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EX-32 - EXHIBIT 32 - CDI CORPa32-cdix20160630.htm
EX-31.2 - EXHIBIT 31.2 - CDI CORPa312-cdix20160630.htm
EX-31.1 - EXHIBIT 31.1 - CDI CORPa311-cdix20160630.htm
EX-10.1 - EXHIBIT 10.1 - CDI CORPa101amendmentno1tocreditag.htm
 

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 June 30, 2016
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 August 1, 2016 was as follows:
Common stock, $0.10 par value:
Class B common stock, $0.10 par value:
18,598,044 Shares
None

 




CDI CORP.
Form 10-Q
For the Quarterly Period Ended June 30, 2016

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. In addition, from time to time, we and our representatives may make statements that are forward-looking. 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 or volatility in general economic conditions and levels of capital spending by clients in the industries we serve, including as a result of the Brexit referendum or the U.S. elections; weakness or volatility in the financial and capital markets, which may result in the postponement or cancellation of our clients' projects or the inability of our clients to pay our fees; the termination of one or more major client contracts or projects; the uncertain timing and funding of new contract awards and renewals; a high concentration of our business with a few large clients; the failure to achieve the anticipated benefits of acquisitions, and difficulties in integrating acquired businesses with CDI; the inability to obtain favorable price and other terms for any acquisitions and divestitures we may do; delays or reductions in U.S. government spending; credit risks associated with our clients; competitive market pressures; foreign currency fluctuations; restrictions on the availability of funds and on our activities under our asset-based, secured credit facility; the availability, retention 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 professional employees and our temporary employees; our performance on client contracts; negative outcome of pending and future claims and litigation; improper disclosure or loss of sensitive or confidential company, client, government, employee or candidate information, including personal data; 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 United States Securities and Exchange Commission (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, 2015. 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)
 
June 30,
2016
 
December 31,
2015
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,675

 
$
16,932

Accounts receivable, net of allowances of $2,452 and $1,942
218,224

 
205,494

Prepaid expenses and other current assets
12,554

 
12,768

Prepaid income taxes
8,070

 
5,126

Total current assets
243,523

 
240,320

Property and equipment, net of accumulated depreciation of $87,577 and $84,941
19,330

 
18,728

Deferred income taxes
3,412

 
3,228

Goodwill
45,576

 
45,794

Other intangible assets, net
18,202

 
20,427

Other non-current assets
9,988

 
10,600

Total assets
$
340,031

 
$
339,097

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Credit facility
$
25,932

 
$
18,831

Accounts payable
35,775

 
30,262

Accrued compensation and related expenses
37,127

 
34,464

Other accrued expenses and other current liabilities
13,839

 
19,903

Income taxes payable
332

 
323

Total current liabilities
113,005

 
103,783

Deferred compensation
7,388

 
7,723

Deferred income tax
6,768

 
1,530

Other non-current liabilities
5,806

 
4,818

Total liabilities
132,967

 
117,854

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 22,250 and 22,163 shares
2,225

 
2,216

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

 

Additional paid-in-capital
75,820

 
74,774

Retained earnings
198,574

 
210,875

Accumulated other comprehensive loss
(11,460
)
 
(14,135
)
Common stock in treasury, at cost - 3,392 and 2,463 shares
(58,095
)
 
(52,487
)
Total CDI shareholders' equity
207,064

 
221,243

Total equity
207,064

 
221,243

Total liabilities and equity
$
340,031

 
$
339,097


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
 
Six Months Ended
 
June 30
 
June 30
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue
$
226,693

 
$
246,821

 
$
460,217

 
$
504,279

Cost of services
184,598

 
200,174

 
374,847

 
410,862

Gross profit
42,095

 
46,647

 
85,370

 
93,417

Operating and administrative expenses
48,315

 
45,444

 
95,362

 
90,717

Restructuring and other related costs
240

 

 
289

 
47

Loss on disposition

 

 

 
310

Operating profit (loss)
(6,460
)
 
1,203

 
(10,281
)
 
2,343

Other income (expense), net
(452
)
 
(97
)
 
(601
)
 
(84
)
Income (loss) before income taxes
(6,912
)
 
1,106

 
(10,882
)
 
2,259

Income tax expense
572

 
1,263

 
1,419

 
2,029

Net income (loss)
(7,484
)
 
(157
)
 
(12,301
)
 
230

Less: Loss attributable to noncontrolling interests

 

 

 
(83
)
Net income (loss) attributable to CDI
$
(7,484
)
 
$
(157
)
 
$
(12,301
)
 
$
313

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.39
)
 
$
(0.01
)
 
$
(0.63
)
 
$
0.02

Diluted
$
(0.39
)
 
$
(0.01
)
 
$
(0.63
)
 
$
0.02



See accompanying notes to consolidated financial statements.

4

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


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income (loss)
$
(7,484
)
 
$
(157
)
 
$
(12,301
)
 
$
230

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
155

 
1,806

 
2,675

 
(3,138
)
Reclassification of foreign currency translation adjustment

 

 

 
362

Total comprehensive income (loss)
(7,329
)
 
1,649

 
(9,626
)
 
(2,546
)
Comprehensive income attributable to noncontrolling interests

 

 

 
15

Total comprehensive income (loss) attributable to CDI
$
(7,329
)
 
$
1,649

 
$
(9,626
)
 
$
(2,561
)
 

See accompanying notes to consolidated financial statements.

5

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


 
Six Months Ended
 
June 30,
 
2016
 
2015
 
 
 
 
Operating activities:
 
 
 
Net income (loss)
$
(12,301
)
 
$
230

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
5,707

 
5,012

Landlord contribution for tenant improvements
1,622

 

Deferred income taxes
5,130

 
823

Share-based compensation
1,156

 
1,349

Loss on disposition

 
310

Loss on disposal of assets, net
120

 
73

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(13,048
)
 
(1,312
)
Prepaid expenses and other current assets
133

 
(4,043
)
Accounts payable
5,478

 
(482
)
Accrued compensation and related expenses
2,725

 
13,738

Accrued expenses and other current liabilities
(3,925
)
 
(1,022
)
Income taxes receivable/payable
(2,937
)
 
(1,565
)
Other non-current assets
2,985

 
(150
)
Other non-current liabilities
(587
)
 
(717
)
Net cash provided by (used in) operating activities
(7,742
)
 
12,244

 
 
 
 
Investing activities:
 
 
 
Additions to property and equipment
(4,475
)
 
(4,768
)
Acquisition-related payment
(2,108
)
 

Proceeds from disposition
120

 
360

Proceeds from sale of assets
7

 
16

Net cash used in investing activities
(6,456
)
 
(4,392
)
 
 
 
 
Financing activities:
 
 
 
Dividends paid to shareholders

 
(5,114
)
Stock repurchased under stock repurchase program
(5,608
)
 

Borrowings on credit facilities
80,592

 
10,601

Repayments on credit facilities
(73,322
)
 
(8,813
)
Payment of debt issuance costs
(28
)
 

Common shares withheld for taxes
(48
)
 
(287
)
Change in book overdraft
160

 

Excess tax benefit from share-based compensation awards

 
53

Net cash provided by (used in) financing activities
1,746

 
(3,560
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
195

 
(1,374
)
Net increase (decrease) in cash and cash equivalents
(12,257
)
 
2,918

Cash and cash equivalents at beginning of period
16,932

 
36,324

Cash and cash equivalents at end of period
$
4,675

 
$
39,242

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
308

 
$
76

Cash paid (received) for income taxes, net
$
(862
)
 
$
2,563


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, 2014
22,084

 
$
2,208

 
$
(52,487
)
 
$
72,023

 
$
258,113

 
$
(6,207
)
 
$
273,650

 
$
703

 
$
274,353

Net income

 

 

 

 
313

 

 
313

 
(83
)
 
230

Translation adjustments

 

 

 

 

 
(2,874
)
 
(2,874
)
 
98

 
(2,776
)
Share-based compensation expense

 

 

 
1,349

 

 

 
1,349

 

 
1,349

Reclassification of equity awards from liabilities, net

 

 

 
129

 

 

 
129

 

 
129

Vesting and exercise of equity awards
90

 
9

 

 
(9
)
 

 

 

 

 

Common shares withheld for taxes
(17
)
 
(1
)
 

 
(286
)
 

 

 
(287
)
 

 
(287
)
Disposition of controlling interest

 

 

 

 

 

 

 
(718
)
 
(718
)
Cash dividends declared ($0.26 per common share)

 

 

 

 
(5,114
)
 

 
(5,114
)
 

 
(5,114
)
June 30, 2015
22,157
 
$
2,216

 
$
(52,487
)
 
$
73,206

 
$
253,312

 
$
(9,081
)
 
$
267,166

 
$

 
$
267,166

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
22,163

 
$
2,216

 
$
(52,487
)
 
$
74,774

 
$
210,875

 
$
(14,135
)
 
$
221,243

 
$

 
$
221,243

Net loss

 

 

 

 
(12,301
)
 

 
(12,301
)
 

 
(12,301
)
Translation adjustments

 

 

 

 

 
2,675

 
2,675

 

 
2,675

Share-based compensation expense

 

 

 
1,156

 

 

 
1,156

 

 
1,156

Reclassification of equity awards from liabilities, net

 

 

 
(53
)
 

 

 
(53
)
 

 
(53
)
Vesting and exercise of equity awards
96

 
10

 

 
(10
)
 

 

 

 

 

Common shares withheld for taxes
(9
)
 
(1
)
 

 
(47
)
 

 

 
(48
)
 

 
(48
)
Stock repurchased under stock repurchase program

 

 
(5,608
)
 

 

 

 
(5,608
)
 

 
(5,608
)
June 30, 2016
22,250
 
$
2,225

 
$
(58,095
)
 
$
75,820

 
$
198,574

 
$
(11,460
)
 
$
207,064

 
$

 
$
207,064

 

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”) seek to create extraordinary outcomes with its clients by delivering solutions based on highly skilled and professional talent. CDI’s business is comprised of four segments: Enterprise Talent, Specialty Talent and Technology Solutions, Engineering Solutions and Management Recruiters International (MRI). CDI’s client offerings include an array of engineering design project solutions, information technology project solutions and managed services, specialty technology staff augmentation, and program and managed staffing services. CDI's clients are corporations in multiple industries, including energy, chemicals, infrastructure, aerospace, industrial equipment, technology, as well as municipal and state governments, and the United States (U.S.) Department of Defense. CDI has offices and delivery centers in the U.S., Canada and the United Kingdom (UK). In addition, CDI provides recruiting and staffing services through its global MRINetwork® of franchisees.

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 3, 2016. Results for the six months ended June 30, 2016 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.

Reclassifications - Certain historical financial information in the prior period consolidated financial statements has been reclassified to conform to the current period presentation. Historical segment financial information has been reclassified as a result of an operational realignment plan adopted in December 2015. This reclassification did not impact any previously reported consolidated revenues, gross profit or results of operations. See Note 12-Reporting Segments.

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. In 2016, the FASB issued two amendments that have the same effective date as the original standard. 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, but has determined that it will utilize the deferred effective date of January 1, 2018 to adopt the standard.

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 Company adopted ASU 2015-02 during the first quarter of 2016, which adoption did not 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 February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases (ASU 2016-02). ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. ASU 2016-02 does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting is largely unchanged from the previous accounting standard. In addition, ASU 2016-02 expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach. The guidance is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company has not determined the impact that adoption of this guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) (ASU 2016-09). ASU 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company adopted ASU 2016-09 during the first quarter of 2016, which adoption did not have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The standard is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. The Company has not determined the impact that adoption of this guidance will have 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 June 30, 2016 Using
 
 
Fair Value Measurements at June 30, 2016
 
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
 
$
1,643

 
$
1,643

 
$

 
$

Large cap
 
2,318

 
2,318

 

 

International
 
1,384

 
1,384

 

 

Mid cap
 
922

 
922

 

 

Small cap
 
507

 
507

 

 

Balanced
 
493

 
493

 

 

Money market funds
 
780

 
780

 

 

Total assets (1)
 
$
8,047

 
$
8,047

 
$

 
$

 
(1) 
As of June 30, 2016, $1.0 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, 2015 Using
 
 
Fair Value Measurements at December 31, 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
 
$
1,772

 
$
1,772

 
$

 
$

Large cap
 
2,686

 
2,686

 

 

International
 
1,449

 
1,449

 

 

Mid cap
 
530

 
530

 

 

Small cap
 
425

 
425

 

 

Balanced
 
450

 
450

 

 

Money market funds
 
1,041

 
1,041

 

 

Total assets (1)
 
$
8,353

 
$
8,353

 
$

 
$

 
(1) 
As of December 31, 2015, $0.9 million and $7.5 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, 2015
 
 
 
 
 
June 30, 2016
 
Gross
Balance
 
Accumulated Impairment Losses
 
Additions
 
Translation and Other Adjustments
 
Gross
Balance
 
Accumulated Impairment Losses
 
 
 
 
 
 
 
 
 
 
 
 
Enterprise Talent
$
40,134

 
$
(34,511
)
 
$

 
$

 
$
39,539

 
$
(33,916
)
Specialty Talent and Technology Solutions
16,445

 

 

 

 
16,445

 

Engineering Solutions
35,713

 
(21,431
)
 

 

 
35,713

 
(21,431
)
MRI
15,749

 
(6,305
)
 

 
(218
)
 
14,922

 
(5,696
)
Total goodwill
$
108,041

 
$
(62,247
)
 
$

 
$
(218
)
 
$
106,619

 
$
(61,043
)

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 an interim assessment for impairment of goodwill and other indefinite-lived intangible assets as of December 31, 2015 due to a decrease in the Company's stock price and market capitalization. The Company's assessment determined that the fair values for each of the Company's reporting units were substantially in excess of their related carrying values as of December 31, 2015.

The Company performed its annual assessment as of July 1, 2015 and determined that the carrying values of the Company's Enterprise Talent - UK Staffing (AndersElite®) and Engineering Solutions - Aerospace and Industrial Equipment (formerly Global Engineering and Technology Solutions (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 based upon reliance, in part, on the report of a 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 in the consolidated statements of operations, comprised of $10.7 million and $10.4 million in Enterprise Talent - UK Staffing (AndersElite®) and Engineering Solutions - Aerospace and Industrial Equipment (formerly 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.


10



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

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.

The following tables summarize the changes in the Company's carrying value of other intangible assets during the indicated periods:
 
December 31, 2015
 
 
 
 
 
June 30, 2016
 
Gross
Balance
 
Accumulated Amortization
 
Amortization
 
Translation
 
Gross
Balance
 
Accumulated Amortization
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
20,376

 
$
(7,974
)
 
$
(1,839
)
 
$
(100
)
 
$
20,261

 
$
(9,798
)
Trademarks
6,440

 
(1,054
)
 
(237
)
 

 
6,440

 
(1,291
)
Non-compete
150

 
(150
)
 

 

 
150

 
(150
)
Reacquired franchise rights
972

 
(498
)
 
(49
)
 

 
972

 
(547
)
Total intangible assets subject to amortization
27,938

 
(9,676
)
 
(2,125
)
 
(100
)
 
27,823

 
(11,786
)
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trademarks
2,165

 

 

 

 
2,165

 

Total other intangible assets
$
30,103

 
$
(9,676
)
 
$
(2,125
)
 
$
(100
)
 
$
29,988

 
$
(11,786
)


6.    Restructuring and Other Related Costs

In December 2015, the Company approved a restructuring plan (the “2015 Restructuring Plan”) to better align its organization and operations with the Company's strategy. The 2015 Restructuring Plan is expected to be completed during 2016. Substantially all remaining payments are expected to be made during 2016 with certain payments related to the consolidation of facilities expected through 2022. Additional charges of approximately $0.3 million to $0.5 million are expected to be recognized during 2016 primarily related to system consolidation costs and employee severance charges.

In December 2014, the Company approved a restructuring plan (the “2014 Restructuring Plan”) to optimize its operations and facility footprint. The 2014 Restructuring Plan was substantially complete during 2015 with certain payments related to the consolidation of facilities expected through 2019 and certain employee severance expected through 2016.

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, 2014
$
2,031

 
$
2,600

 
$

 
$
4,631

Cash payments
(1,282
)
 
(598
)
 

 
(1,880
)
Charges

 
33

 
14

 
47

Non-cash

 

 
(14
)
 
(14
)
Balance as of June 30, 2015
$
749

 
$
2,035

 
$

 
$
2,784

 
 
 
 
 
 
 
 
Balance as of December 31, 2015
$
2,202

 
$
2,935

 
$

 
$
5,137

Cash payments
(1,009
)
 
(1,020
)
 

 
(2,029
)
Charges
72

 
217

 

 
289

Balance as of June 30, 2016
$
1,265

 
$
2,132

 
$

 
$
3,397


The consolidated balance sheets as of June 30, 2016 and December 31, 2015 include $2.7 million and $4.1 million in “Other accrued expenses and other current liabilities”, and $0.7 million and $1.0 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.    Acquisition and Disposition

EdgeRock Technologies, LLC Acquisition
On October 6, 2015, the Company acquired EdgeRock Technologies, LLC (EdgeRock), a provider of ERP and other specialist IT staffing, including business intelligence and data analytics, for cash consideration of $33.4 million, including a working capital adjustment that was paid in 2016, plus up to an additional $4.0 million of cash contingent on EdgeRock's operating performance for the twelve months ending October 31, 2016. EdgeRock currently comprises the Specialty Talent business within the Specialty Talent and Technology Solutions reporting segment. During the first three months of 2016, the Company recorded a benefit of $0.8 million to "Operating and administrative expenses" in the consolidated statements of operations related to the reversal of the estimated contingent earnout liability.

CDI-Pycopsa 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 Engineering Solutions (formerly 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 the six months ended June 30, 2015. During the six months ended June 30, 2016, the Company received $0.1 million of proceeds related to the sale.

8.    Credit Facility

On October 30, 2015, the Company and certain domestic subsidiaries (collectively with the Company, the “U.S. Borrowers”), certain Canadian subsidiaries of the Company (collectively, the "Canadian Borrowers"), and certain UK subsidiaries of the Company (collectively, the "UK Borrowers"), collectively (the "Borrowers") entered into an agreement for a secured lending facility (the "Credit Agreement") with Bank of America, N.A. and other lenders. The Credit Agreement established a $150.0 million revolving line of credit facility which also includes an option to expand the facility by up to $75.0 million subject to agreement by the lenders, with a five-year term ending on October 30, 2020. The facility is comprised initially of three subfacilities with $122.5 million available to the U.S. borrowers, $15.0 million available to the Canadian borrowers and $12.5 million available to the UK borrowers. It also includes a $30.0 million sublimit for swingline loans and a $20.0 million sublimit for letters of credit. 

Availability under the Credit Agreement is tied to a borrowing base, measured by 85% of eligible billed accounts receivable, plus 80% of eligible unbilled accounts receivable, less customary reserve amounts; provided however that the portion of the borrowing base consisting of 80% of eligible unbilled accounts receivable may not exceed 30% of the sum of (i) 85% of the eligible billed accounts receivable, plus (ii) 80% of the eligible unbilled accounts receivable. Borrowings under the Credit Agreement may be used by the Company and the other Borrowers for general business purposes including capital expenditures and permitted acquisitions and investments. Accounts receivable, used in the determination of the borrowing base, are subject to lender discretion and, in certain circumstances, the lender may use cash balances in a dominion account established with the administrative agent to repay outstanding balances. As a result, amounts borrowed under the Credit Agreement are presented as current in the consolidated balance sheets. 

The Borrowers’ obligations under the Credit Agreement are secured by a first lien security interest in all of the Borrowers’ personal property (subject to customary exceptions), including, among other things, accounts receivable, equity interests, deposit accounts, intellectual property, and leased properties where books and records are kept.
 
As of June 30, 2016, the Company had total outstanding borrowings of $25.9 million, letters of credit outstanding of $3.3 million and $116.2 million available to borrow under the Credit Agreement. The Company was in compliance with all covenants under the Credit Agreement as of June 30, 2016. Interest was payable at rates ranging from 1.71% to 1.76% per annum for outstanding borrowings as of June 30, 2016.

As of December 31, 2015, the Company had total outstanding borrowings of $18.8 million, letters of credit outstanding of $3.3 million and $120.7 million available to borrow under the Credit Agreement. The Company was in compliance with all covenants under the Credit Agreement as of December 31, 2015.


12



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

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.

A valuation allowance has been recorded to reduce deferred tax assets to the amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts. In the fourth quarter of 2015 the company booked a valuation allowance against federal deferred tax assets due to cumulative losses.
The effective tax rates for the six months ended June 30, 2016 and 2015 were (13.0)% and 89.8%, respectively. The effective tax rate for the six months ended June 30, 2016 is a negative rate due to taxes on profits in Canada and taxes imposed in certain U.S. states, while tax benefits from losses in the United Kingdom and United States are not recognizable due to valuation allowances. The effective tax rate for the six months ended June 30, 2015 was 89.8% due to a mix of the tax effects of stock based compensation, foreign losses not benefited and expenses that were not deductible for tax.

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. A full valuation allowance has been recorded against the deferred tax asset related to part of the group’s U.S. state taxes and federal 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
 
Six months ended
 
June 30
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to CDI
$
(7,484
)
 
$
(157
)
 
$
(12,301
)
 
$
313

Denominator:
 
 
 
 
 
 
 
Basic weighted-average shares
19,174

 
19,675

 
19,427

 
19,655

Dilutive effect of share-based awards

 

 

 
191

Diluted weighted-average shares
19,174

 
19,675

 
19,427

 
19,846

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
(0.39
)
 
$
(0.01
)
 
$
(0.63
)
 
$
0.02

Diluted
$
(0.39
)
 
$
(0.01
)
 
$
(0.63
)
 
$
0.02


There were 0.6 million shares and 0.4 million shares excluded from the computation of EPS for the three months ended June 30, 2016 and 2015, respectively, because their inclusion would have been anti-dilutive. There were 0.6 million shares and 0.2 million shares excluded from the computation of EPS for the six months ended June 30, 2016 and 2015, respectively, because their inclusion would have been anti-dilutive.


13



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

12.    Reporting Segments

During December 2015, the Company adopted a plan to deliver improved performance and efficiencies through increased strategic focus and operational realignment. As a result of this realignment, certain historical segment financial information has been reclassified to conform to the current period segment presentation that became effective during the first quarter of 2016. This reclassification did not impact any previously reported consolidated revenues, gross profit or results of operations.
The Company's reporting segments are as follows:
Enterprise Talent - Enterprise Talent provides staff augmentation, placement and other staffing-related services to support its clients’ access to engineering and technology personnel on a temporary or permanent basis. Enterprise Talent focuses on delivering its services to medium and larger sized enterprises that have ongoing needs for skilled and technical labor. The duration of individual client engagements can range from several months to multiple years based on a client’s project, seasonal or business cycle needs. In addition, Enterprise Talent offers enterprise clients managed staffing program services, vendor management solutions, certification management solutions, and recruitment process outsourcing solutions. Enterprise Talent currently operates in North America under the CDI® brand name and in the United Kingdom under the AndersElite® brand name.
Specialty Talent and Technology Solutions - Specialty Talent and Technology Solutions provides clients with specialized technology talent and solutions through a flexible delivery model that spans staff augmentation and placement services, project execution and management services, and outsourced managed services. Specialty Talent, currently comprised entirely of EdgeRock, provides staff augmentation services focused on highly specialized information technology skillsets, including enterprise resource planning, business intelligence, analytics, infrastructure and application management and development. Technology Solutions provides a range of information technology professional services in a consult, integrate and operate model. These services include IT strategy and consulting, assessments, execution of IT infrastructure and IT engineering solutions, business application solutions, digital marketing services, service management, quality assurance and testing, and program management.
Engineering Solutions - Engineering Solutions provides engineering design, as well as complete physical asset and product delivery solutions for its clients. Engineering design principally involves the production of construction and/or technical documentation and specifications performed at a CDI facility or at a client's facility under the supervision of CDI personnel. Complete physical asset and product delivery solutions involve services that manage the integration of all supply chain contributors to a new or upgraded industrial production or infrastructure asset, naval asset or in support of aerospace and industrial original equipment manufacturers. Engineering Solutions is organized around the following business verticals: Energy, Chemicals and Infrastructure (EC&I), Aerospace and Industrial Equipment (AIE) and Government Services.
EC&I serves producers and operators of energy, chemicals, industrial, education and civil infrastructures with a full range of engineering solutions. Specific services including up-front planning, engineering design, industrial and commercial architecture, design/build, transportation and civil engineering, site services, procurement, construction management, start up and commissioning.
AIE serves commercial and defense aviation, as well as industrial original equipment manufacturers, with design and manufacturing engineering services, including mechanical and electrical systems design, drafting, engineering analysis, software design and verification, validation and testing, and tooling design and development.
Government Services primarily serves the U.S. Department of Defense and the U.S. Navy, in particular, with a variety of design and engineering services, including naval architecture, ship alteration, systems modification and installation, technical documentation and training, logistics management, marine manufacturing and aviation engineering.
Within each of the verticals, Engineering Solutions provides these solutions through a services delivery model consisting of skill-based centers of excellence, together with regional offices to serve more localized project or client needs.
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 clients. The MRI franchisees provide permanent placement services primarily under the brand names MRINetwork®, Management Recruiters®and Sales Consultants®. MRI also provides training and support, implementation and back-office services to enable franchisees to pursue contract staffing opportunities.

14



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

Inter-segment revenue is eliminated in consolidation and is not significant. 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, certain prepaid expenses, other current assets, certain property and equipment and certain other non-current assets.

Reporting segment operations data is presented in the following table for the indicated periods:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Enterprise Talent
$
133,480

 
$
149,392

 
$
273,129

 
$
310,818

Specialty Talent and Technology Solutions (1)
19,129

 
7,901

 
37,522

 
15,591

Engineering Solutions
61,153

 
76,536

 
124,407

 
151,367

MRI
12,931

 
12,992

 
25,159

 
26,503

Total revenue
$
226,693

 
$
246,821

 
$
460,217

 
$
504,279

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Enterprise Talent
$
15,434

 
$
18,326

 
$
31,915

 
$
37,586

Specialty Talent and Technology Solutions (1)
5,510

 
2,595

 
10,822

 
5,157

Engineering Solutions
14,776

 
19,254

 
30,253

 
37,633

MRI
6,375

 
6,472

 
12,380

 
13,041

Total gross profit
$
42,095

 
$
46,647

 
$
85,370

 
$
93,417

 
 
 
 
 
 
 
 
Operating profit (loss):
 
 
 
 
 
 
 
Enterprise Talent
$
(458
)
 
$
3,093

 
$
677

 
$
7,269

Specialty Talent and Technology Solutions (1), (2)
(436
)
 
444

 
9

 
1,169

Engineering Solutions (3)
(2,943
)
 
907

 
(4,878
)
 
510

MRI
1,081

 
1,574

 
1,664

 
3,030

Corporate
(3,704
)
 
(4,815
)
 
(7,753
)
 
(9,635
)
Total operating profit (loss)
(6,460
)
 
1,203

 
(10,281
)
 
2,343

Other income (expense), net
(452
)
 
(97
)
 
(601
)
 
(84
)
Income (loss) before income taxes
$
(6,912
)
 
$
1,106

 
$
(10,882
)
 
$
2,259

 
(1) 
On October 6, 2015, the Company acquired EdgeRock, which is included in Specialty Talent and Technology Solutions.
(2) 
In the first quarter of 2016, the Company's Specialty Talent and Technology Solutions segment recorded a benefit to "Operating and administrative expenses" of $0.8 million related to the reversal of the EdgeRock acquisition earnout liability.
(3) 
In the first quarter of 2015, the Company's Engineering Solutions 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.




15



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

Reporting segment asset data is presented in the following table for the indicated periods:
 
 
June 30,
 
December 31,
 
 
2016
 
2015
 
 
 
 
 
Assets:
 
 
 
 
Enterprise Talent
 
$
145,772

 
$
137,695

Specialty Talent and Technology Solutions
 
38,305

 
40,127

Engineering Solutions
 
96,511

 
93,810

MRI
 
21,943

 
23,273

Corporate
 
37,500

 
44,192

Total assets
 
$
340,031

 
$
339,097



Reporting segment depreciation and amortization data is presented in the following table for the indicated periods:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Enterprise Talent
$
315

 
$
274

 
$
631

 
$
666

Specialty Talent and Technology Solutions (1)
652

 
73

 
1,654

 
145

Engineering Solutions
1,197

 
1,505

 
2,468

 
3,016

MRI
66

 
80

 
132

 
162

Corporate
395

 
518

 
822

 
1,023

Total Depreciation and amortization
$
2,625

 
$
2,450

 
$
5,707

 
$
5,012

 
(1) 
On October 6, 2015, the Company acquired EdgeRock, which is included in Specialty Talent and Technology Solutions.


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)

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 seeks to create extraordinary outcomes with its clients by delivering solutions based on highly skilled and professional talent. CDI’s business is comprised of four segments: Enterprise Talent, Specialty Talent and Technology Solutions, Engineering Solutions and Management Recruiters International (MRI). CDI’s client offerings include an array of engineering design project solutions, information technology project solutions and managed services, specialty technology staff augmentation, and program and managed staffing services. CDI's clients are corporations in multiple industries, including energy, chemicals, infrastructure, aerospace, industrial equipment, technology, as well as municipal and state governments, and the United States (U.S.) Department of Defense. CDI has offices and delivery centers in the U.S., Canada and the United Kingdom (UK). In addition, CDI provides recruiting and staffing services through its global MRINetwork® of franchisees.
Enterprise Talent provides staff augmentation, placement and other staffing-related services to support its clients’ access to professional engineering and technology personnel on a temporary or permanent basis. Specialty Talent and Technology Solutions provides clients with specialized technology talent as well as solutions that include staff augmentation and placement services, project execution and management services, and outsourced managed services. Engineering Solutions provides engineering design, as well as deliverable work products or services performed at a CDI facility or at a client's facility under the supervision of CDI personnel. MRI is a global franchisor that provides the use of its trademarks, business systems and training and support services to its franchisees who engage in the search and recruitment of executive, technical, professional and managerial personnel for employment by their clients. See Note 12—Reporting Segments, in the notes to the consolidated financial statements included in Item 1 of this Form 10-Q Report for more information relating to the Company's reporting segments.
The Company's results of operations can be affected by economic conditions, capital spending by clients and business confidence. The Company is undertaking a strategic transformation and operational turnaround. As a result, the Company will make select investments and take other actions to improve business results and may experience volatility in financial performance. Historical trends may not be indicative of future trends.
Second Quarter 2016 Overview
Revenue during the second quarter of 2016 decreased by $20.1 million or 8.2% as compared to the second quarter of 2015 primarily due to decreases in Enterprise Talent and Engineering Solutions, partially offset by an increase in Specialty Talent and Technology Solutions. Enterprise Talent revenue decreased primarily due to reduced staffing at a large information technology client and, to a lesser extent, reduced UK staffing revenue, reduced Canadian pipeline staffing and the negative impact of foreign currency exchange rates. Engineering Solutions revenue decreased primarily due to decreases in EC&I and AIE, partially offset by an increase in Government Services. Specialty Talent and Technology Solutions revenue increased primarily due to the inclusion of EdgeRock, which was acquired on October 6, 2015. Gross profit decreased by $4.6 million primarily due to the decrease in revenue and, to a lesser extent, a reduction in overall gross profit margin. Overall gross profit margin decreased due to reductions in gross profit margin in all segments, partially offset by a shift in revenue mix to higher margin Specialty Talent and Technology Solutions business as a result of the inclusion of EdgeRock. Operating and administrative expenses increased primarily due to the inclusion of EdgeRock. Excluding EdgeRock, operating and administrative expenses decreased primarily due to reduced personnel and support costs in EC&I, AIE and UK Staffing, partially offset by personnel-related investments in management and business development in North America Staffing, Government Services, Technology Solutions and MRI. The Company reported an operating loss of $6.5 million compared to an operating profit of $1.2 million and net loss attributable to CDI of $7.5 million compared to $0.2 million for the second quarter of 2016 as compared to the second quarter of 2015, respectively.
The June 23, 2016 referendum by British voters to exit the European Union (“Brexit”) adversely impacted global markets, including currencies, and resulted in a decline in the value of the British pound as compared to the U.S. dollar. A weaker British pound compared to the U.S. dollar during a reporting period causes local currency results of the Company's UK operations to be translated into fewer U.S. dollars. The Company's UK operations, future financial performance and translation of results may be affected, in part, by the outcome of tariff, trade, regulatory, and other negotiations as the United Kingdom negotiates its exit from the European Union.




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)

Results of Operations

Consolidated Discussion
Three months ended June 30, 2016 as compared to the three months ended June 30, 2015

The following table presents changes in revenue by segment along with selected financial information for the indicated periods:
 
Three Months Ended
 
 
 
 
 
June 30,
 
 
 
 
 
2016
 
2015
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Enterprise Talent
$
133,480

 
58.9
 %
 
$
149,392

 
60.5
 %
 
$
(15,912
)
 
(10.7
)%
Specialty Talent and Technology Solutions
19,129

 
8.4

 
7,901

 
3.2

 
11,228

 
142.1

Engineering Solutions
61,153

 
27.0

 
76,536

 
31.0

 
(15,383
)
 
(20.1
)
MRI
12,931

 
5.7

 
12,992

 
5.3

 
(61
)
 
(0.5
)
Total Revenue
$
226,693

 
100.0

 
$
246,821

 
100.0

 
$
(20,128
)
 
(8.2
)
Gross profit
$
42,095

 
18.6

 
$
46,647

 
18.9

 
$
(4,552
)
 
(9.8
)
Operating and administrative expenses
$
48,315

 
21.3

 
$
45,444

 
18.4

 
$
2,871

 
6.3

Restructuring and other related costs
$
240

 
0.1

 
$

 

 
$
240

 
NM

Operating profit (loss)
$
(6,460
)
 
(2.8
)
 
$
1,203

 
0.5

 
$
(7,663
)
 
NM

Net loss attributable to CDI
$
(7,484
)
 
(3.3
)
 
$
(157
)
 
(0.1
)
 
$
(7,327
)
 
NM

Effective income tax rate
(8.3
)%
 
 
 
114.2
%
 
 
 
 
 
 
 
NM - Not meaningful.
Revenue decreased primarily due to a decrease in Enterprise Talent and Engineering Solutions, partially offset by an increase in Specialty Talent and Technology Solutions. Enterprise Talent revenue decreased primarily due to reduced staffing at a large information technology client and, to a lesser extent, reduced UK Staffing revenue, reduced Canadian pipeline staffing and the negative impact of foreign currency exchange rates. Engineering Solutions revenue decreased primarily due to decreases in EC&I and AIE, partially offset by an increase in Government Services. Specialty Talent and Technology Solutions revenue increased primarily due to the inclusion of EdgeRock, which was acquired on October 6, 2015, and, to a lesser extent, an increase in Technology Solutions. MRI revenues decreased slightly as a decrease in royalties was predominantly offset by an increase in franchise fees and contract staffing revenue.
Gross profit decreased primarily due to the decrease in revenue and, to a lesser extent, a reduction in overall gross profit margin. Overall gross profit margin decreased due to reductions in gross profit margin in all segments, partially offset by a shift in revenue mix to higher margin Specialty Talent and Technology Solutions business as a result of the acquisition of EdgeRock.
Operating results decreased primarily due to the decrease in gross profit and an increase in operating and administrative expenses, partially offset by reduced corporate operating costs. Operating and administrative expenses increased primarily due to the inclusion of EdgeRock. Excluding EdgeRock, operating and administrative expenses decreased primarily due to reduced personnel and support costs in EC&I, AIE and UK Staffing, partially offset by personnel-related investments in management and business development in North America Staffing, Government Services, Technology Solutions and MRI. Corporate operating costs decreased primarily due to reduction in costs associated with international business development activities and stock compensation expense.
Income tax expense decreased $0.7 million during the second quarter of 2016 as compared to the second quarter of 2015. 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; in aggregate, these factors 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 second quarter of 2016 as compared to the second quarter of 2015 is not meaningful. See Note 10—Income taxes, in the notes to the consolidated financial statements included in Item 1 of this Form 10-Q Report for more information.



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)

Consolidated Discussion - Continued
Six months ended June 30, 2016 as compared to the six months ended June 30, 2015

The following table presents changes in revenue by segment along with selected financial information for the indicated periods:
 
Six Months Ended
 
 
 
 
 
June 30,
 
 
 
 
 
2016
 
2015
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Enterprise Talent
$
273,129

 
59.3
 %
 
$
310,818

 
61.6
%
 
$
(37,689
)
 
(12.1
)%
Specialty Talent and Technology Solutions
37,522

 
8.2

 
15,591

 
3.1

 
21,931

 
140.7

Engineering Solutions
124,407

 
27.0

 
151,367

 
30.0

 
(26,960
)
 
(17.8
)
MRI
25,159

 
5.5

 
26,503

 
5.3

 
(1,344
)
 
(5.1
)
Total Revenue
$
460,217

 
100.0

 
$
504,279

 
100.0

 
$
(44,062
)
 
(8.7
)
Gross profit
$
85,370

 
18.5

 
$
93,417

 
18.5

 
$
(8,047
)
 
(8.6
)
Operating and administrative expenses (1)
$
95,362

 
20.7

 
$
90,717

 
18.0

 
$
4,645

 
5.1

Restructuring and other related costs
$
289

 
0.1

 
$
47

 

 
$
242

 
NM

Loss on disposition
$

 

 
$
310

 
0.1

 
$
(310
)
 
NM

Operating profit (loss)
$
(10,281
)
 
(2.2
)
 
$
2,343

 
0.5

 
$
(12,624
)
 
NM

Net income (loss) attributable to CDI
$
(12,301
)
 
(2.7
)
 
$
313

 
0.1

 
$
(12,614
)
 
NM

Effective income tax rate
(13.0
)%
 
 
 
89.8
%
 
 
 
 
 
 
 
(1) 
In the first quarter of 2016, the Company's Specialty Talent and Technology Solutions segment recorded a benefit of $0.8 million related to the reversal of the EdgeRock acquisition earnout liability.
NM - Not meaningful.
Revenue decreased due to a decrease in Enterprise Talent, Engineering Solutions and MRI, partially offset by an increase in Specialty Talent and Technology Solutions. Enterprise Talent revenue decreased primarily due to reduced Canadian pipeline staffing, reduced staffing at a large information technology client, reduced UK Staffing revenue and the negative impact of foreign currency exchange rates. Engineering Solutions revenue decreased primarily due to decreases in EC&I and AIE, partially offset by an increase in Government Services. Specialty Talent and Technology Solutions revenue increased primarily due to the inclusion of EdgeRock, which was acquired on October 6, 2015, and, to a lesser extent, an increase in Technology Solutions. MRI revenue decreased due to a decrease in contract staffing revenue and royalties, partially offset by an increase in franchise fees.
Gross profit decreased primarily due to the decrease in revenue as overall gross profit margin remained flat. Overall gross profit margin remained flat as decreases in Enterprise Talent, Engineering Solutions and Technology Solutions gross profit margins were offset by a shift in revenue mix to higher margin Specialty Talent and Technology Solutions business, primarily as a result of the inclusion of EdgeRock.
Operating results decreased primarily due to the decrease in gross profit and an increase in operating and administrative expenses, partially offset by reduced corporate operating costs. Operating and administrative expenses increased primarily due to the inclusion of EdgeRock. Excluding EdgeRock, operating and administrative expenses decreased primarily due to reduced personnel and support costs in EC&I, AIE and UK Staffing, partially offset by personnel-related investments in management and business development in North America Staffing, Government Services, Technology Solutions and MRI. Corporate operating costs decreased primarily due to a reduction in costs associated with international business development activities.
Income tax expense decreased $0.6 million during the first six months of 2016 as compared to the first six months of 2015. 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, 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 six months of 2016 as compared to the first six months of 2015 is not meaningful. See Note 10—Income taxes, in the notes to the consolidated financial statements included in Item 1 of this Form 10-Q Report for more information.


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)

Segment Results of Operations

Enterprise Talent
Three months ended June 30, 2016 as compared to the three months ended June 30, 2015

The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
Three Months Ended
 
 
 
 
 
June 30,
 
 
 
 
 
2016
 
2015
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
North America Staffing
$
112,978

 
84.6
 %
 
$
123,169

 
82.4
%
 
$
(10,191
)
 
(8.3
)%
UK Staffing
20,502

 
15.4

 
26,223

 
17.6

 
(5,721
)
 
(21.8
)
Total revenue
133,480

 
100.0

 
149,392

 
100.0

 
(15,912
)
 
(10.7
)
Cost of services
118,046

 
88.4

 
131,066

 
87.7

 
(13,020
)
 
(9.9
)
Gross profit
15,434

 
11.6

 
18,326

 
12.3

 
(2,892
)
 
(15.8
)
Operating and administrative expenses
15,802

 
11.8

 
15,233

 
10.2

 
569

 
3.7

Restructuring and other related costs
90

 
0.1

 

 

 
90

 
NM

Operating profit (loss)
$
(458
)
 
(0.3
)
 
$
3,093

 
2.1

 
$
(3,551
)
 
NM

 
NM - Not meaningful.

Revenue decreased in both the North America and UK Staffing businesses. North America Staffing revenue decreased primarily due to reduced staffing at a large information technology client, reduced Canadian pipeline staffing and the negative impact of foreign currency exchange rates, partially offset by growth at a large engineering client. Canadian pipeline staffing continues to be negatively affected by the impact of the decline in oil and gas prices on clients' maintenance and capital projects. UK Staffing revenue decreased due to reductions across engineering and construction sectors, in part associated with the uncertainty around the Brexit referendum and the negative impact of foreign currency exchange rates, partially offset by an acquisition of a small construction recruitment business in October 2015.

Gross profit decreased primarily due to the decrease in revenue and, to a lesser extent, a reduction in gross profit margin. Gross profit margin decreased primarily due to a shift in geographic and service mix and negative pricing pressure.

Operating and administrative expenses increased primarily due to an increase in personnel-related investments and in bad debt expense in the North America Staffing business, partially offset by reduced facilities expenses in North America Staffing and reduction in personnel and other expenses in UK Staffing as actions were taken to align expenses to lower revenue.

Operating profit decreased primarily due to a reduction in gross profit and, to a lesser extent, the increase 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)

Enterprise Talent - Continued