 million. Borrowings under the Credit Agreement are limited by certain financial covenants. The Company had $39.2 million available to borrow as of September 30, 2015. The Company was in compliance with all covenants under the Credit Agreement as of September 30, 2015. Interest was payable at a rate of 1.72% per annum for outstanding borrowings as of September 30, 2015.

As of December 31, 2014, the Company had outstanding borrowings of $1.3 million, letters of credit outstanding of $3.2 million and $70.5 million available to borrow under the Credit Agreement. The Company was in compliance with all covenants under the Credit Agreement as of December 31, 2014. As of December 31, 2014, the Company had an unsecured $0.4 million letter of credit outstanding under an agreement with TD Bank, N.A.

In October 2015, the Company borrowed $30.7 million million under the Credit Agreement in order to fund the acquisition of EdgeRock Technologies, LLC (see Note 13—Subsequent Events).

On October 30, 2015, the Company entered into a new credit agreement with Bank of America, N.A. and other lenders that established a secured $150.0 million revolving line of credit facility, with a five-year term ending on October 30, 2020. (see Note 13—Subsequent Events).

9.
Commitments and Contingencies

Legal Proceedings
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Although management cannot predict the timing or outcome of these matters with certainty, management does not believe that the final resolution of these matters, individually or in the aggregate, would have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

10.
Income Taxes

The Company calculates an effective income tax rate each quarter using the estimated annual effective rate method based upon forecasted annual income by jurisdiction, statutory tax rates and other tax-related items. The impact of discrete items is recognized in the interim period in which they occur. Discrete items and the mix of domestic and foreign pre-tax income and losses with no tax benefit may significantly impact the interim period income tax provision and increase the volatility of the interim period effective tax rate at low levels of pre-tax results.
The effective tax rates for the three months ended September 30, 2015 and 2014 were 5.8% and 34.8%, respectively. The effective tax rates for the nine months ended September 30, 2015 and 2014 were (4.1)% and 40.2%, respectively. During the three months ended September 30, 2015, the Company recorded a $3.2 million benefit related to the impairment of goodwill and a $2.7 million charge for the increase in valuation allowance related to certain deferred tax assets. In addition, during the nine months ended September 30, 2014, the Company recorded a $0.5 million charge for the write-off of deferred tax assets related to the forfeiture of the outstanding equity awards due to the separation of the Company's former CEO.


12


CDI CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts, unless otherwise indicated)
(Unaudited)

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets, including net operating loss carryforwards. Management’s assessment is made for each taxpayer on a jurisdiction by jurisdiction basis. On the basis of this evaluation, as of September 30, 2015, a full valuation allowance has been recorded against the deferred tax asset related to part of the group’s US state taxes as these are more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or decreased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

11.
Basic and Diluted Earnings Per Share (EPS) Data

The following table reconciles the denominator used to compute basic EPS to the denominator used to compute diluted EPS for the indicated periods:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to CDI
$
(20,202
)
 
$
5,400

 
$
(19,889
)
 
$
11,864

Denominator:
 
 
 
 
 
 
 
Basic weighted-average shares
19,695

 
19,614

 
19,668

 
19,562

Dilutive effect of share-based awards


 
185

 


 
203

Diluted weighted-average shares
19,695

 
19,799

 
19,668

 
19,765

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
(1.03
)
 
$
0.28

 
$
(1.01
)
 
$
0.61

Diluted
$
(1.03
)
 
$
0.27

 
$
(1.01
)
 
$
0.60


There were 0.7 million shares and 0.4 million shares excluded from the computation of EPS for the three months ended September 30, 2015 and 2014, respectively, because their inclusion would have been anti-dilutive. There were 0.4 million shares and 0.3 million shares excluded from the computation of EPS for the nine months ended September 30, 2015 and 2014, respectively, because their inclusion would have been anti-dilutive.

12.
Reporting Segments
The Company has the following three reporting segments:
•
Global Engineering and Technology Solutions (GETS) - GETS provides engineering and information technology solutions that involve principally the production of deliverable work products or services performed at a CDI facility or at a customer's facility under the supervision of CDI personnel. These solutions typically include analysis of a customer's engineering or information technology needs and the development of a solution that generally ranges in duration from several months to multiple years. Depending on the industry, engineering services can include feasibility studies, architectural and structural designs, technology assessments, conceptual designs, pricing studies, preliminary designs, execution planning, procurement optimization, detailed designs, testing and validations of regulatory compliance, technology integration and operating and maintenance support. Information technology services can include assessments, business application services, web development, service-desk support, quality assurance and testing and program management. GETS provides these solutions through a delivery model consisting of centers of excellence, with concentrated skill sets required for larger, more complex projects, regional centers to service local needs of customers; and customer-centered offices to deliver site-specific services.
•
Professional Staffing Services (PSS) - PSS provides skilled technical and professional personnel for discrete periods of time to augment the customer's workforce in times of project, seasonal, peak period or business cycle needs. These engagements can range from several months to multiple years in duration. PSS also provides permanent placement services and professional staffing services to targeted industries that include managed services and managed staffing programs, and functional staffing outsourcing.

13


CDI CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts, unless otherwise indicated)
(Unaudited)

•
Management Recruiters International (MRI) - MRI is a global franchisor that does business as MRINetwork® and 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 customers. The MRI franchisees provide permanent placement services primarily under the brand names Management Recruiters®, Sales Consultants® and OfficeMates 5®. MRI also provides training and support, implementation services and back-office services to enable franchisees to pursue contract staffing opportunities.

For purposes of performance measurement, the Company charges certain expenses directly attributable to the reporting segments and allocates certain other expenses and support costs. Support costs consist principally of employee benefits administration, accounting support, IT services and shared service center costs. Operating and administrative expenses that are not directly attributable to the reporting segments are classified as corporate. Identifiable assets of the reporting segments exclude corporate assets. Corporate assets consist principally of all cash and cash equivalents, all current and deferred income tax assets, and certain corporate assets not directly associated with the reporting segments including certain property and equipment and certain prepaid expenses and other current assets and certain other non-current assets.

Reporting segment operations data is presented in the following table for the indicated periods:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
GETS
$
84,293

 
$
88,388

 
$
251,251

 
$
254,930

PSS
146,864

 
192,426

 
457,682

 
557,295

MRI
13,505

 
14,918

 
40,008

 
44,061

Total revenue
$
244,662

 
$
295,732

 
$
748,941

 
$
856,286

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
GETS
$
22,045

 
$
24,391

 
$
64,836

 
$
69,596

PSS
18,166

 
23,141

 
55,751

 
67,896

MRI
6,616

 
6,956

 
19,657

 
20,556

Total gross profit
$
46,827

 
$
54,488

 
$
140,244

 
$
158,048

 
 
 
 
 
 
 
 
Operating profit (loss):
 
 
 
 
 
 
 
GETS (1), (2), (3)
$
(9,798
)
 
$
3,429

 
$
(7,963
)
 
$
7,200

PSS (1), (3)
(9,092
)
 
7,367

 
(1,979
)
 
20,379

MRI
1,927

 
1,721

 
4,957

 
4,733

Corporate (4)
(5,166
)
 
(4,035
)
 
(14,801
)
 
(12,157
)
Total operating profit (loss)
(22,129
)
 
8,482

 
(19,786
)
 
20,155

Other income (expense), net (5)
683

 
(133
)
 
599

 
(207
)
Income (loss) before income taxes
$
(21,446
)
 
$
8,349

 
$
(19,187
)
 
$
19,948

 
(1) 
The following table summarizes the amount of restructuring and other related costs recognized by reporting segment for the indicated periods:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
GETS
$
235

 
$
—

 
$
235

 
$
419

PSS
331

 
—

 
378

 
(249
)
MRI
—

 
—

 
—

 
—

Corporate
—

 
—

 
—

 
(98
)
Restructuring and other related costs
$
566

 
$
—

 
$
613

 
$
72


(2) 
In the first quarter of 2015, the Company's GETS segment recorded a charge of $0.3 million related to the loss on disposition of the Company's controlling interest in a Mexico-based engineering design company.

14


CDI CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts, unless otherwise indicated)
(Unaudited)

(3) 
In the third quarter of 2015, the Company recorded an aggregate charge of $21.5 million related to the impairment of goodwill and certain fixed assets, comprised of GETS $10.9 million and PSS $10.7 million.
(4) 
In the first quarter of 2014, the Company recorded an aggregate $0.9 million after tax charge related to the separation of the former CEO that is comprised of a $0.7 million pre-tax charge ($0.4 million after tax) to operations associated with the former CEO's separation arrangement and an additional $0.5 million charge to income tax expense for the write-off of deferred tax assets related to the forfeiture of equity awards.
(5) 
In the third quarter of 2015, the Company recorded a pre-tax gain of $0.8 million for a sale of a non-operating corporate asset. Proceeds from the sale were $1.2 million.

Inter-segment activity is not significant; therefore, revenue reported for each operating segment is substantially from external customers.

Reporting segment asset data is presented in the following table for the indicated periods:
 
September 30,
 
December 31,
 
2015
 
2014
 
 
 
 
Assets:
 
 
 
GETS
$
111,632

 
$
120,223

PSS
153,317

 
159,774

MRI
23,528

 
23,539

Corporate
61,287

 
68,684

Total assets
$
349,764

 
$
372,220



13.
Subsequent Events

EdgeRock Technologies, LLC Acquisition

On October 6, 2015, the Company acquired EdgeRock Technologies, LLC (EdgeRock), a provider of ERP and specialist IT staffing talent, including business intelligence and data analytics, for cash consideration of $31.3 million, subject to working capital adjustments, plus up to an additional $4.0 million of cash contingent on EdgeRock's operating performance for the twelve months ended October 31, 2016. Cash paid at closing was funded, in part, through borrowings under the Credit Agreement. The Company and EdgeRock have made a tax election to treat the Company's acquisition of all outstanding membership interests of EdgeRock as an asset purchase.

The Company is in the preliminary phase of the purchase accounting process, including obtaining third party valuations of certain tangible and intangible assets acquired. As such, the purchase accounting process is incomplete. The Company expects to provide the required disclosures of the estimated fair value of the assets and liabilities acquired for this business combination as an amendment to the Form 8-K filed October 13, 2015.

New Credit Agreement

On October 30, 2015, the Company and several of its subsidiaries (collectively, the “Borrowers”) entered into a new credit agreement with Bank of America, N.A. and other lenders for an asset-based lending facility. The credit agreement established a $150.0 million revolving line of credit facility (including an optional ability to expand the facility by $75.0 million if the lenders agree to provide the loan), with a five-year term ending on October 30, 2020. The facility is broken up into three subfacilities with $122.5 million available to U.S. borrowers, $15.0 million available to Canadian borrowers and $12.5 million available to UK borrowers. It also includes a $30.0 million sublimit for swingline loans and a $20.0 million sublimit for letters of credit. The facility's availability is limited to 85% of eligible billed accounts receivable and 80% of eligible unbilled accounts receivable less certain reserves as defined in the new credit agreement. Borrowings under the new credit agreement may be used by the Borrowers for general business purposes including capital expenditures and permitted acquisitions and investments. The Borrowers’ obligations under this credit agreement are secured by a first lien security interest in essentially all of the Borrowers’ personal property. 


15


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)

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 provides engineering, information technology and staffing solutions. The Company's customers operate in a variety of industries, ranging from Oil, Gas and Chemicals (OGC) to Aerospace and Industrial Equipment (AIE), and High Technology (Hi-Tech), and include corporate, federal, state and municipal entities. The Company also serves customers that operate in the infrastructure, U.S. defense, and transportation industries and such Company operations are included in the Company's "Other" industry vertical. The Company serves customers through offices and delivery centers in the United States (U.S.), Canada and the United Kingdom (UK).  The Company also provides staffing services through its global MRINetwork® of franchisees.  
The Company operates through its three reporting segments: Global Engineering and Technology Solutions (GETS), Professional Staffing Services (PSS) and Management Recruiters International (MRI). GETS provides engineering and information technology solutions that involve the production of deliverable work products or services performed at a CDI facility or at a customer's facility under the supervision of CDI personnel. PSS provides staffing services to customers on a national or enterprise scale (formerly called programs) and retail and specialty staffing services on a local or regional scale (formerly called non-programs). 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 customers.
The Company's results of operations can be affected by economic conditions, capital spending by customers, business confidence and select investments to improve business results. The Company is in the midst of a strategic transformation and operational turnaround and may, as a result, experience volatility in financial performance. Historical trends may not be indicative of future trends.

On October 6, 2015, the Company acquired EdgeRock Technologies, LLC, a provider of ERP and specialist IT staffing talent, including business intelligence and data analytics (see Note 13—Subsequent Events, in the notes to the consolidated financial statements included in Item 1 of this Form 10-Q Report).

On October 30, 2015, the Company entered into a new credit agreement with Bank of America, N.A. and other lenders that established a secured $150.0 million revolving line of credit facility, with a five-year term ending on October 30, 2020. (see Note 13—Subsequent Events, in the notes to the consolidated financial statements included in Item 1 of this Form 10-Q Report).
Third Quarter 2015 Overview
Revenue during the third quarter of 2015 decreased by $51.1 million or 17.3% as compared to the third quarter of 2014 primarily due to a decrease across all verticals in PSS. PSS revenue decreased primarily due to reduced Canadian pipeline staffing in the OGC vertical, a large customer in the Hi-Tech vertical, existing customers in the "Other" industry vertical and the negative impact of exchange rates. Gross profit decreased by $7.7 million primarily due to the decrease in revenue, partially offset by an increase in gross profit margin. Gross profit margin increased primarily due to an overall shift in revenue mix toward higher margin GETS business, partially offset by a shift in revenue mix within GETS to lower margin OGC business. Operating and administrative expenses increased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to an increase in costs associated with corporate and international business development activities, partially offset by reduced costs associated with lower business volumes. During the third quarter of 2015, the Company recorded an aggregate $21.5 million impairment charge predominantly comprised of goodwill impairment charges of $10.4 million and $10.7 million in GETS and PSS, respectively. Operating profit (loss) decreased to $(22.1) million for the third quarter of 2015 as compared to $8.5 million for the third quarter of 2014. Net income (loss) attributable to CDI decreased to $(20.2) million for the third quarter of 2015 as compared to $5.4 million for the third quarter of 2014.




16


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

Results of Operations

Consolidated Discussion
Three months ended September 30, 2015 as compared to the three months ended September 30, 2014

The following table presents changes in revenue by segment along with selected financial information for the indicated periods:
 
Three Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
GETS
$
84,293

 
34.5
 %
 
$
88,388

 
29.9
%
 
$
(4,095
)
 
(4.6
)%
PSS
146,864

 
60.0

 
192,426

 
65.1

 
(45,562
)
 
(23.7
)
MRI
13,505

 
5.5

 
14,918

 
5.0

 
(1,413
)
 
(9.5
)
Total Revenue
$
244,662

 
100.0

 
$
295,732

 
100.0

 
$
(51,070
)
 
(17.3
)
Gross profit
$
46,827

 
19.1

 
$
54,488

 
18.4

 
$
(7,661
)
 
(14.1
)
Operating and administrative expenses
$
46,853

 
19.2

 
$
46,006

 
15.6

 
$
847

 
1.8

Restructuring and other related costs
$
566

 
0.2

 
$
—

 
—

 
$
566

 
NM

Impairment
$
21,537

 
8.8

 
$
—

 
—

 
$
21,537

 
NM

Operating profit (loss)
$
(22,129
)
 
(9.0
)
 
$
8,482

 
2.9

 
$
(30,611
)
 
(360.9
)
Net income (loss) attributable to CDI
$
(20,202
)
 
(8.3
)
 
$
5,400

 
1.8

 
$
(25,602
)
 
(474.1
)
Effective income tax rate
5.8
%
 
 
 
34.8
%
 
 
 
 
 
 
 
(1) 
In the third quarter of 2015, the Company recorded an aggregate charge of $21.5 million comprised of $21.0 million million related to the impairment of goodwill and $0.5 million related to the impairment of certain fixed assets.
NM - Not meaningful.
Revenue decreased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to a decrease in PSS. PSS revenue decreased across all verticals primarily due to reduced Canadian pipeline staffing in the OGC vertical, a large customer in the Hi-Tech vertical, existing customers in the "Other" industry vertical and the negative impact of exchange rates. GETS revenue decreased primarily due to reduced spending by a large commercial aviation customer in the AIE vertical and project completions, partially offset by increased spending from oil and gas refiners, in the OGC vertical. MRI revenue decreased primarily due to lower contract staffing volumes.
Gross profit decreased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to the decrease in revenue, partially offset by an increase in overall gross profit margin. Overall gross profit margin increased primarily due to a shift in revenue mix toward higher margin GETS business. Within GETS, gross profit margin decreased slightly primarily due to a shift in revenue mix toward OGC business from AIE business.
Operating profit decreased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to an aggregate $21.5 million impairment charge in the third quarter of 2015 and the decrease in gross profit. The impairment charge is predominantly comprised of goodwill impairment charges of $10.4 million and $10.7 million in GETS and PSS, respectively. Operating and administrative expenses increased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to an increase in costs associated with corporate and international business development activities, partially offset by reduced costs associated with lower business volumes.
The effective income tax rates for both periods were impacted by discrete items, the mix of domestic and foreign pre-tax income and certain foreign losses with no tax benefit that, in aggregate, had a significant impact on the effective income tax rates due to the marginal levels of pre-tax results for both periods. As such, comparison of effective tax rates for the third quarter of 2015 as compared to the third quarter of 2014 is not meaningful.
Corporate
Corporate expenses consist of operating and administrative expenses that are not allocated to the reporting units under segment reporting. Corporate expenses were $5.2 million for the third quarter of 2015 compared to $4.0 million for the third quarter of 2014. The increase in corporate expenses are primarily due to an increase in costs associated with corporate and international business development activities.


17


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

Consolidated Discussion - Continued
Nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014

The following table presents changes in revenue by segment along with selected financial information for the indicated periods:
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
GETS
$
251,251

 
33.5
 %
 
$
254,930

 
29.8
%
 
$
(3,679
)
 
(1.4
)%
PSS
457,682

 
61.1

 
557,295

 
65.1

 
(99,613
)
 
(17.9
)
MRI
40,008

 
5.3

 
44,061

 
5.1

 
(4,053
)
 
(9.2
)
Total Revenue
$
748,941

 
100.0

 
$
856,286

 
100.0

 
$
(107,345
)
 
(12.5
)
Gross profit
$
140,244

 
18.7

 
$
158,048

 
18.5

 
$
(17,804
)
 
(11.3
)
Operating and administrative expenses
$
137,570

 
18.4

 
$
137,821

 
16.1

 
$
(251
)
 
(0.2
)
Restructuring and other related costs
$
613

 
0.1

 
$
72

 
—

 
$
541

 
NM

Impairment
$
21,537

 
2.9

 
$
—

 
—

 
$
21,537

 
NM

Loss on disposition
$
310

 
—

 
$
—

 
—

 
$
310

 
NM

Operating profit (loss)
$
(19,786
)
 
(2.6
)
 
$
20,155

 
2.4

 
$
(39,941
)
 
(198.2
)
Net income (loss) attributable to CDI
$
(19,889
)
 
(2.7
)
 
$
11,864

 
1.4

 
$
(31,753
)
 
(267.6
)
Effective income tax rate
(4.1
)%
 
 
 
40.2
%
 
 
 
 
 
 
 
(1) 
In the third quarter of 2015, the Company recorded an aggregate charge of $21.5 million comprised of $21.0 million million related to the impairment of goodwill and $0.5 million related to the impairment of certain fixed assets.
NM - Not meaningful.
Revenue decreased for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to a decrease in PSS. PSS revenue decreased primarily due to reduced Canadian pipeline staffing in the OGC vertical, North America staffing in the "Other" industry vertical, staffing at a large customer in the Hi-Tech vertical and the negative impact of exchange rates. MRI revenue decreased primarily due to lower contract staffing volumes.
Gross profit decreased for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to the decrease in revenue and, to a lesser extent, decrease in the gross profit margin in GETS. Overall gross profit margin increased slightly as the shift in revenue mix toward higher margin GETS business was offset by lower margins in GETS. Within GETS, gross profit margin decreased primarily due to a shift in revenue mix toward OGC business from AIE business.
Operating profit decreased for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to an aggregate $21.5 million impairment charge in the third quarter of 2015 and the decrease in gross profit. The impairment charge is predominantly comprised of goodwill impairment charges of $10.4 million and $10.7 million in GETS and PSS, respectively. Operating and administrative expenses decreased slightly for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to reduced costs associated with lower business volumes, partially offset by an increase in costs associated with corporate and international business development activities.
The effective income tax rates for both periods were impacted by discrete items, the mix of domestic and foreign pre-tax income and certain foreign losses with no tax benefit that, in aggregate, had a significant impact on the effective income tax rates due to the marginal levels of pre-tax results for both periods. As such, comparison of effective tax rates for the first nine months of 2015 as compared to the first nine months of 2014 is not meaningful.
Corporate
Corporate expenses consist of operating and administrative expenses that are not allocated to the reporting units under segment reporting. Corporate expenses were $14.8 million for the first nine months of 2015 compared to $12.3 million for the first nine months of 2014. The increase in corporate expenses are primarily due to an increase in costs associated with corporate and international business development activities.

18


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 September 30, 2015 as compared to the three months ended September 30, 2014

The following table presents changes in revenue by industry vertical along with selected financial information for the indicated periods:
 
Three Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Oil, Gas and Chemicals (OGC)
$
38,750

 
46.0
 %
 
$
39,786

 
45.0
%
 
$
(1,036
)
 
(2.6
)%
Aerospace and Industrial Equipment (AIE)
14,877

 
17.6

 
17,799

 
20.1

 
(2,922
)
 
(16.4
)
Hi-Tech
7,724

 
9.2

 
8,273

 
9.4

 
(549
)
 
(6.6
)
Other
22,942

 
27.2

 
22,530

 
25.5

 
412

 
1.8

Total revenue
84,293

 
100.0

 
88,388

 
100.0

 
(4,095
)
 
(4.6
)
Cost of services
62,248

 
73.8

 
63,997

 
72.4

 
(1,749
)
 
(2.7
)
Gross profit
22,045

 
26.2

 
24,391

 
27.6

 
(2,346
)
 
(9.6
)
Operating and administrative expenses
20,724

 
24.6

 
20,962

 
23.7

 
(238
)
 
(1.1
)
Restructuring and other related costs
235

 
0.3

 
—

 
—

 
235

 
NM

Impairment (1)
10,884

 
12.9

 
—

 
—

 
10,884

 
NM

Operating profit (loss)
$
(9,798
)
 
(11.6
)
 
$
3,429

 
3.9

 
$
(13,227
)
 
(385.7
)
 
(1) 
In the third quarter of 2015, the Company recorded an aggregate charge of $10.9 million comprised of $10.4 million related to the impairment of goodwill and $0.5 million related to the impairment of certain fixed assets.
NM - Not meaningful.

Revenue decreased during the third quarter of 2015 as compared to the third quarter of 2014 primarily due to the decreases in the AIE and OGC industry verticals. The decrease in AIE revenue is primarily due to reduced spending by a large commercial aviation customer. The decrease in OGC revenue is primarily due to project completions, partially offset by increased spending from oil and gas refiners. Hi-Tech industry vertical revenue decreased primarily due to reduced spending among from existing customers. The increase in the "Other" industry vertical is primarily due to increased spending for government services, partially offset by reduced spending for architectural engineering services in Infrastructure.

Gross profit and gross profit margin decreased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to decreased volume and pricing from a large commercial aviation customer in the AIE industry vertical and a decline in margins across all verticals.

Operating and administrative expenses decreased slightly during the third quarter of 2015 as compared to the third quarter of 2014. Operating costs during the third quarter of 2015 include a $10.9 million impairment charge in the AIE industry vertical and $0.2 million in restructuring and other related costs.

Operating profit decreased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to the 2015 goodwill impairment charge and, to a lesser extent, the decrease in gross profit.



19


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 (GETS) - Continued
Nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014

The following table presents changes in revenue by industry vertical along with selected financial information for the indicated periods:
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Oil, Gas and Chemicals (OGC)
$
116,910

 
46.5
 %
 
$
107,054

 
42.0
%
 
$
9,856

 
9.2
 %
Aerospace and Industrial Equipment (AIE)
46,189

 
18.4

 
57,452

 
22.5

 
(11,263
)
 
(19.6
)
Hi-Tech
23,315

 
9.3

 
24,291

 
9.5

 
(976
)
 
(4.0
)
Other
64,837

 
25.8

 
66,133

 
25.9

 
(1,296
)
 
(2.0
)
Total revenue
251,251

 
100.0

 
254,930

 
100.0

 
(3,679
)
 
(1.4
)
Cost of services
186,415

 
74.2

 
185,334

 
72.7

 
1,081

 
0.6

Gross profit
64,836

 
25.8

 
69,596

 
27.3

 
(4,760
)
 
(6.8
)
Operating and administrative expenses
61,370

 
24.4

 
61,977

 
24.3

 
(607
)
 
(1.0
)
Restructuring and other related costs
235

 
0.1

 
419

 
0.2

 
(184
)
 
(43.9
)
Impairment
10,884

 
4.3

 
—

 
—

 
10,884

 
NM

Loss on Disposition
310

 
0.1

 
—

 
—

 
310

 
NM

Operating profit (loss)
$
(7,963
)
 
(3.2
)
 
$
7,200

 
2.8

 
$
(15,163
)
 
(210.6
)
 
NM - Not meaningful.

Revenue decreased slightly during the first nine months of 2015 as compared to the first nine months of 2014 primarily due to decreases in the AIE, Hi-Tech and "Other" industry verticals, partially offset by an increase in revenue in the OGC industry vertical. The decrease in AIE revenue is primarily due to reduced spending by a large commercial aviation customer. The decrease in the "Other" industry vertical revenue is primarily due to reduced spending for architectural engineering services in Infrastructure and for government services. The increase in OGC revenue is primarily due to increased spending by existing downstream customers.

Gross profit and gross profit margin decreased for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to an overall shift in revenue mix toward lower margin OGC business and decreased volume and pricing from a large commercial aviation customer in the AIE industry vertical.

Operating and administrative expenses decreased slightly during the first nine months of 2015 as compared to the first nine months of 2014 primarily due to cost savings as a result of the 2014 restructuring plan, partially offset by increased costs to facilitate growth in the OGC industry vertical. Operating costs during the first nine months quarter of 2015 include a $10.9 million goodwill impairment charge in the AIE industry vertical, a $0.3 million loss on disposition of the Company's controlling interest in a Mexico-based OGC engineering design company, and $0.2 million in restructuring and other related costs, compared to $0.4 million in restructuring and other related costs during the first nine months of 2014.

Operating profit decreased for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to the 2015 goodwill impairment charge and, to a lesser extent, the decrease in gross profit, partially offset by the decrease in operating and administrative expenses.


20


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 Staffing Services (PSS)
Three months ended September 30, 2015 as compared to the three months ended September 30, 2014

The following table presents changes in revenue by industry vertical along with selected financial information for the indicated periods:
 
Three Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Oil, Gas and Chemicals (OGC)
$
32,583

 
22.2
 %
 
$
51,386

 
26.7
%
 
$
(18,803
)
 
(36.6
)%
Aerospace and Industrial Equipment (AIE)
17,038

 
11.6

 
21,216

 
11.0

 
(4,178
)
 
(19.7
)
Hi-Tech
49,514

 
33.7

 
57,837

 
30.1

 
(8,323
)
 
(14.4
)
Other
47,729

 
32.5

 
61,987

 
32.2

 
(14,258
)
 
(23.0
)
Total revenue
146,864

 
100.0

 
192,426

 
100.0

 
(45,562
)
 
(23.7
)
Cost of services
128,698

 
87.6

 
169,285

 
88.0

 
(40,587
)
 
(24.0
)
Gross profit
18,166

 
12.4

 
23,141

 
12.0

 
(4,975
)
 
(21.5
)
Operating and administrative expenses
16,274

 
11.1

 
15,774

 
8.2

 
500

 
3.2

Restructuring and other related costs
331

 
0.2

 
—

 
—

 
331

 
NM

Impairment
10,653

 
7.3

 
—

 
—

 
10,653

 
NM

Operating profit (loss)
$
(9,092
)
 
(6.2
)
 
$
7,367

 
3.8

 
$
(16,459
)
 
(223.4
)
 
NM - Not meaningful.

Revenue decreased for the third quarter of 2015 as compared to the third quarter of 2014 due to decreases in all industry verticals. OGC revenue decreased primarily due to reduced spending for Canadian pipeline staffing as a result of a shift to more normalized maintenance and customer reductions in capital spending due to declines in oil prices. Revenue in the "Other" industry vertical decreased primarily due to decreased spending by existing customers. Revenue in Hi-Tech declined primarily due to reduced staffing at a large customer. The decrease in AIE revenue is primarily due to decreased demand by existing enterprise staffing customers. In addition, currency exchange rates negatively impacted revenues, primarily in the OGC and "Other" industry verticals.

Gross profit decreased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to the decrease in revenue. Gross profit margin increased slightly for the third quarter of 2015 as compared to the third quarter of 2014.

Operating and administrative expenses increased during the third quarter of 2015 as compared to the third quarter of 2014 primarily due to investments in additional recruiting and sales capacity in the U.S. specialty staffing and UK staffing businesses, partially offset by reduced costs associated with lower business volumes. Operating costs during the third quarter of 2015 include a $10.7 million goodwill impairment charge in the "Other" industry vertical related to our AndersElite business in the UK and $0.3 million charge in restructuring and other related costs.

Operating profit decreased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to the goodwill impairment charge and reduction in gross profit.






21


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 Staffing Services (PSS) - Continued
Nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014

The following table presents changes in revenue by industry vertical along with selected financial information for the indicated periods:
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Oil, Gas and Chemicals (OGC)
$
101,203

 
22.1
 %
 
$
140,866

 
25.3
 %
 
$
(39,663
)
 
(28.2
)%
Aerospace and Industrial Equipment (AIE)
55,209

 
12.1

 
61,716

 
11.1

 
(6,507
)
 
(10.5
)
Hi-Tech
154,545

 
33.8

 
177,866

 
31.9

 
(23,321
)
 
(13.1
)
Other
146,725

 
32.1

 
176,847

 
31.7

 
(30,122
)
 
(17.0
)
Total revenue
457,682

 
100.0

 
557,295

 
100.0

 
(99,613
)
 
(17.9
)
Cost of services
401,931

 
87.8

 
489,399

 
87.8

 
(87,468
)
 
(17.9
)
Gross profit
55,751

 
12.2

 
67,896

 
12.2

 
(12,145
)
 
(17.9
)
Operating and administrative expenses
46,699

 
10.2

 
47,766

 
8.6

 
(1,067
)
 
(2.2
)
Restructuring and other related costs
378

 
0.1

 
(249
)
 
—

 
627

 
(251.8
)
Impairment
10,653

 
2.3

 
—

 
—

 
10,653

 
NM

Operating profit (loss)
$
(1,979
)
 
(0.4
)
 
$
20,379

 
3.7

 
$
(22,358
)
 
(109.7
)
 
NM - Not meaningful.

Revenue decreased for the first nine months of 2015 as compared to the first nine months of 2014 due to decreases in all industry verticals. OGC revenue decreased primarily due to reduced Canadian pipeline staffing as a result of a shift to more normalized maintenance and customer reductions in capital spending due to declines in oil prices. Revenue in the "Other" industry vertical decreased primarily due to a decrease in spending by existing North American customers, partially offset by an increase in spending in the UK construction and rail business. The increase in spending in the UK construction and rail business was more than offset by the negative impact of currency exchange rates. Hi-Tech revenue decreased primarily due to reduced staffing at a large customer. The decrease in AIE revenue is primarily due to reduced spending by enterprise staffing customers. In addition, currency exchange rates negatively impacted revenues, primarily in the OGC and "Other" industry verticals.

Gross profit decreased for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to the decrease in revenue. Gross profit margin remained flat for the first nine months of 2015 as compared to the first nine months of 2014.

Operating and administrative expenses decreased during the first nine months of 2015 as compared to the first nine months of 2014 primarily due to reduced costs associated with lower business volumes, partially offset by investments in additional recruiting and sales capacity in the U.S. specialty staffing and UK staffing businesses. Operating costs during the first nine months of 2015 include a $10.7 million goodwill impairment charge in the "Other" industry vertical related to our AndersElite business in the UK and $0.4 million charge in restructuring and other related costs, compared to a credit of $0.2 million in restructuring and other related costs during the first nine months of 2014.

Operating profit decreased for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to the reduction in gross profit and the goodwill impairment charge.


22


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)
Three months ended September 30, 2015 as compared to the three months ended September 30, 2014

The following table presents changes in revenue by service type along with selected financial information for the indicated periods:
 
Three Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Contract Staffing
$
10,106

 
74.8
%
 
$
11,600

 
77.8
%
 
$
(1,494
)
 
(12.9
)%
Royalties and Franchise Fees
3,399

 
25.2

 
3,318

 
22.2

 
81

 
2.4

Total revenue
13,505

 
100.0

 
14,918

 
100.0

 
(1,413
)
 
(9.5
)
Cost of services
6,889

 
51.0

 
7,962

 
53.4

 
(1,073
)
 
(13.5
)
Gross profit
6,616

 
49.0

 
6,956

 
46.6

 
(340
)
 
(4.9
)
Operating and administrative expenses
4,689

 
34.7

 
5,235

 
35.1

 
(546
)
 
(10.4
)
Operating profit
$
1,927

 
14.3

 
$
1,721

 
11.5

 
$
206

 
12.0



Revenue decreased for the third quarter of 2015 as compared to the third quarter of 2014 primarily due to the decrease in contract staffing revenue. The decrease in contract staffing revenue is primarily due to a decrease in billable staffing headcount.

Gross profit decreased in the third quarter of 2015 as compared to the third quarter of 2014 primarily due to the reduction in contract staffing revenue, offset by a slight increase in royalty and franchise fees. Gross profit margin increased due to the shift in revenue mix to higher margin royalties and franchise fees.

Operating and administrative expenses decreased during the third quarter of 2015 as compared to the third quarter of 2014 primarily due to lower sales expenses related to contract staffing, partially offset by increased spending on payroll and other staff related costs.
Operating profit increased for the third quarter of 2015 as compared to the third quarter of 2014 as the decrease in operating and administrative expenses more than offset the decrease in gross profit.





23


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) - Continued
Nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014

The following table presents changes in revenue by service type along with selected financial information for the indicated periods:
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Contract Staffing
$
30,052

 
75.1
%
 
$
34,480

 
78.3
%
 
$
(4,428
)
 
(12.8
)%
Royalties and Franchise Fees
9,956

 
24.9

 
9,581

 
21.7

 
375

 
3.9

Total revenue
40,008

 
100.0

 
44,061

 
100.0

 
(4,053
)
 
(9.2
)
Cost of services
20,351

 
50.9

 
23,505

 
53.3

 
(3,154
)
 
(13.4
)
Gross profit
19,657

 
49.1

 
20,556

 
46.7

 
(899
)
 
(4.4
)
Operating and administrative expenses
14,700

 
36.7

 
15,823

 
35.9

 
(1,123
)
 
(7.1
)
Operating profit
$
4,957

 
12.4

 
$
4,733

 
10.7

 
$
224

 
4.7



Revenue decreased for the first nine months of 2015 as compared to the first nine months of 2014 primarily due to the decrease in contract staffing revenue, partially offset by an increase in franchise fees and royalty revenue. Contract staffing revenue decreased primarily due to a decrease in billable staffing headcount. Royalties and franchise fees increased due to the addition of new franchises and increased permanent placement royalties.

Gross profit decreased in the first nine months of 2015 as compared to the first nine months of 2014 primarily due to the reduction in contract staffing revenue, partially offset by an increase in franchise fees and royalties. Gross profit margin increased due to the shift in revenue mix to higher margin royalties and franchise fees.

Operating and administrative expenses decreased during the first nine months of 2015 as compared to the first nine months of 2014 due primarily to lower sales expenses related to contract staffing, offset by increased spending on payroll and other staff related costs.
Operating profit increased slightly for the first nine months of 2015 as compared to the first nine months of 2014 as the decrease in operating and administrative expenses more than offset the decrease in gross profit.

24


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, availability of borrowings under credit facilities and access to the capital markets. 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 available borrowing capacity will be sufficient to support the Company's working capital requirements and capital expenditures for 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 Borrowers for general business purposes or for letters of credit. As of September 30, 2015, there were $3.0 million outstanding borrowings and $3.2 million of letters of credit outstanding under the Credit Agreement. See Note 8-Short—Term Borrowings, in the notes to the consolidated financial statements included in Item 1 of this Form 10-Q Report for more information relating to the Credit Agreement.
As of September 30, 2015, the Company had cash and cash equivalents of $26.4 million and $39.2 million is available to borrow under the Credit Agreement. Borrowings under the Credit Agreement may be limited from time to time by certain financial covenants. The Company was in compliance with all covenants under the Credit Agreement as of September 30, 2015.

In October 2015, the Company borrowed $30.7 million million under the Credit Agreement in order to fund the acquisition of EdgeRock Technologies, LLC (see Note 13—Subsequent Events, in the notes to the consolidated financial statements included in Item 1 of this Form 10-Q Report).

On October 30, 2015, the Company entered into a new credit agreement with Bank of America, N.A. and other lenders that established a secured $150.0 million revolving line of credit facility, with a five-year term ending on October 30, 2020. (see Note 13—Subsequent Events, in the notes to the consolidated financial statements included in Item 1 of this Form 10-Q Report).
As of September 30, 2015, approximately 40% of the Company's cash and cash equivalents were held by certain non-U.S. subsidiaries, principally Canadian and UK entities, and denominated in foreign currencies, principally Canadian dollars and British pounds sterling. 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 Company’s billing and cash collection cycle for the Company's largest customer is based on their monthly fiscal calendar which can cause significant fluctuations in cash receipts in any given period.
Cash and cash equivalents decreased from $36.3 million on December 31, 2014 to $26.4 million on September 30, 2015.
The following table summarizes the net cash impact, by classification, from the Company's consolidated statements of cash flows for the indicated periods:
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2015
 
2014
 
Change
 
 
 
 
 
 
Operating Activities
$
2,426

 
$
16,449

 
$
(14,023
)
Investing Activities
(4,902
)
 
(7,759
)
 
2,857

Financing Activities
(6,137
)
 
(10,734
)
 
4,597

Effect of exchange rate changes on cash and cash equivalents
(1,278
)
 
(357
)
 
(921
)
Net decrease in cash and cash equivalents
$
(9,891
)
 
$
(2,401
)
 
$
(7,490
)
Operating Activities
For the first nine months of 2015, the Company generated $2.4 million net cash in operating activities, which is a $14.0 million decrease from the comparable period in 2014. The decrease is primarily due to lower net income and decreased collections of accounts receivable, partially offset by lower payroll-related payments due to the timing of pay cycles.

25


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)

Investing Activities
For the first nine months of 2015, the Company used $4.9 million net cash in investing activities, which is a $2.9 million decrease from the comparable period in 2014. The reduction in the use of cash is primarily due to the receipt of $1.2 million in proceeds from the sale of a non-operating corporate asset, lower capital expenditures and, to a lesser extent, proceeds received during the first nine months of 2015 from the sale of the Company's interest in a Mexico-based engineering design company.
Financing Activities
For the first nine months of 2015, net cash used in financing activities was $6.1 million compared to $10.7 million during the comparable period in 2014. The decrease in cash used in financing activities is primarily due to an increase in net borrowings under the Company's short term borrowing facility and a change in book overdrafts.

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.
The critical accounting estimates and assumptions identified in the Company's 2014 annual report on Form 10-K filed on March 5, 2015 with the Securities and Exchange Commission have not materially changed.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk, primarily related to changes in foreign currency exchange rates. The Company monitors this risk to limit the effect of changes in foreign currency exchange rates on earnings and cash flows.

Foreign Currency Risk
The Company's exposure to foreign currency exchange rate risk relates primarily to its foreign subsidiaries’ operations denominated in their functional currencies, principally Canadian dollars and British pounds sterling. These foreign subsidiaries’ assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the end of each reporting period and revenue and expenses are translated at the average rates of exchange during the reporting period with any translation adjustments reported in accumulated other comprehensive income (loss) in the consolidated balance sheets. Transactions denominated in a currency other than the reporting entity's functional currency may give rise to exchange gains and losses that impact the Company’s results of operations. The Company has not historically realized significant foreign currency gains or losses on such transactions. The Company’s primary exposure to exchange gains and losses is based on intercompany loans between entities with different functional currencies. The Company utilizes short term foreign exchange forward contracts to reduce its exposure to these intercompany loans.

Item 4.    Controls and Procedures 
Evaluation of disclosure controls and procedures
The management of the Company, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2015. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of that date to provide reasonable assurance that information reported in this Form 10-Q Report is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There were no changes in the Company's internal control over financial reporting during the Company's third quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


26



PART II. OTHER INFORMATION

Item 1.    Legal Proceedings
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business. Although management cannot predict the timing or outcome of these matters with certainty, management does not believe that the final resolution of these matters, individually or in the aggregate, would have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows.

Item 1A.    Risk Factors
There have been no material changes from the risk factors disclosed in the “Risk Factors” section (Part I, Item 1A) of the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2.    Unregistered Sales of Equity and Use of Proceeds
None.

Item 3.    Defaults Upon Senior Securities
None.

Item 4.    Mine Safety Disclosures
None.

Item 5.    Other Information 
None.

Item 6.    Exhibits
The list of exhibits in the Index to Exhibits to this report is incorporated herein by reference.


27



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
CDI Corp.
Date:
November 5, 2015
 
By:
/s/ Michael S. Castleman
 
 
 
 
Michael S. Castleman
 
 
 
 
Executive Vice President and
 
 
 
 
Chief Financial Officer
 
 
 
 
(Duly Authorized Officer and
 
 
 
 
Principal Financial Officer)


28



INDEX TO EXHIBITS

Exhibit No.
 
Description
 
 
 
10.1
 
Share Purchase Agreement by and among CDI Corporation, EdgeRock Technologies, LLC, the sellers listed on the signature pages hereto and MEP Advisors, LLC solely in its capacity as representative of the sellers dated as of October 6, 2015, incorporated by reference from Exhibit 2.1 of CDI Corp's Form 8-K dated October 6, 2015, File No. 001-05519, as filed with the Securities and Exchange Commission on October 13, 2015.
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101*
 
 
(101.INS)
 
XBRL Instance Document
(101.SCH)
 
XBRL Taxonomy Extension Schema Document
(101.CAL)
 
XBRL Taxonomy Extension Calculation Linkbase Document
(101.DEF)
 
XBRL Taxonomy Extension Definition Linkbase Document
(101.LAB)
 
XBRL Taxonomy Extension Label Linkbase Document
(101.PRE)
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
*
Pursuant to Regulation S-T, these interactive data files are deemed not filed or incorporated in any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

29


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