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EX-32 - EXHIBIT 32 - CDI CORPexhibit32-20161231.htm
EX-31 - EXHIBIT 31 - CDI CORPexhibit31-20161231.htm
EX-23 - EXHIBIT 23 - CDI CORPexhibit23-20161231.htm
EX-21 - EXHIBIT 21 - CDI CORPexhibit21-20161231.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-K
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
 
 
1735 Market Street, Suite 200, Philadelphia, PA 19103
(Address of principal executive offices)
Common stock, $0.10 par value
(Title of each class)
 
 
23-2394430
(I.R.S. Employer Identification Number)
New York Stock Exchange
(Name of exchange on which registered)
(215) 569-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ YES x NO
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ YES x NO
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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
As of June 30, 2016, the aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates was $84.3 million computed by reference to the reported price at which the common equity was last sold on the New York Stock Exchange on June 30, 2016, which was the last business day of the registrant's most recently completed second fiscal quarter.
The number of shares outstanding of each of the registrant's classes of common stock as of February 27, 2017 was as follows:
Common stock, $0.10 par value
Class B common stock, $0.10 par value
18,673,246 Shares
None
 
Documents Incorporated By Reference
Portions of the registrant's definitive proxy statement for its 2017 annual meeting of shareholders (to be filed with the Securities and Exchange Commission within 120 days after the registrant's fiscal year end of December 31, 2016) are incorporated by reference into Part III of this Form 10-K.
 




CDI CORP.

TABLE OF CONTENTS

 
 
 
Page No.
Note About Forward—Looking Statements
Part I:
 
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
Part II:
 
 
 
 
Item 5.
 
Item 6.
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
Part III:
 
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
Part IV:
 
 
 
 
Item 15.


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Caution Concerning ForwardLooking Statements
This annual report on Form 10-K (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; 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 customers 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 acquisition and divestitures we may do; delays or reductions in 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 customer contracts; negative outcome of pending and future claims and litigation; improper disclosure or loss of sensitive or confidential company, customer, 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 this Form 10-K Report. 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.


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PART I.

Item 1.    Business

General
CDI Corp. and its subsidiaries (NYSE:CDI) seek to create extraordinary outcomes with its clients by delivering solutions based on skilled technical 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). The Company provides to clients engineering and information technology solutions encompassing managed, project and talent services. CDI's clients are in multiple industries, including energy, chemicals, infrastructure, aerospace, industrial equipment, technology, and also include municipal and state governments, and the United States (U.S.) Department of Defense. CDI has offices and delivery centers in the U.S. and Canada. In addition, CDI provides recruiting and staffing services through its global MRINetwork® of franchisees.  
On September 16, 2016, the Company completed the sale of CDI AndersElite Limited (Anders), the Company's UK-based staffing and recruitment business in the Enterprise Talent reporting segment, to AndersElite Holdings Ltd., an entity controlled by certain members of Anders' management. See Note4 Acquisition and Dispositions, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report.
On September 16, 2016, the Company announced that Scott Freidheim, President and Chief Executive Officer (CEO), resigned from the Company effective September 15, 2016. Michael Castleman, CDI’s Chief Financial Officer (CFO), was elected as President of the Company and agreed to serve as interim CEO, in addition to continuing to serve as CDI’s CFO.

Services
The Company provides to clients engineering and information technology solutions encompassing managed, project and talent services through the Company's reporting segments 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.
Specialty Talent and Technology Solutions - Specialty Talent and Technology Solutions provides clients with specialized technology talent and solutions through a multi-faceted 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 Technologies, LLC (EdgeRock), provides staff augmentation services focused on 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 include 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.

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Government Services primarily serves the U.S. Department of Defense and, in particular the U.S. Navy, 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.

Business Strategy 
The Company’s mission is to create extraordinary outcomes with its clients by delivering solutions based on skilled technical and professional talent. The key elements of the Company’s strategy are as follows:
To focus on specialized information technology and engineering skills that meet the rapidly evolving needs of existing and new customers, thereby improving both the growth and margin profile of the Company;
To leverage industry and solution domain expertise that provide unique competitive differentiation and market access for the Company;
To deploy specialized talent and domain expertise via a multi-faceted delivery model encompassing managed project and staffing solutions;
To improve operational efficiency through the continued introduction of common processes, tools and systems; and
To utilize active portfolio management to optimize the composition of the Company’s business portfolio in support of the Company’s strategy, including acquisitions and divestitures.

During the latter part of 2016, in order to accelerate implementation of its strategy, the Company developed five enterprise-wide programs targeted at increasing sales and operational effectiveness. These programs include:
Increase client and vertical industry penetration through corporate strategic and key account management;
Extend multiple engineering and technology service lines to civilian and defense agencies in the federal government;
Integrate the Company's Specialty Talent and Technology Solutions units under the EdgeRock brand and pursue a coordinated go-to-market strategy around high-value IT applications, infrastructure and service management;
Create a single talent acquisition Center of Excellence serving all CDI operations as an engine for service and client growth; and
Unify operating platforms and support organizations to reduce cost and complexity while improving effectiveness throughout the enterprise.

Geographical Information
See Note 14—Reporting Segments, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report for disclosures related to geographical information.

Other Information
The Company was incorporated in Pennsylvania on July 30, 1985. It is the successor registrant to CDI Corporation, which was incorporated in Pennsylvania on September 16, 1950.

Customers/Markets
The Company's customers consist primarily of: multi-national, national and regional companies; and U.S. Federal, state and local governments. The Company provides its services to customers in a variety of industries, including energy, chemicals, infrastructure, aerospace, industrial equipment, technology, as well as municipal and state governments, and the U.S. Department of Defense. Revenue from the Company's largest customer, International Business Machines Corporation (IBM), accounted for approximately 14% of total CDI consolidated revenue in 2016


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MRI provides trademarks and business systems, as well as service, training, support and ancillary services to its franchisees, to enable them to be successful in their businesses. MRI seeks to sell new franchises and renew existing franchises. New franchisees have typically been brought into the MRI network primarily on a referral basis from existing franchisees and through direct marketing. MRI's business is not dependent on any single franchisee.

Pricing
The Company generally determines its pricing based on mark-ups of its employees' or contractors' hourly rates of pay. Pricing for fixed-priced contracts is generally based on an assessment of the level of effort, scope of work, execution risk and deliverable obligations. Permanent placement revenue is based on agreed-upon rates, which generally is a percentage of the candidate's initial annual compensation or a fixed fee.

U.S. government contracts generally are subject to the Federal Acquisition Regulation (FAR), agency-specific regulations that supplement the FAR and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustments, mandatory disclosure, and audit requirements. Failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, inability to bill and collect receivables from customers, and the assessment of penalties and fines.

MRI's revenue includes contract staffing revenues, royalties on permanent placements and initial franchise fees. MRI receives royalty fees based on a percentage of the franchisee's permanent placement fees and any other revenue collected. New franchise agreements generally have a term of 10 years. Individual franchises may be acquired by qualified candidates both in the U.S. and internationally. The domestic pricing structure includes an initial fee and a royalty rate schedule. Contract staffing revenue is typically priced as a mark-up on hourly pay rates.

Competition
The Company competes in national and regional markets with numerous engineering and information technology outsourcing companies and with temporary staffing and permanent placement firms. All segments of the Company's operations face competition in attracting both customers and high-quality personnel with specialized skills. Customers typically invite several companies to bid for contracts, which the Company believes are awarded primarily on the basis of prior performance, reputation, value-added services, technological capability and price. The Company believes it derives a competitive advantage from its lengthy experience with and long-standing commitment to the industries it serves, long-term relationships with its customers, technical capabilities, and geographic presence.

The engineering and information technology outsourcing business is highly fragmented. Certain of the Company's competitors have greater financial resources and offer a broader range of services and others are smaller and tend to be more specialized. The extent of competition varies according to particular markets and geographic areas. The degree and type of competition is also influenced by the type and scope of a particular project.

The temporary staffing and permanent placement businesses are very competitive and highly fragmented, with limited barriers to entry into the market. In many areas, local companies are the strongest competitors. Price competition among companies and pricing pressures from customers are significant in the staffing services industry.

The Company's primary competitors include: Jacobs Engineering Group Inc.; AECOM Technology Corporation; Gibbs and Cox, Inc.; Chicago Bridge & Iron Company N.V.; Belcan, LLC; Hargrove and Associates, Inc.; Tulsa Inspection Resources, LLC; Collabera, Inc.; CIBER, Inc.; Computer Task Group, Inc.; Unisys Corporation; ManpowerGroup, Inc.; Allegis Group; Adecco S.A.; Robert Half International, Inc.; Heidrick & Struggles International, Inc.; Korn/Ferry International; Kforce, Inc.; On Assignment, Inc. and Sanford Rose Associates International, Inc.

Safeguards-Business, Disaster and Contingency Planning
CDI has a number of safeguards that seek to protect the Company from various system-related risks. Given the significant amount of data generated in the Company's key processes, including customer-related projects, recruiting, payroll, and customer invoicing, CDI has implemented redundant system processing capabilities designed to limit risk related to hardware failure. CDI's systems are hosted at a secure Tier III+ rated third-party data center facility. Additionally, CDI utilizes a secondary backup facility to store critical data off-site in the event of a catastrophic issue at the primary location. CDI maintains and regularly tests its Information Technology Disaster Recovery Plan for its core systems and associated data.
 
Employees
As of December 31, 2016, CDI had approximately 700 staff employees. In addition, CDI had approximately 5,600 employees and other workers engaged as billable personnel. The number of billable employees and other workers varies in relation to the number of projects and assignments in progress at any particular time.
 

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Access to Company Information
CDI maintains a website at www.cdicorp.com and makes available free of charge on that website (under “Investor Relations”) the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after CDI electronically files these materials with, or furnishes them to, the Securities and Exchange Commission. Also available on CDI's website are the Company's Corporate Governance Principles, Code of Conduct and the charters for the Audit Committee, Compensation Committee, Finance Committee, Executive Committee and Governance and Nominating Committee. The information contained on CDI's website, or on other websites linked to CDI's website, is not part of, or incorporated in, this Form 10-K Report.


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Item 1A.    Risk Factors
CDI's business involves a number of risks, many of which are beyond our control. The risks and uncertainties described below could individually or collectively have a material adverse effect on our business, assets, profitability or prospects. While these are not the only risks and uncertainties we face, management believes that the more significant risks and uncertainties are as follows:

CDI's business could be negatively affected by unfavorable economic conditions.
Our results of operations are affected by the level of business activity of our customers, which in turn is affected by the macroeconomic conditions in which they operate. In recent years, there has been considerable volatility and uncertainty in economic conditions in the U.S. and other countries in which CDI does business. We are likely to experience reduced demand for our services during periods of declining economic activity, increased unemployment and tightened credit availability. If, in the event of unfavorable economic conditions, companies limit their spending on the services which CDI provides, this would have a material adverse effect on our financial and operating performance.

Our staffing businesses earn revenue when qualified candidates accept open positions with potential employers. These employers may postpone or cut back on hiring in an effort to cut costs, particularly during economic downturns. In addition, during periods of high unemployment, candidates may be less likely to take the risk of seeking new employment, creating a lack of qualified candidates. Both of these events could have a material adverse effect on our financial and operating performance.

In addition, our MRI segment derives royalty revenue from franchisees. If persons hoping to start MRI franchises are unable to obtain credit, they could be prevented from purchasing franchises, which could impede our growth in that sector. If current franchisees are unable to obtain credit, it could cause downsizing in their organizations, in turn negatively affecting MRI's royalty revenue, potentially having a material adverse effect on CDI's financial and operating performance.

While CDI manages its cost structure in response to reduced demand for our services, these efforts may not be successful in us being profitable or maintaining our level of profitability.

CDI's business is dependent on capital spending by customers in the industries we serve, and delays and cuts in capital spending could result in the loss of revenue and profitability.
Demand for a significant portion of CDI's services is highly dependent upon the level of capital spending by our customers, especially in our engineering and IT project outsourcing businesses and in certain portions of our staffing business. The pace of customer capital spending programs, new product launches and similar activities have a direct impact on our customers' needs for project outsourcing and both temporary and permanent employees. During the most recent recession and in its aftermath, there were delays and cancellations of projects due to credit constraints and weak economic conditions experienced by some of our customers. Such delays and cancellations could adversely affect CDI's revenue and profitability.

Our revenue is subject to uncertainties and cyclicality. Our results of operations depend on, among other factors, new business contracts and contract renewals, and the selection process and timing for performing these contracts are subject to contingencies beyond our control. In addition, our customer contracts and arrangements may be adjusted, canceled or suspended by our customers, in most cases on short notice.
A significant portion of our revenue is directly or indirectly derived from awards of long-term contracts. It is difficult to predict whether and when we will receive such awards due to the typically lengthy and complex bidding and selection process, which is affected by a number of factors, such as market conditions, customers' financing arrangements and governmental approvals. Because a meaningful portion of our revenue is generated from these contracts, CDI's results of operations and cash flows can fluctuate from quarter to quarter depending on the timing of contract awards and contract renewals.

Furthermore, substantially all of CDI's contracts are subject to cancellation or termination at the discretion of the customer, typically on short notice. Many of our contracts, particularly in the staffing business, contain no minimum purchase obligations on the part of the customer. Project contracts are generally subject to changes in the scope of services to be provided. Accordingly, we do not have a guaranteed backlog of business.


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Many of the industries we serve are cyclical, and fluctuations in commodity prices could also have a material adverse impact on our operating results. Our concentration in the energy sector makes our business results more vulnerable to the impact of swings in oil and gas prices.
Many of the industries CDI serves (such as the oil, gas and chemical industries) historically have been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in domestic and international economic activity. Consequently, CDI's results of operations have fluctuated and may continue to fluctuate depending on the demand for services from these cyclical industries. Fluctuations in commodity prices (such as chemicals or oil and gas, which have experienced significant price volatility in the recent past) can have a significant impact on our engineering outsourcing and staffing businesses, since those prices have a direct effect on our customers' decisions to add personnel and to invest in capital projects. Significant changes in commodity prices can negatively impact the financial returns on those projects, which may result in projects being delayed or canceled, which in turn could have a material adverse impact on our operating results. CDI's significant concentration of customers in the energy sector can result in significant volatility in our financial condition and operating results.

A substantial portion of CDI's revenue is derived from a few major customers, and the loss of one or more major customers could have a material adverse effect on our financial results.
Currently, CDI’s revenue is concentrated from a relatively small number of major customers. The loss of one or more major customers or projects, or a significant decrease in the volume of business that we receive from such major customers or projects, could have a material adverse effect on CDI's financial condition and results of operations. Revenue from one customer, IBM, accounted for approximately 14% of total CDI consolidated revenue in 2016. Our current contract with IBM was extended in September 2016, with a new two-year term, but it is subject to termination by IBM with or without cause at any time.

CDI derives a substantial portion of its revenue and profits from government agencies. If adequate government funding is delayed or is not available, then our revenue and profits could decline.
CDI is a party to many prime contracts and subcontracts involving U.S. Federal, state and local governments and their agencies and authorities. Such contracts are subject to various uncertainties, restrictions and regulations. All levels of government are facing budget pressures, and government contracts are exposed to risks associated with appropriations.

Contracts with the U.S. Federal Government, for example, are subject to the uncertainties of Congressional funding. In recent years, automatic budget cuts under sequestration and partial government shutdowns have resulted in the disruption of ongoing programs, facilities closures and personnel reductions in the defense sector, which in turn have had adverse consequences on our U.S. Government business.

Legislatures may appropriate funds for a given project on a year-by-year basis, even though the project may take more than one year to perform. In addition, public-supported financing, such as state and local municipal bonds, may be only partially raised to support existing infrastructure projects. As a result, a project we are currently working on may only be partially funded and thus additional public funding may be required in order to complete our contract. Governments are typically under no obligation to maintain funding at any specific level, and funds for government programs can be eliminated. As a result, CDI's government customers may terminate our contracts for convenience or decide not to renew the contracts with little or no prior notice. Government contracts may also contain terms (such as broad indemnification obligations) that expose CDI to higher levels of risk and potential liability than non-government contracts.

CDI's project outsourcing services expose the company to potential professional liability, product liability and other claims. Our project outsourcing business also may encounter difficulties that result in additional costs, reductions in revenue, claims, disputes and the payment of damages.
In connection with certain of our project outsourcing services, the Company performs engineering and other services in various types of facilities, including major industrial facilities, where accidents or system failures can have serious consequences. CDI also provides engineering and related services in connection with major products such as aircraft engines and naval ships. Any catastrophic occurrences in excess of insurance limits relating to locations or products which are engineered by CDI or locations where our services are performed could result in significant professional liability, product liability and other claims against us. Furthermore, the project outsourcing services CDI provides expose us to additional risks, including equipment failures, personal injuries, property damage and unforeseen engineering, architectural and environmental problems, each of which could significantly impact our performance and materially impact our financial condition and results of operations.


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CDI's project outsourcing services often involve complex design and engineering, significant procurement of equipment and supplies, and broad construction management. We may encounter difficulties in the design or engineering, equipment and supply delivery, schedule changes and other factors, some of which are beyond our control, that impact our ability to complete the project in accordance with the original delivery schedule. In addition, we often rely on third-party equipment manufacturers as well as other third-party subcontractors to assist with the completion of our contracts. Any delay by these equipment manufacturers or subcontractors to complete their respective portions of a project, or any failure by subcontractors to satisfactorily complete their respective portions of a project, as well as other factors beyond our control, may result in delays in the overall progress of such project, cause us to incur additional costs or both. These delays and additional costs may be substantial, and we may be required to compensate the customer for these delays. While we may recover these additional costs from the responsible vendor, subcontractor or other third party, we may not be able to recover all of these costs in all circumstances.

In addition, some contracts may require our customers to provide us with design or engineering information or with equipment or materials to be used on a project. In some cases, the customer may provide us with deficient design or engineering information or equipment, or may provide the information or equipment to us later than required by the project schedule. The customer may also determine, after commencement of the project, to change various elements of the project. We are subject to the risk that we might be unable to obtain, through negotiation, arbitration, litigation or otherwise, adequate amounts to compensate us for the additional work or expenses incurred due to customer requested change orders or failure by the customer to timely provide required items. A failure to obtain adequate compensation for these matters could require CDI to record an adjustment to amounts of revenue and gross profit that were recognized in prior periods. Any such adjustments could have a material adverse effect on our results of operations and financial condition.

If we were to provide customers with construction services along with our engineering and procurement services, we would be exposed to additional risks, including greater risks relating to employee safety, greater liability in our customer contracts, compliance with environmental, health and safety laws, additional requirements to provide performance bonds or letters of credit, and increased reliance on subcontractors and suppliers, all of which could result in additional costs and liabilities to us.

We are subject to many different laws and regulations. The failure to comply with those laws and regulations could result in significant fines and penalties being imposed on CDI, harm to our reputation, loss of business and other adverse consequences. Changes in laws and regulations could also result in loss of business and increased costs.
Many U.S., state, local and foreign laws and regulations govern and impact the business, operations and employees of CDI. These laws and regulations are often complex. CDI's Code of Conduct and other policies mandate compliance with all applicable laws and regulations, and we maintain a compliance program and provide employees with training, guidelines and information about applicable laws and regulations. CDI has controls and procedures in place that are designed to detect and prevent legal violations and errors and misconduct by employees. However, these policies, programs, controls and procedures cannot provide assurance that employees or agents of CDI will not violate any laws or regulations. Government regulatory agencies can investigate CDI's compliance with laws and regulations and, if they believe there have been violations, can seek to impose significant fines and penalties (both civil and criminal) on us. In recent years, laws (such as the Dodd-Frank Act) have increased the rewards for whistleblowing and may result in more claims of violations and in more government investigations. Compliance with laws and regulations, and responding to government investigations, even when no violations have occurred, can entail significant costs and expenses. If violations are alleged or found, CDI's reputation could be materially damaged for a considerable period of time, which in turn could directly or indirectly result in a loss of business for CDI. Customers and potential customers could decide to discontinue doing business with us, to decrease the amount of business they do with us or to not award new business to us. Our senior management may be required to devote a significant amount of time to repairing the relationship with any customer that decides or threatens to discontinue or decrease its business with CDI, thereby decreasing the amount of time senior management is able to devote to other facets of our business.

Government contracts are subject to specific procurement regulations, profit and cost controls, and a variety of other legal requirements. For example, under contracts with the U.S. Federal Government, we must comply with the Federal Acquisition Regulation, the Truth in Negotiations Act, the Cost Accounting Standards, the Service Contract Act and Department of Defense security regulations. We are also subject to government audits, investigations and proceedings and so-called “qui tam” actions brought by individuals or the government under the U.S. False Claims Act or under similar state and local laws. Government agencies routinely review and audit government contractors to determine whether allowable costs are in accordance with applicable regulations.

If we violate a law or regulation, fail to comply with a contractual or other requirement or do not satisfy an audit, a variety of penalties can be imposed, including monetary damages and criminal and civil penalties. In addition, our government contracts could be terminated, CDI could be suspended or debarred from government contract work, or payment of our costs could be disallowed. Any of these actions could harm CDI's reputation and could have a material adverse impact on our business, financial condition and results of operations.


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CDI's business is also subject to licensing in many states and in certain foreign countries. There can be no assurance we will continue to obtain all necessary government licenses or that the cost of compliance with the licensing rules will not prove to be material in the future. Any failure to comply with licensing requirements, or any increase in the cost of compliance, could materially and adversely impact us.

New laws or regulations also could disrupt or reduce existing business done by CDI. Changes in laws or regulations could result in the imposition of new or additional employee benefits, licensing or tax requirements, thereby increasing our costs of doing business. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner or in a sufficient amount to cover increased costs as a result of any of the foregoing. CDI's staffing services entail employing a large number of individuals on a temporary basis and placing such individuals in customers' workplaces. Therefore, increased government regulation of the workplace or of the employer-employee relationship could materially and adversely impact CDI.

CDI's existing credit facility is secured by substantially all of the company’s assets, and borrowings may be limited by our level of eligible accounts receivable. The credit agreement contains restrictive covenants. CDI's ability to access additional credit also could be limited.
CDI is a party to a credit agreement (the “2015 Credit Agreement”) with Bank of America, N.A. and other lenders under which we have access to a $150 million asset-based revolving line of credit facility (the “Credit Facility”) that terminates in October 2020. Borrowings under the Credit Facility are secured by liens on substantially all of our assets. The amount available for borrowing at any time is determined based on the value of our eligible accounts receivable. The amount available for borrowing under the Credit Facility could be significantly reduced if there is a reduction in our eligible accounts receivable due to weak economic conditions, poor operational performance or other factors. Any loss or material reduction in our ability to access funds under the Credit Facility could materially and negatively impact our liquidity.

The 2015 Credit Agreement includes specific limitations (subject to various exceptions) on our ability to take certain actions, which include incurring other indebtedness, making acquisitions and other investments, and disposing of assets other than in the ordinary course of business. The failure to comply with any of these restrictive covenants would cause a default under the 2015 Credit Agreement. A default (whether resulting from a breach of the restrictive covenants, the failure to pay amounts due under the 2015 Credit Agreement, or otherwise), if not waived or cured, could cause CDI's debt under the Credit Facility to become immediately due and payable, could terminate our ability to obtain funds under the Credit Facility, could lead to the lenders seizing our assets that are their security under the Credit Facility, and could result in the lenders maintaining substantial control over our bank accounts and funds. In such a situation, we may not be able to repay the debt or borrow sufficient funds to refinance the debt, and even if new financing is available, it may not be on terms acceptable to us. If our lenders were to exercise their ability to seize our assets and exercise control over our bank accounts, this could cause serious disruption in our business and operations. Additionally, if we need to obtain a waiver under the Credit Facility or if we seek other financing, if available, our cost of borrowing could significantly increase and we could face more restrictive covenants. This could materially and adversely affect CDI's results of operations and financial condition.

Although CDI has in the past generally financed much of its operations using cash provided by operations, at times we may depend on the availability of credit to support our working capital needs, grow our business and to help fund business acquisitions. The state of the global credit markets could make it more difficult for us to access funds, refinance our existing indebtedness, enter into agreements for new indebtedness, or obtain funding through the issuance of debt securities. There is no guarantee that CDI will be able to renew the Credit Facility on terms as favorable as those in the existing facility, and if we were unable to do so, CDI's costs of borrowing and our business may be materially adversely affected.

We could experience significant losses if customers fail to pay amounts owed to CDI.
We typically bill our customers for our services in arrears and so are subject to the risk that our customers will delay or fail to pay our invoices. Accounts receivable represent the largest asset on CDI's balance sheet. While we take steps to evaluate and manage the credit risks relating to our customers, economic downturns can adversely affect various industries and, within those industries, particular customers' ability to pay, which could reduce our ability to collect all amounts due from those customers. There may also be delays in payments from customers, which would increase the level of working capital which CDI needs to maintain and could impact our liquidity. In addition, in the staffing business, there are sometimes intermediaries between us and the customer, and therefore financial problems involving the intermediary company could pose credit risks to CDI.

In our staffing business, we could experience significant legal actions and claims that may subject us to substantial liabilities, damage our business reputation, result in the loss of customer relationships, and adversely affect our employee recruitment and retention efforts.
We employ people who work at CDI offices and, particularly in our staffing business, in the workplaces of our customers. Our ability to control the workplace environment of our customers is limited. Further, many of these individuals have access to customer information systems and confidential information. As the employer of record, we incur a risk of liability to our temporary employees for various workplace events, including claims of physical injury, discrimination, harassment, wrongful termination, and failure to protect confidential personal information. Other risks include possible claims of errors and omissions; intentional or

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criminal misconduct; release, misuse or misappropriation of customer intellectual property; employment of undocumented workers; and other claims. These types of actions could involve large claims and significant defense costs. In many cases, we are required to indemnify customers against some or all of these risks. The failure of our employees to observe our policies and guidelines intended to reduce these risks could result in negative publicity, payment of monetary damages or fines, criminal investigations and/or charges, injunctive relief, or other material adverse effects on our business. Claims raised by customers stemming from the improper actions of our employees, even if without merit, could cause us to incur significant expense associated with the costs or damages related to such claims. Further, such claims by customers could damage our business reputation and result in the discontinuation of customer relationships. Any associated negative publicity could adversely affect our ability to attract and retain qualified employees in the future.

CDI has significant payroll-related costs, such as workers' compensation, unemployment taxes and medical benefits, which are subject to increases caused by government regulation and other factors, and such increases could adversely affect our financial results.
In conducting its business, CDI pays a number of payroll-related costs and expenses, including unemployment taxes, workers' compensation and medical coverage for its personnel. Unemployment insurance premiums paid by employers typically increase during periods of increased levels of unemployment. Workers' compensation costs may increase in the future if states raise benefit levels and liberalize allowable claims. CDI maintains insurance relating to its exposure for losses associated with workers' compensation and medical coverage for its personnel, but this insurance coverage is subject to deductibles. We have established reserves for workers' compensation and medical coverage claims based on historical loss statistics and periodic independent actuarial valuations. While we believe that our assumptions and estimates are appropriate, significant differences in actual experience or significant changes in assumptions may materially and adversely affect our future financial results. Our future earnings could also be materially and adversely affected if we are not able to increase the fees charged to customers to absorb the increased costs related to unemployment insurance, workers' compensation and medical benefits. In addition, our future earnings could also be materially and adversely affected by future cost increases for these programs.

Our financial results will be adversely impacted if we are unable to maintain our utilization rates and control our costs.
As a services business, it is our skilled personnel that generate our revenues and our largest expenses are wages, salaries and other payroll-related expenses. However, balancing our workforce levels against the demands for our services can be difficult, particularly in our engineering and IT solutions business. Delays or cutbacks in projects or delays in finding new projects could increase the non-productive time of our personnel, which would decrease our utilization levels and our profit margins. We generally cannot reduce our labor costs as quickly as declines in revenue may occur. As a result, some of our operations may retain underutilized employees for longer periods. To achieve our desired level of profitability, we must maintain our utilization at an appropriate rate. If we are unable to achieve and maintain our target utilization rates, our financial results could be adversely impacted. Further, if labor costs increase, this could put upward pressure on our costs and adversely affect our profitability if we are unable to recover these increased costs by increasing the prices for our services.

Our costs, particularly in our staffing business, could increase as a result of health care reform laws.
The 2010 Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, the “Health Care Acts”) represented comprehensive U.S. health care reform legislation that, in addition to other provisions, subjects large employers like CDI to potential penalties unless we offer our employees health care coverage that meets certain affordability, value and coverage standards. To comply with the employer mandate provision of the Health Care Acts, we offer health care coverage to all of our temporary and permanent employees who are eligible for coverage under the Health Care Acts. Designating employees as eligible is complex and is subject to challenge by employees and the Internal Revenue Service. While we believe we have properly identified eligible employees, a later determination that we failed to offer the required health coverage to eligible employees could result in penalties that may materially harm our business. We cannot be certain that compliant insurance coverage will remain available to us on reasonable terms, and we could face additional risks arising from future changes to the Health Care Acts or changed interpretations of our obligations under the Health Care Acts. There can be no assurance that we will be able to raise the rates we charge to our customers to recover all related costs or that they will be recovered in the period in which the costs are incurred, and the net impact on our results of operations could be significant.
 
Changes to the Health Care Acts appear likely, through both Congressional action and executive action by the President of the United States. However, the exact nature of the changes is now yet known, which creates uncertainty regarding their impact on CDI and its business.

CDI is engaged in highly competitive businesses. Pricing pressures and increasing consolidation of purchasing by our customers could reduce our market share and profits.
The engineering and IT project outsourcing business and the professional staffing business are highly competitive and fragmented, and particularly in the case of staffing services, have limited barriers to entry. CDI competes in global, national, regional and local markets with numerous engineering and IT outsourcing companies and with temporary staffing and permanent placement firms, some of which have greater financial and other resources than we have. Price competition among companies in our industry and pricing pressures from customers are significant. The number of customers that consolidate their purchases of

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engineering and IT outsourcing and staffing services with a single provider or with a small number of providers has continued to rise. This long-term trend to consolidate purchases may make it more difficult for CDI to obtain or retain customers in the future. We also face the risk that certain customers may decide to provide internally services similar to those we offer.

We rely on information systems in our operations. Failure to protect these systems against security breaches could materially and adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed.
The efficient operation of CDI's business is dependent on information technology systems and networks, some of which are cloud-based or managed by third parties. Information systems are inherently vulnerable to security breaches by computer hackers and cyber terrorists. Our defense and energy businesses may make CDI a target for cyberattacks. Cybersecurity attacks are evolving and include malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. We have devoted and will continue to devote significant resources to the security of our information systems. We rely on industry-accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not always be adequate to properly prevent security breaches. In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased overhead costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could materially and adversely affect our business and results of operations. We maintain insurance to cover certain of these cybersecurity risks, but that insurance is subject to limits and self-insured retentions.

Our reputation could be harmed and we could incur significant liabilities if there was improper disclosure of employee or customer data or other sensitive information.
CDI's business involves the use, storage and transmission of large amounts of information about our employees, candidates, customers and franchisees, a portion of which is confidential and/or personally sensitive. In our IT project outsourcing business, we sometimes handle or impact protected health information of employees or patients of our customers or their clients. The protection of all such information, as well as CDI data, is critical to us. We have established policies, procedures and technology to help protect the security and privacy of this information. However, the regulatory environment surrounding information security and personal data privacy is increasingly demanding, with the frequent enactment of new and changing requirements. Privacy breaches may require notification and other remedies which can be costly and which may have other serious adverse consequences for our business, including regulatory penalties and fines and oversight by state or federal regulatory agencies.

We also, from time to time, export sensitive customer data and technical information to recipients outside the U.S. CDI has a policy in place that requires an analysis prior to the export of any products, software, data, technology or other information from our systems to determine if any restrictions apply to the export. We have also established policies and procedures to help protect the security and privacy of this information.

It is possible that CDI's security controls over personal and customer data and other practices that we follow may not prevent the improper access to or disclosure of personally identifiable information, protected health information and customer confidential information. Any such disclosure could harm CDI's reputation, cause us to lose customers or candidates, and subject us to liability under our contracts and laws that protect personal, health and customer data, resulting in increased costs or loss of revenue.

CDI relies on outside suppliers to perform certain administrative services, and we may suffer damage to our business if those suppliers fail to adequately perform those services.
CDI outsources certain payroll, employee benefits administration, information technology and other functions to companies that specialize in performing those services. The failure of such outside service providers to adequately perform such services could have a material adverse effect on our business and operations. Such third parties may also face risks relating to cybersecurity and possible breaches of data privacy laws which are similar to the risks faced by CDI as described above. We seek to reduce those risks by requiring audits of the relevant third parties' information technology processes or by performing other due diligence inquiries regarding such processes, but there can be no assurance that such parties will not experience cybersecurity or data privacy breaches which could adversely affect our employees, customers and business.


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CDI's continued success is dependent on our ability to hire and retain qualified employees, both management and billable personnel. The loss of key personnel could have a material adverse effect on our business. In addition, our business may be harmed if CDI or its employees are unable to obtain the security clearances or other qualifications needed to perform services for our customers.
CDI depends upon its ability to attract qualified personnel who possess the skills and experience required by its customers and to successfully bid for new customer projects. Our employees and independent contractors who provide services to our customers can terminate their employment or service arrangements with CDI on short or no notice. CDI must continually evaluate its access to available qualified personnel to keep pace with changing customer needs and emerging technologies. Competition for individuals with proven professional or technical skills always exists, and the demand for such individuals (particularly in certain engineering and IT disciplines and geographic areas) is expected to remain strong for the foreseeable future. There can be no assurance that qualified personnel will continue to be available to CDI in sufficient numbers and on terms of employment acceptable to CDI.

Our operations also depend on the continued efforts of our executives and senior management. The loss of key members of CDI's management team may cause a significant disruption to our business. CDI also depends on the performance and productivity of its local managers and sales and recruiting personnel. The loss of key managers and field personnel may also jeopardize existing customer relationships, which could cause revenue to decline.

A number of government programs require contractors and management to have security clearances. Depending on the level of required clearance, security clearances can be difficult and time-consuming to obtain. If CDI or its employees are unable to obtain or retain necessary security clearances, we may not be able to win certain new business, and our existing customers could terminate their contracts with us or decide not to renew them. To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the anticipated revenue or profit from such contract.

The outcome of pending and future claims and litigation could have a material adverse effect on our business.
From time to time, various types of legal claims arise in connection with the ordinary conduct of our business. CDI's customers may make claims based on our alleged failure to perform in accordance with contract requirements. Since our project business often involves responsibility to produce specified deliverables, these types of claims may arise more frequently in those business operations. In addition, employees of CDI may make a variety of claims including workplace injury claims and employment-related claims such as discrimination, harassment, and wage and hour claims. Since CDI's staffing business involves employing a large number of individuals on a temporary basis and placing them in customer workplaces where we have limited ability to control the workplace environment, these types of claims may arise more frequently in those business operations. Customers in the staffing business may also allege claims based on the conduct of staffing employees assigned to the customer's worksite. In addition, CDI is subject to possible government claims or fines for violations of various laws. Any of these claims, if successful, could have a material adverse effect on our business.

A charge for impairment of goodwill or other intangible assets could have a material adverse effect on our reported results of operations.
We are required to test the goodwill and other indefinite-lived intangible assets carried on our consolidated balance sheets for possible impairment on an annual basis based upon a fair value approach. As of December 31, 2016, CDI had $61.4 million of goodwill and other intangible assets, representing 21.2% of our total assets of $289.3 million.

CDI has chosen to perform its annual goodwill and other indefinite-lived intangible assets impairment testing by reporting unit as of July 1 of each fiscal year. We are also required to test for impairment between annual tests if events occur or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit was below its carrying value. Examples of events or circumstances include, but are not limited to: adverse changes in business climate, regulatory environment or legal factors; unanticipated competition; loss of key personnel; and a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of. Other factors that could impact an impairment include, but are not limited to, significant underperformance relative to projected future operating results, significant changes in the manner of use of acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and decreases in our market capitalization below the recorded amount of our net assets for a sustained period. If the fair value of CDI's reporting units were less than their book value, we could be required to record a non-cash impairment charge. The amount of any impairment could be significant and could have a material adverse effect on our financial results for the period in which the charge is taken. CDI recorded impairment charges in 2015 and 2014 in the amounts of $21.5 million and $14.7 million, respectively.

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Our financial results could be harmed by foreign currency fluctuations, weak foreign economies or unfavorable foreign political developments in connection with CDI's international operations.
CDI's operations outside the United States (principally in Canada) are material to our business, and our reported financial condition and results of operations are exposed to the effects (both positive and negative) of fluctuating exchange rates. CDI's exposure to foreign currency fluctuations currently relates primarily to operations denominated in Canadian dollars. Exchange rate fluctuations impact the U.S. dollar value of reported earnings derived from these foreign operations as well as our investment in the net assets related to these operations. CDI has at times in the past (including in 2016) engaged, and may in the future engage, in hedging activities with respect to certain of its foreign operations.
     
Our international operations are subject to a variety of other risks, including, but not limited to, the following:

Recessions in foreign economies and the impact on costs of doing business in those countries;
Difficulties in staffing and managing foreign operations;
Changes in foreign government policies and regulatory requirements;
The adoption of new, and the expansion of existing, trade restrictions and the failure to comply with U.S. export control laws;
The lack of well-developed legal systems and less established or traditional business practices in some countries, which could make it difficult for CDI to enforce its contractual rights;
Social, political and economic instability, including risks of loss due to civil strife, acts of war, insurrection and terrorism;
Limitations on the movement of cash; and
Logistical and communications challenges.

Any repatriation of funds currently held in foreign jurisdictions may result in higher effective tax rates and incremental cash tax payments. In addition, changes in legislation with respect to the tax treatment of foreign earnings may have a material impact on our U.S. tax expense and cash flows.

CDI operates in many different jurisdictions and could be materially and adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the UK Bribery Act and similar worldwide anti-corruption laws.
The U.S. Foreign Corrupt Practices Act, the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. CDI's internal policies mandate compliance with these anti-corruption laws. From time to time, we may operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees or agents in violation of our policies. Expansion of our business outside the U.S. (including in developing countries) could increase the risk of such violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations or financial condition.

CDI faces competition from lower-cost, offshore outsourcing companies, which may result in a loss of market share and reduced profitability.
Over the years there has been increasing pressure from customers on their suppliers to outsource certain areas of their businesses to lower-cost offshore locations. Many engineering and IT outsourcing and staffing companies already have or are seeking offshore solutions to support their technology and business process functions, and as a result, a significant amount of domestic technology and engineering project work utilizes offshore capabilities as alternatives to domestic resources. CDI has not established significant lower-cost outsourcing centers, though it has occasionally partnered with offshore companies to provide additional lower cost options to its customers. We may expand our service delivery capabilities outside the U.S. in the future. Conducting business through offshore arrangements entails additional compliance and regulatory issues and may result in additional costs to CDI. CDI's partnering arrangements are subject to our ability to maintain good working relationships with our foreign partners and on our partners' ability to fulfill their obligations under our agreements with them. Changes in the supply and demand for offshore personnel with the training to perform the engineering and IT services sought by CDI's customers, as well as other factors affecting offshore labor costs, could raise CDI's costs, which would put pressure on our margins. Also, other offshore solution providers could develop direct relationships with CDI's customers resulting in a significant loss of CDI's market share and revenue.


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Our business could be disrupted by natural or man-made disasters. Certain of our offices and customers operate in areas that may be impacted by severe weather conditions.
Various types of natural or man-made disasters could interfere with CDI's continued ability to operate its business normally. For example, the ability to protect our data centers and information systems (whether maintained internally or outsourced) against damage from fire, power loss, telecommunications failure and other disasters is critical. In order to provide many of our services, we must be able to store, retrieve, process and manage large databases and periodically expand and upgrade our capabilities. Any damage to our data centers or any failure of our telecommunication links (whether maintained internally or outsourced) that interrupts our operations or results in an inadvertent loss of data could materially and adversely affect our ability to meet our customers' needs and their confidence in utilizing CDI for future services. While we and our outsourcing providers have developed various backup plans, disaster recovery plans and business continuity plans, there can be no assurance that we would be able to continue to operate our business smoothly in the face of certain natural or man-made disasters. Such business interruptions could materially and adversely affect our financial results and future prospects.

CDI services the oil, gas and chemical industries, each of which has a significant concentration of activities in the Gulf Coast of the U.S. CDI also has two major engineering centers in this area. The U.S. Gulf Coast has been impacted by severe hurricanes in the past, and could be further impacted by severe weather in the future. Hurricanes in the U.S. Gulf Coast could negatively impact CDI's customers and our ability to serve them.

Regulation regarding climate change may negatively impact our customers and our projects.
Increasing concerns about climate change may result in additional regulation affecting our customers and our projects, particularly those involved in the exploration, production, transportation or refining of fossil fuels. Those new regulations could increase the cost of projects for our customers and, in some cases, prevent a project from moving forward, thereby potentially reducing the need for our services, which could in turn have a material adverse impact on our results of operation.

Acquisitions and divestitures present risks and uncertainties.
CDI has pursued and continues to pursue acquisitions as an element of its strategy, but we cannot provide assurances that we will be able to locate suitable acquisition candidates or that we will be able to consummate any such transactions on terms and conditions acceptable to us, or that such transactions will be successful. Adverse changes in the credit markets may make it more difficult and costly to finance acquisitions. Acquisitions involve a number of risks, including the diversion of management's attention from its existing operations, the failure to retain key personnel or customers of an acquired business, the failure to realize anticipated benefits, such as cost savings and revenue enhancements, the potentially substantial transaction costs associated with acquisitions, the assumption of unknown liabilities of the acquired business, and the inability to successfully integrate the business within CDI. Potential impairment charges could result if we overpay for an acquisition. There can also be no assurance that any past or future acquired businesses will generate anticipated revenues or earnings.

Also as part of its strategy, CDI may undertake divestitures as well as acquisitions. Any divestitures will be accompanied by risks commonly encountered in the sale of businesses, which may include the following: disrupting our ongoing businesses; reducing our revenue; not obtaining full value for the divested business; losing key personnel; distracting management focus from our existing businesses; indemnification claims against CDI for breaches of representations, warranties and covenants in sale agreements; retaining unforeseen liabilities for the divested business if a buyer fails to honor all of its commitments; damaging relationships with employees and customers as a result of transferring a business to new owners; and the failure to close a sale transaction due to conditions, such as financing or regulatory approvals, not being satisfied.

Our brand and reputation are key assets and competitive advantages of our company, and our business may be affected by how we are perceived in the marketplace.
Our ability to attract and retain customers and employees is affected by external perceptions of our brand and reputation. Reputational damage from negative perceptions or publicity could damage our reputation with customers and employees as well as prospective customers and employees. We may not be successful in detecting, preventing, or negating all changes in or impacts upon our reputation. Negative perceptions or publicity could have a material adverse effect on our business and financial results.


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We bear the risk of cost overruns in fixed-price contracts.
CDI sometimes enters into fixed-price contracts with customers, primarily for engineering project services. Revenue recognized under fixed-price contracts accounted for less than 3% of 2016 consolidated revenue. Under these fixed-price contracts, prices are established based on cost and scheduling estimates, which in turn are based in part on an evaluation of the scope of work and assumptions about the prices and availability of skilled personnel, equipment and materials. If our price estimates for a particular project prove to be inaccurate, if there are errors or ambiguities as to contract specifications, or if there are unanticipated technical problems, then cost overruns may occur, and we could experience reduced profits or a loss for that project. Cost overruns may also be caused by changes in the scope of the project after the contract has been entered into or by a failure of the parties to adequately define and agree upon the entire scope of the project at inception. In those cases, there may be disputes between the parties over who should pay for the cost overruns. We will attempt to negotiate change orders to recover the additional costs, but there can be no assurance that we will be successful in these negotiations with our customers. In general, fixed-price contracts can offer greater profit potential but also entail more inherent risk both in terms of possible financial losses and the potential for significant disputes with customers than contracts containing pricing on a time-and-materials basis.

Estimates of our income tax liabilities are subject to various uncertainties and actual results could vary significantly from these estimates.
When we prepare our financial statements, we estimate our income tax liabilities with respect to the various jurisdictions in which we do business. Significant judgment is required in determining the provision for income tax liabilities in our financial statements and in forecasting our effective income tax rate for a given period. The provision for income taxes and tax liability in the future could be materially and adversely affected by numerous factors, including changes in tax laws, regulations or accounting principles, changes in the valuation of deferred tax assets and liabilities, and audits by taxing authorities. We may not be able to generate sufficient profits in the future to realize the benefit of our net deferred tax assets.

If CDI fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately report its financial results or prevent fraud. As a result, investors could lose confidence in our financial reporting, which could harm our business and the trading price of our stock.
Effective internal controls are necessary for CDI to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We devote significant attention to establishing and maintaining effective internal controls. Any failure to implement required new or improved controls or difficulties encountered in their implementation could affect our operating results or cause us to fail to meet reporting obligations in future periods. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a significant negative effect on the market price of CDI stock.

We perform certain projects through joint ventures, teaming agreements or other business arrangements, which may expose CDI to additional risks and uncertainties.
As is common in the project engineering industry, CDI executes certain projects jointly with other contractors through joint ventures or other teaming arrangements. These arrangements expose CDI to a number of risks, including the risk that our partners may not be able to fulfill their performance obligations under the joint venture or teaming agreements and related customer contracts. There is also a risk that our joint venture partners may be incapable of providing the required financial support to the joint ventures. Another risk is that improper, illegal or unethical actions by our joint venture partners would have a negative impact on the reputation of the joint venture and CDI. Disputes can also arise not only between CDI and its joint venture partners, but also between the joint ventures and customers. To the extent any of these risks or disputes occur, our operating results could be harmed.

CDI may not be able to obtain the insurance coverages necessary to manage its risks.
CDI relies on insurance to help manage its risks and to limit our exposure to significant claims. The future availability and cost of such insurance is subject to market forces and our claims experience. There can be no assurance that CDI can always obtain and maintain appropriate insurance coverage, including errors and omissions insurance, in order to effectively manage the risks of its business.

In addition, CDI has elected to retain a portion of losses that may occur through the use of various deductibles, limits and retentions under these programs. As a result, we may be subject to future liability for which CDI is only partially insured, or completely uninsured. Our insurers are subject to business risk. One or more of our insurers may be unable to fulfill their insurance obligations due to insolvency or otherwise. To the extent we are not insured against a loss or any of our insurers fails to provide coverage, CDI's financial condition and results of operations could be materially and adversely affected.


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Our business could be negatively affected by actions of activist shareholders.
On September 28, 2016, a group including BLR Partners LP (the “BLR Group”) filed a Schedule 13D with the SEC, reporting an approximately 6% ownership of CDI’s outstanding shares of common stock. Subsequent amendments to the Schedule 13D indicate that the share ownership by the BLR Group has increased to 8.1% and that the BLR Group has delivered letters to the Company nominating six individuals for election to the Board of Directors of CDI at the 2017 shareholders’ meeting. Unless the BLR Group later withdraws its nominations, a proxy contest may occur and that would require us to incur legal fees and proxy solicitation expenses in addition to those normally expended for a solicitation in connection with our annual shareholders’ meeting. A proxy contest could become a significant distraction for our management and employees, which may adversely impact our ability to conduct our business optimally and pursue our strategic objectives. It could create uncertainty and impair our ability to retain key employees and to hire new talent or cause our customers, suppliers and other business partners to terminate, or not to renew or enter into, arrangements with us. The actions of activist shareholders could create similar uncertainty among investors and potential investors as to our future direction and adversely affect the market price and volatility of our common stock without regard to CDI’s operational or financial performance.

Anti-takeover provisions in the Company’s organizational documents and under Pennsylvania law could discourage a takeover of CDI and depress our share price.
CDI’s Articles of Incorporation and By-Laws contain, and Pennsylvania law contains, provisions that may have the effect of discouraging or delaying the acquisition of control over the Company by means of a hostile tender offer, exchange offer, proxy contest or similar transaction. For example, CDI’s Articles of Incorporation require supermajority approval for certain business combinations with interested shareholders, and our By-Laws, which are subject to amendment by the Board of Directors, require advance notice for shareholder proposals and nominations at a shareholders’ meeting. In addition, Pennsylvania law permits directors to consider a broad range of factors when evaluating whether a possible takeover attempt is in the best interest of the corporation, including but not limited to shareholders’ interests. These various provisions apply even to takeover offers that some shareholders may deem to be beneficial, and can impede attempts to remove or replace incumbent directors even if their removal would be regarded by some shareholders or potential investors as desirable.

A significant portion of CDI's common stock is owned by related parties, and they could vote their shares in a way that is adverse to the interests of other shareholders.
Certain of CDI's directors, and trusts for which some of our directors serve as trustee, own a substantial portion of CDI's outstanding common stock. By virtue of this stock ownership, such shareholders have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to shareholders for approval, including the election of directors and the amendment of our Articles of Incorporation or By-Laws. Such shareholders could exercise influence over CDI in a manner adverse to the interests of our other shareholders.

Our stock price may be subject to significant volatility and could suffer a decline in value.
The market price of our common stock may be subject to significant volatility. It has in the past, and may in the future, suffer substantial declines. We believe that many factors, including several which are beyond our control, have a significant effect on the market price of our common stock. These include actual or anticipated variations in our quarterly financial results, changes in financial estimates by securities analysts, announcements regarding acquisitions or divestitures, changes in industry trends or conditions, and changes in general economic conditions and the financial markets.

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Item 1B.    Unresolved Staff Comments
None.

Item 2.    Properties

The Company maintains major facilities in the following locations, all of which are leased:

Segment
 
Location
 
Description
 
 
 
 
 
Corporate / MRI
 
Philadelphia, Pennsylvania
 
Headquarters office/MRI offices
Engineering Solutions
 
Ebensburg, Pennsylvania
 
Engineering center
Engineering Solutions
 
Baton Rouge, Louisiana
 
Engineering center
Engineering Solutions
 
Cincinnati, Ohio
 
Engineering center
Engineering Solutions
 
Houston, Texas
 
Engineering center
Corporate / Specialty Talent and Technology Solutions
 
Cross Lanes, West Virginia
 
Shared services center and technology solutions service operations
Engineering Solutions
 
Norfolk, Virginia
 
Engineering center
Specialty Talent and Technology Solutions
 
Boston, Massachusetts
 
Staffing center
Specialty Talent and Technology Solutions / Engineering Solutions
 
Phoenix, Arizona
 
Engineering center, staffing center and technology solutions service operations

Additionally, each reporting segment maintains numerous other active facilities and locations under operating lease agreements. Most of the leased space is devoted to engineering design, recruiting, administrative and back-office functions, sales and marketing. Most of these facilities are leased for terms ranging from three to fourteen years. The Company believes that its facilities are adequate to meet its current and near-term needs.
 
A few of the Company's offices accommodate more than one operating segment. In such cases, square-foot usage is allocated among the segments, primarily based on utilization.

Item 3.    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 4.    Mine Safety Disclosures 
Not Applicable.


18




PART II.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information
Shares of CDI’s common stock are traded on the New York Stock Exchange under the trading symbol “CDI”. The high and low sales price per share of the Company’s common stock for each quarter during the last two years are shown in the table below, together with dividend information for each period.
 
 
High
 
Low
 
Cash
Dividends
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
Fourth quarter
 
$
8.40

 
$
4.90

 
$

Third quarter
 
7.03

 
4.84

 

Second quarter
 
7.82

 
5.39

 

First quarter
 
6.79

 
4.31

 

 
 
 
 
 
 
 
2015
 
 
 
 
 
 
Fourth quarter
 
9.39

 
6.46

 
0.13

Third quarter
 
13.25

 
8.36

 
0.13

Second quarter
 
14.71

 
11.93

 
0.13

First quarter
 
19.24

 
13.16

 
0.13


Dividends
The Company paid quarterly cash dividends during 2015. On January 25, 2016, the Company announced that its Board of Directors approved the elimination of the quarterly dividend. The declaration and payment of future dividends will be at the discretion of the Company’s Board of Directors and will depend upon many factors, including the Company’s earnings, cash flows, financial condition and capital requirements. The Company's 2015 Credit Agreement with Bank of America, N.A. and other lenders limits the Company with respect to, among other things, making dividend payments that immediately after giving effect thereto, cause or continue to cause an event of default, as that term is defined in the 2015 Credit Agreement. In addition, the 2015 Credit Agreement restricts the Company from making dividend payments above certain amounts unless, after giving effect to the dividend, the Company maintains certain levels of availability under its credit facility and, depending on the level of availability, its consolidated fixed charge coverage ratio is equal to or greater than 1:1 for the trailing four fiscal quarters. See Note 7—Credit Facilities, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report for a further description of the restrictions under the 2015 Credit Agreement.

Shareholders
As of February 27, 2017, there were 320 shareholders of record of the Company’s common stock. A single record shareholder account may however represent multiple beneficial owners, including holders of shares in street name accounts. Including those multiple beneficial owners, the Company estimates that the total number of shareholders of the Company’s common stock on February 27, 2017 was approximately 5,000.

See Part III, Item 12 and Note 8—Share-Based Compensation, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report, for information relating to securities authorized for issuance under the Company’s equity compensation plans.


19




Comparative Stock Performance
The following graph sets forth the cumulative total shareholder return (assuming an investment of $100 on December 31, 2011 and the reinvestment of any dividends) for the last five fiscal years on: CDI stock, the Standard & Poor's (S&P) 500 Index, CDI's old peer group and CDI's new peer group.

CDI's old peer group (Old Peer Group) is comprised of the following companies: AECOM Technology Corp.; Chicago Bridge & Iron Company N.V.; CIBER, Inc.; Computer Task Group, Inc.; Heidrick & Struggles International, Inc.; Jacobs Engineering Group, Inc.; Kforce, Inc.; Korn/Ferry International; ManpowerGroup, Inc.; and Robert Half International, Inc.

CDI's new peer group (New Peer Group) is comprised of the following companies: AECOM Technology Corp.; Chicago Bridge & Iron Company N.V.; CIBER, Inc.; Computer Task Group, Inc.; Heidrick & Struggles International, Inc.; Jacobs Engineering Group, Inc.; Kforce, Inc.; Korn/Ferry International; ManpowerGroup, Inc.; On Assignment, Inc.; Robert Half International, Inc. and Unisys Corporation. The Company believes this peer group is more reflective of the broad group of publicly traded companies from markets in which the Company currently competes and therefore provides a more meaningful comparison of stock performance.

cdi-2016123_chartx08697.jpg
 
 
December 31,
 
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
CDI Corp.
 
$
100.00

 
$
128.86

 
$
143.08

 
$
141.30

 
$
57.64

 
$
63.09

S&P 500 Index - Total Return
 
100.00

 
116.00

 
153.57

 
174.60

 
177.01

 
198.18

Old Peer Group
 
100.00

 
113.15

 
177.28

 
149.82

 
147.85

 
159.79

New Peer Group
 
100.00

 
113.45

 
179.84

 
153.12

 
149.94

 
161.68



20




Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
None.

Purchases of Equity Securities by the Issuer
The Company did not repurchase any of the Company's common stock during the quarter ended December 31, 2016.

Stock Repurchase Program
On January 25, 2016, the Company announced that its Board of Directors approved a stock repurchase program (the "Stock Repurchase Program"). Under the Stock Repurchase Program, CDI is authorized to repurchase up to $20 million of its common stock from time to time and at prices considered appropriate by the Company. Repurchases have been and may be made via privately negotiated transactions, open market purchases, block trades or by other means at management's discretion in compliance with applicable securities laws. The timing of repurchases and number of shares of common stock to be purchased will depend upon market conditions and other factors. The Company is not required to repurchase any specific number of shares and the Stock Repurchase Program will remain in effect until fully utilized or until modified, suspended or discontinued.

A total of 1,190,356 shares of CDI Corp. common stock were repurchased by the Company at an average price per share of $6.09 under the Stock Repurchase Program, and there remained an outstanding authorization to repurchase approximately $12.7 million of outstanding stock as of December 31, 2016.

Item 6. Selected Financial Data

The following is selected financial data derived from the Company’s audited consolidated financial statements for each of the last five years. The data should be read in conjunction with the Company’s consolidated financial statements and accompanying notes thereto included in Part II, Item 8 of this Form 10-K Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Form 10-K Report. The data presented in the table below is in thousands, except for per share data.
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
Earnings Data:
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
864,367

 
$
985,494

 
$
1,122,972

 
$
1,087,859

 
$
1,104,958

Net income (loss) attributable to CDI (1), (2), (3), (4), (5), (6)
 
$
(31,573
)
 
$
(37,003
)
 
$
3,082

 
$
12,884

 
$
19,116

 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(1.66
)
 
$
(1.88
)
 
$
0.16

 
$
0.66

 
$
0.99

Diluted
 
$
(1.66
)
 
$
(1.88
)
 
$
0.16

 
$
0.65

 
$
0.97

Weighted-average shares outstanding - Basic
 
19,031

 
19,676

 
19,577

 
19,442

 
19,344

Weighted-average shares outstanding - Diluted
 
19,031

 
19,676

 
19,790

 
19,739

 
19,745

 
 
 
 
 
 
 
 
 
 
 
Cash dividends paid per common share (7)
 
$

 
$
0.52

 
$
0.52

 
$
0.39

 
$
0.65

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
289,292

 
$
339,097

 
$
372,220

 
$
405,807

 
$
400,705

Long-term obligations
 
$
19,446

 
$
14,071

 
$
15,024

 
$
17,397

 
$
16,717

Total equity
 
$
188,976

 
$
221,243

 
$
274,353

 
$
285,174

 
$
279,780

 
(1) 
In 2016, the Company recorded a $11.3 million charge to operations related to the sale of Anders, the Company's UK staffing and recruitment business.
(2) 
The Company recorded restructuring charges to operations in 2016, 2015, 2014 and 2013 in the amounts of $3.8 million, $4.2 million, $3.6 million and $5.7 million, respectively.
(3) 
The Company recorded impairment charges to operations in 2015 and 2014 in the amounts of $21.5 million and $14.7 million, respectively, related to the impairment of goodwill, definite-lived intangibles and other assets.
(4) 
In 2016 and 2015, the Company recorded a valuation allowance for deferred tax assets in the amount of $11.0 million and $15.0 million, respectively.
(5) 
In 2013, the Company recorded a $3.3 million benefit to operations related to the settlement of legal claims pursued by the Company.
(6) 
In 2013, the Company recorded a $1.8 million benefit to operations related to the reduction of an acquisition earnout liability.
(7) 
In 2016, the Company announced that its Board of Directors approved the elimination of the Company's dividend.

21



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included in Part II, Item 8 of this Form 10-K Report.

Executive Overview
Business Overview
CDI seeks to create extraordinary outcomes with its clients by delivering solutions based on skilled technical 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). The Company provides to clients engineering and information technology solutions encompassing managed, project and talent services. CDI's clients are 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. and Canada. 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, staff augmentation and solutions including project assessment execution and management services, and outsourced managed services. Engineering Solutions provides engineering and architectural design, as well as deliverable work products and 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 14—Reporting Segments, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report.
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.
Fiscal Year 2016 Overview
Revenue in 2016 decreased by $121.1 million or 12.3% as compared to 2015 primarily due to a decrease in Enterprise Talent and Engineering Solutions, partially offset by an increase in Specialty Talent and Technology Solutions. Gross profit decreased by $22.8 million primarily due to the decrease in volume as overall gross profit margin remained flat. The Company reported an operating loss in 2016 of $30.5 million compared to an operating loss of $28.6 million in 2015. Excluding an $11.3 million loss on the sale of CDI AndersElite Limited in 2016 and $21.5 million impairment charge in 2015, operating loss declined primarily due to the decrease in gross profit, partially offset by a decrease in Operating and administrative expenses. In 2016 and 2015, the Company recorded a valuation allowance for deferred tax assets in the amount of $11.0 million and $15.0 million, respectively. Net loss attributable to CDI was $31.6 million in 2016 as compared to net loss attributable to CDI of $37.0 million in 2015.
In September 2016, the Company approved a restructuring plan (the “2016 Restructuring Plan”) to further align its organizational structure, facilities and resource utilization with business volumes and strategic direction. During 2016, the Company recorded a charge of $3.8 million to "Restructuring and other related costs" in the consolidated statement of operations. See Note 6Restructuring and other related costs, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report.
On September 16, 2016, the Company completed the sale of CDI AndersElite Limited (Anders), the Company's UK-based staffing and recruitment business in the Enterprise Talent reporting segment, to AndersElite Holdings Ltd., an entity controlled by certain members of Anders' management. The Company recorded a loss of $11.3 million to "Loss on disposition of business interests" in the consolidated statement of operations related to the disposition of Anders. See Note 4Acquisition and Dispositions, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report.
On September 16, 2016, the Company announced that Scott Freidheim, President and CEO, resigned from the Company effective September 15, 2016. Michael Castleman, CDI’s CFO, was elected as President of the Company and agreed to serve as interim CEO, in addition to continuing to serve as CDI’s CFO.


22



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Results of Operations
Fiscal Year 2016 versus 2015
Consolidated Results of Operations
The following table presents changes in revenue by segment along with selected financial information for the indicated periods:
 
2016
 
2015
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Enterprise Talent
$
495,955

 
57.4
 %
 
$
595,963

 
60.5
 %
 
$
(100,008
)
 
(16.8
)%
Specialty Talent and Technology Solutions
74,931

 
8.7

 
41,430

 
4.2

 
33,501

 
80.9

Engineering Solutions
243,298

 
28.1

 
294,941

 
29.9

 
(51,643
)
 
(17.5
)
MRI
50,183

 
5.8

 
53,160

 
5.4

 
(2,977
)
 
(5.6
)
Total Revenue
$
864,367

 
100.0

 
$
985,494

 
100.0

 
$
(121,127
)
 
(12.3
)
Gross profit
$
162,120

 
18.8

 
$
184,901

 
18.8

 
$
(22,781
)
 
(12.3
)
Operating and administrative expenses
$
177,535

 
20.5

 
$
187,433

 
19.0

 
$
(9,898
)
 
(5.3
)
Restructuring and other related costs
$
3,767

 
0.4

 
$
4,217

 
0.4

 
$
(450
)
 
(10.7
)
Impairment
$

 

 
$
21,537

 
2.2

 
$
(21,537
)
 
NM

Loss on disposition of business interests
$
11,301

 
1.3

 
$
310

 

 
$
10,991

 
NM

Operating loss 
$
(30,483
)
 
(3.5
)
 
$
(28,596
)
 
(2.9
)
 
$
(1,887
)
 
6.6

Net loss attributable to CDI (1)
$
(31,573
)
 
(3.7
)
 
$
(37,003
)
 
(3.8
)
 
$
5,430

 
(14.7
)
Cash flow provided by operations
$
13,493

 
 
 
$
14,265

 
 
 
$
(772
)
 
(5.4
)
Effective income tax rate
(0.3
)%
 
 
 
(30.0
)%
 
 
 
 
 
 
 
(1) 
In 2016 and 2015, the Company recorded valuation allowances for deferred tax assets in the amounts of $11.0 million and $15.0 million, respectively.
NM–Not meaningful.
Revenue decreased due to declines in Enterprise Talent, Engineering Solutions and MRI, partially offset by an increase in Specialty Talent and Technology Solutions. Enterprise Talent revenue decreased due to declines in both North America Staffing and UK Staffing, in part due to the disposition of Anders on September 16, 2016. Engineering Solutions revenue decreased due to a decline 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 Technologies, LLC (EdgeRock), which was acquired on October 6, 2015, and, to a lesser extent, an increase in Technology Solutions. MRI revenue decreased due to a decline in royalties and contract staffing revenue, 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 MRI 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.
Excluding the $11.3 million loss on disposition in 2016 and $21.5 million impairment charge in 2015, operating results decreased primarily due to the decrease in gross profit, offset partially by a reduction in operating and administrative expenses. Operating and administrative expenses decreased primarily due to the disposition of Anders on September 16, 2016, actions taken by the Company to reduce personnel-related and other costs in response to lower business volumes and reduced corporate costs, offset partially by the inclusion of EdgeRock. Corporate operating costs decreased primarily due to a reduction in costs associated with corporate development and international business development activities.
The effective income tax rate for 2016 was impacted primarily by increased valuation allowances on deferred tax assets. The effective income tax rate for 2015 was impacted by increased valuation allowances on deferred tax assets and the effect of goodwill impairment. See Note 10—Income Taxes, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report for further information.

23



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Segment Results of Operations

Enterprise Talent
The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
2016
 
2015
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
North America Staffing
$
436,653

 
88.0
 %
 
$
490,986

 
82.4
 %
 
$
(54,333
)
 
(11.1
)%
UK Staffing
59,302

 
12.0

 
104,977

 
17.6

 
(45,675
)
 
(43.5
)
Total revenue
495,955

 
100.0

 
595,963

 
100.0

 
(100,008
)
 
(16.8
)
Cost of services
439,593

 
88.6

 
524,035

 
87.9

 
(84,442
)
 
(16.1
)
Gross profit
56,362

 
11.4

 
71,928

 
12.1

 
(15,566
)
 
(21.6
)
Operating and administrative expenses
52,132

 
10.5

 
61,639

 
10.3

 
(9,507
)
 
(15.4
)
Restructuring and other related costs
433

 
0.1

 
1,084

 
0.2

 
(651
)
 
(60.1
)
Impairment (1)

 

 
10,653

 
1.8

 
(10,653
)
 
NM

Loss on disposition of business interest (2)
11,301

 
2.3

 

 

 
11,301

 
NM

Operating loss
$
(7,504
)
 
(1.5
)
 
$
(1,448
)
 
(0.2
)
 
$
(6,056
)
 
NM

 
(1)
In 2015, the Company recorded a charge of $10.7 million related to the impairment of goodwill in Anders, the Company's UK-based staffing and recruitment business.
(2) 
On September 16, 2016, the Company completed the sale of Anders and recorded a loss of $11.3 million on disposition.
NM–Not meaningful.

Revenue decreased in both the North America and UK Staffing businesses. North America Staffing revenue decreased primarily due to reduced staffing volumes at a large information technology client, reduced Canadian pipeline staffing volumes, and the negative impact of foreign currency exchange rates. UK Staffing revenue decreased primarily due to the sale of Anders, the Company's UK Staffing business, on September 16, 2016 and, to a lesser extent, reductions across the engineering and construction sectors and the negative impact of foreign currency exchange rates.

Gross profit decreased primarily due to the decrease in revenue and, to a lesser extent, a decrease in gross profit margin. Gross profit margin decreased slightly, primarily due to a shift in geographic and service mix, partly resulting from the sale of Anders, and negative pricing pressure.

Operating and administrative expenses decreased primarily due to the disposition of Anders on September 16, 2016 and actions taken by the Company to reduce personnel-related and other costs in response to lower business volumes.

Excluding the $11.3 million loss on disposition in 2016 and $10.7 million impairment charge in 2015, both related to Anders, operating results decreased primarily due to the reduction in gross profit, partially offset by the decrease in operating and administrative expenses.




24



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Specialty Talent and Technology Solutions
The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
2016
 
2015
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Specialty Talent (1)
$
42,016

 
56.1
 %
 
$
10,242

 
24.7
%
 
$
31,774

 
NM
Technology Solutions
32,915

 
43.9

 
31,188

 
75.3

 
1,727

 
5.5
Total revenue
74,931

 
100.0

 
41,430

 
100.0

 
33,501

 
80.9
Cost of services
52,823

 
70.5

 
27,998

 
67.6

 
24,825

 
88.7
Gross profit
22,108

 
29.5

 
13,432

 
32.4

 
8,676

 
64.6
Operating and administrative expenses (1)
22,376

 
29.9

 
12,571

 
30.3

 
9,805

 
78.0
Restructuring and other related costs
215

 
0.3

 
130

 
0.3

 
85

 
65.4
Operating profit (loss)
$
(483
)
 
(0.6
)
 
$
731

 
1.8

 
$
(1,214
)
 
NM
 
(1) 
On October 6, 2015, the Company acquired EdgeRock, which comprises the entirety of Specialty Talent.
NM–Not meaningful.

Revenue increased primarily due to the acquisition of EdgeRock on October 6, 2015, which currently comprises the entirety of Specialty Talent, and, to a lesser extent, an increase in Technology Solutions. Technology Solutions revenue increased primarily due to increased spending by certain clients, including new projects, partially offset by the impact of other clients' program reductions as part of their overall cost savings initiatives.

Gross profit increased primarily due to the inclusion of EdgeRock, partially offset by a reduction in gross profit margin. Gross profit margin decreased due to the inclusion of EdgeRock and a combination of a shift in service mix and negative pricing pressure in Technology Solutions.

Operating and administrative expenses increased primarily due to the inclusion of EdgeRock and, to a lesser extent, personnel-related investments in business development in Technology Solutions.
Operating results decreased primarily due to the increase in operating and administrative expenses partially offset by the increase in gross profit.



25



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Engineering Solutions

The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
2016
 
2015
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Energy, Chemicals and Infrastructure (EC&I)
$
130,376

 
53.6
 %
 
$
175,232

 
59.4
 %
 
$
(44,856
)
 
(25.6
)%
Aerospace and Industrial Equipment (AIE)
49,238

 
20.2

 
59,881

 
20.3

 
(10,643
)
 
(17.8
)
Government Services
63,684

 
26.2

 
59,828

 
20.3

 
3,856

 
6.4

Total revenue
243,298

 
100.0

 
294,941

 
100.0

 
(51,643
)
 
(17.5
)
Cost of services
184,088

 
75.7

 
221,550

 
75.1

 
(37,462
)
 
(16.9
)
Gross profit
59,210

 
24.3

 
73,391

 
24.9

 
(14,181
)
 
(19.3
)
Operating and administrative expenses
66,758

 
27.4

 
72,884

 
24.7

 
(6,126
)
 
(8.4
)
Restructuring and other related costs
2,690

 
1.1

 
2,153

 
0.7

 
537

 
24.9

Impairment (1)

 

 
10,884

 
3.7

 
(10,884
)
 
NM

Loss on disposition of business interest (2)

 

 
310

 
0.1

 
(310
)
 
NM

Operating loss
$
(10,238
)
 
(4.2
)
 
$
(12,840
)
 
(4.4
)
 
$
2,602

 
(20.3
)
 
(1) 
In 2015, the Company recorded a charge of $10.9 million related to the impairment of goodwill and certain fixed assets within EC&I.
(2) 
In 2015, the Company 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.
NM–Not meaningful.

Revenue decreased in EC&I and AIE, partially offset by an increase in Government Services. The decrease in EC&I was primarily due to reduced spending for engineering services by downstream and midstream clients as a result of the impact of the decline in oil and gas prices. The decrease in AIE revenue was primarily due to reduced spending by a large commercial aviation client. The increase in Government Services was primarily due to new naval defense contracts.

Gross profit decreased primarily due to a reduction in revenue and, to a lesser extent, a slight reduction in gross profit margin. Gross profit margin decreased slightly primarily due to the wind down of the Company's data acquisition and analysis business during 2015 in AIE, a change in service mix in EC&I and the effect of an increase in pass-through materials revenue in Government Services.

Operating and administrative expenses decreased primarily due to actions taken by the Company to reduce personnel-related and other costs in response to lower business volumes and the wind down of the Company's data acquisition and analysis business during 2015, partially offset by an increase in legal fees and reserves for project-related disputes.

Excluding the $10.9 million impairment charge in 2015, operating results decreased primarily due to the decrease in gross profit, partially offset by the decrease in operating and administrative expenses.






26



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Management Recruiters International (MRI)

The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
2016
 
2015
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Contract Staffing
$
38,252

 
76.2
%
 
$
40,044

 
75.3
%
 
$
(1,792
)
 
(4.5
)%
Royalties and Franchise Fees
11,931

 
23.8

 
13,116

 
24.7

 
(1,185
)
 
(9.0
)
Total revenue
50,183

 
100.0

 
53,160

 
100.0

 
(2,977
)
 
(5.6
)
Cost of services
25,743

 
51.3

 
27,010

 
50.8

 
(1,267
)
 
(4.7
)
Gross profit
24,440

 
48.7

 
26,150

 
49.2

 
(1,710
)
 
(6.5
)
Operating and administrative expenses
20,254

 
40.4

 
20,138

 
37.9

 
116

 
0.6

Restructuring and other related costs
206

 
0.4

 

 

 
206

 
NM

Operating profit
$
3,980

 
7.9

 
$
6,012

 
11.3

 
$
(2,032
)
 
(33.8
)
 
NM–Not meaningful.

Revenue decreased due to a decline in royalties and contract staffing revenue, partially offset by an increase in franchise fees. Contract staffing revenue decreased primarily due to the reduction in billable staffing headcount. Royalties decreased primarily due to the departure of franchises and fewer placements.

Gross profit decreased primarily due to a reduction in royalties and contract staffing revenue, partially offset by an increase in franchise fees as gross profit margin remained relatively flat.

Operating and administrative expenses increased slightly as personnel-related investments in business leadership was predominantly offset by decreased costs associated with lower business volumes.
Operating profit decreased due to the decrease in gross profit and increases in operating and administrative expenses and restructuring charges.




27



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Fiscal Year 2015 versus 2014
Consolidated Results of Operations
The following table presents changes in revenue by segment along with selected financial information for the indicated periods:
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Enterprise Talent
$
595,963

 
60.5
 %
 
$
728,686

 
64.9
%
 
$
(132,723
)
 
(18.2
)%
Specialty Talent and Technology Solutions
41,430

 
4.2

 
32,145

 
2.9

 
9,285

 
28.9

Engineering Solutions
294,941

 
29.9

 
303,237

 
27.0

 
(8,296
)
 
(2.7
)
MRI
53,160

 
5.4

 
58,904

 
5.2

 
(5,744
)
 
(9.8
)
Total Revenue
$
985,494

 
100.0

 
$
1,122,972

 
100.0

 
$
(137,478
)
 
(12.2
)
Gross profit
$
184,901

 
18.8

 
$
206,557

 
18.4

 
$
(21,656
)
 
(10.5
)
Operating and administrative expenses
$
187,433

 
19.0

 
$
182,873

 
16.3

 
$
4,560

 
2.5

Restructuring and other related costs
$
4,217

 
0.4

 
$
3,645

 
0.3

 
$
572

 
15.7

Impairment
$
21,537

 
2.2

 
$
14,653

 
1.3

 
$
6,884

 
47.0

Loss on disposition of business interest
$
310

 

 
$

 

 
$
310

 
NM

Operating profit (loss)
$
(28,596
)
 
(2.9
)
 
$
5,386

 
0.5

 
$
(33,982
)
 
NM

Net income (loss) attributable to CDI (1)
$
(37,003
)
 
(3.8
)
 
$
3,082

 
0.3

 
$
(40,085
)
 
NM

Cash flow used in operations
$
14,265

 
 
 
$
14,788

 
 
 
$
(523
)
 
(3.5
)
Effective income tax rate
(30.0
)%
 
 
 
41.5
%
 
 
 
 
 
 
 
(1) 
In 2015, the Company recorded a valuation allowance for deferred tax assets in the amount of $15.0 million.
NM–Not meaningful.
Revenue decreased primarily due to a decrease in Enterprise Talent. Enterprise Talent revenue decreased primarily due to reduced Canadian pipeline staffing in the North America Staffing vertical, reduced staffing at a large information technology client in the North America Staffing vertical and the negative impact of exchange rates, Engineering Solutions revenue decreased primarily due to reduced spending by a large commercial aviation customer in the AIE vertical, partially offset by increased spending by existing downstream customers in the EC&I vertical. MRI revenue decreased primarily due to lower contract staffing volumes. Specialty Talent and Technology Solutions increased primarily due to the inclusion of EdgeRock from the date of acquisition on October 6, 2015.
Gross profit decreased primarily due to the decrease in revenue and, to a lesser extent, decrease in the gross profit margin in Engineering Solutions. Overall gross profit margin increased slightly as the shift in revenue mix toward higher margin Engineering Solutions business was partially offset by lower margins in Engineering Solutions. Within Engineering Solutions, gross profit margin decreased due to lower margins in the AIE and Government Services and a shift in revenue mix toward EC&I business from AIE business.
Operating profit decreased primarily due to the decrease in gross profit and increase in impairment charges and operating and administrative expenses. Operating and administrative expenses increased primarily due to acquisition related costs in 2015, including $2.1 million of amortization of acquired intangible assets related to the EdgeRock acquisition and $1.3 million in costs related to completion of the EdgeRock acquisition, an increase in costs associated with general corporate and international business development activities, and increased information technology costs, particularly associated with systems to support revenue production. These increases were partially offset by reduced costs associated with lower business volumes.
The effective income tax rate for 2015 was impacted by increased valuation allowances on deferred tax assets and the effect of goodwill impairment. The effective income tax rate for 2014 was impacted by increased valuation allowances on deferred tax assets, discrete items, the mix of domestic and foreign pre-tax income and certain foreign losses with no tax benefit. Effective income tax rates can be significantly impacted when pre-tax results are at a level such that these items have a disproportional impact on the effective tax rate. See Note 10—Income Taxes, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report for further information.
Corporate
Corporate expenses consist of operating expenses that are not allocated to the reporting units under segment reporting. Corporate expenses were $21.1 million in 2015 compared to $17.5 million in 2014. The increase in corporate expenses was primarily due to an increase in costs associated with corporate and international business development activities.

28



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Segment Results of Operations

Enterprise Talent
The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
North America Staffing
$
490,986

 
82.4
 %
 
$
614,995

 
84.4
%
 
$
(124,009
)
 
(20.2
)%
UK Staffing
104,977

 
17.6

 
113,691

 
15.6

 
(8,714
)
 
(7.7
)
Total revenue
595,963

 
100.0

 
728,686

 
100.0

 
(132,723
)
 
(18.2
)
Cost of services
524,035

 
87.9

 
639,948

 
87.8

 
(115,913
)
 
(18.1
)
Gross profit
71,928

 
12.1

 
88,738

 
12.2

 
(16,810
)
 
(18.9
)
Operating and administrative expenses
61,639

 
10.3

 
63,143

 
8.7

 
(1,504
)
 
(2.4
)
Restructuring and other related costs (1), (2)
1,084

 
0.2

 
1,001

 
0.1

 
83

 
8.3

Impairment (3)
10,653

 
1.8

 

 

 
10,653

 
NM

Operating profit (loss)
$
(1,448
)
 
(0.2
)
 
$
24,594

 
3.4

 
$
(26,042
)
 
(105.9
)
 
(1) 
In 2015, the Company's Enterprise Talent segment recorded an aggregate $1.1 million charge related to the 2015 Restructuring Plan announced in the third quarter of 2015 and adjustments to the 2014 Restructuring Plan.
(2) 
In 2014, the Company's Enterprise Talent segment recorded a $1.0 million charge related to the 2014 Restructuring Plan announced in the fourth quarter of 2014 and adjustments to the 2013 Restructuring Plan
(3) 
In 2015, the Company's Enterprise Talent segment recorded a charge of $10.7 million related to the impairment of goodwill in the Company's UK Staffing business.
NM–Not meaningful.

Revenue decreased primarily due to a decrease in North America Staffing. North America Staffing 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 and reduced staffing at a large information technology client. In addition, currency exchange rates negatively impacted revenues.
 
Gross profit decreased primarily due to the decrease in revenue as gross profit margin remained relatively flat.

Operating and administrative expenses decreased primarily due to reduced costs associated with lower business volumes offset partially by investments in additional recruiting and sales capacity in the U.S. and UK staffing businesses. Operating results during 2015 included a $10.7 million goodwill impairment charge related to the UK staffing business and a $1.1 million charge in restructuring and other related costs, compared to a $1.0 million charge in restructuring and other related costs during 2014.

Operating results decreased primarily due to the reduction in gross profit, goodwill impairment charge in 2015 and increase in operating and administrative expenses.





29



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Specialty Talent and Technology Solutions
The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Specialty Talent
$
10,242

 
24.7
%
 
$

 
%
 
$
10,242

 
NM

Technology Solutions
31,188

 
75.3

 
32,145

 
100.0

 
(957
)
 
(3.0
)
Total revenue
41,430

 
100.0

 
32,145

 
100.0

 
9,285

 
28.9

Cost of services
27,998

 
67.6

 
21,225

 
66.0

 
6,773

 
31.9

Gross profit
13,432

 
32.4

 
10,920

 
34.0

 
2,512

 
23.0

Operating and administrative expenses
12,571

 
30.3

 
6,715

 
20.9

 
5,856

 
87.2

Restructuring and other related costs
130

 
0.3

 
152

 
0.5

 
(22
)
 
(14.5
)
Operating profit
$
731

 
1.8

 
$
4,053

 
12.6

 
$
(3,322
)
 
(82.0
)
 
NM–Not meaningful.

Revenue increased primarily due to the inclusion of EdgeRock, which was acquired on October 6, 2015 and comprises the entirety of Specialty Talent, offset slightly by a decrease in Technology Solutions. Technology Solutions revenue decreased primarily due to decreased spending at a large customer.

Gross profit increased primarily due to the inclusion of EdgeRock, partially offset by a reduction in gross profit margin. Gross profit margin decreased primarily due to the inclusion of EdgeRock.

Operating and administrative expenses increased primarily due to the inclusion of EdgeRock, related to both direct operating expenses, including $2.1 million of amortization of acquired intangible assets and the allocation of certain corporate expenses to EdgeRock and, to a lesser extent, personnel-related investments in business development in Technology Solutions.
Operating results decreased due to the increase in operating and administrative expenses partially offset by the increase in gross profit.


30



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Engineering Solutions

The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Energy, Chemicals and Infrastructure (EC&I)
$
175,232

 
59.4
 %
 
$
169,661

 
55.9
 %
 
$
5,571

 
3.3
 %
Aerospace and Industrial Equipment (AIE)
59,881

 
20.3

 
73,420

 
24.2

 
(13,539
)
 
(18.4
)
Government Services
59,828

 
20.3

 
60,156

 
19.8

 
(328
)
 
(0.5
)
Total revenue
294,941

 
100.0

 
303,237

 
100.0

 
(8,296
)
 
(2.7
)
Cost of services
221,550

 
75.1

 
224,053

 
73.9

 
(2,503
)
 
(1.1
)
Gross profit
73,391

 
24.9

 
79,184

 
26.1

 
(5,793
)
 
(7.3
)
Operating and administrative expenses
72,884

 
24.7

 
74,748

 
24.7

 
(1,864
)
 
(2.5
)
Restructuring and other related costs (1)
2,153

 
0.7

 
2,092

 
0.7

 
61

 
2.9

Impairment (2), (3)
10,884

 
3.7

 
14,653

 
4.8

 
(3,769
)
 
(25.7
)
Loss on disposition of business interest
310

 
0.1

 

 

 
310

 
NM

Operating loss
$
(12,840
)
 
(4.4
)
 
$
(12,309
)
 
(4.1
)
 
$
(531
)
 
4.3

 
(1) 
In 2015 and 2014, the Company's Engineering Solutions segment recorded a restructuring charge of $2.2 million and $2.1 million, respectively, related to Restructuring Plans.
(2) 
In 2015, the Company's Engineering Solutions segment recorded $10.9 million of charges related to the impairment of goodwill and other assets.
(3) 
In 2014, the Company's Engineering Solutions segment recorded $14.7 million of charges related to the impairment of goodwill, definite-lived intangibles and other assets.
NM–Not meaningful.

Revenue decreased primarily due to the decrease in AIE, partially offset by an increase in EC&I. The decrease in AIE revenue was primarily due to reduced spending by a large commercial aviation customer. The increase in EC&I revenue was primarily due to increased spending by existing downstream customers.

Gross profit and gross profit margin decreased primarily due to decreased volume and pricing from a large commercial aviation customer in the AIE industry vertical, higher medical benefits costs and an overall shift in revenue mix toward lower margin EC&I business.

Operating and administrative expenses decreased slightly primarily due to decreased personnel and infrastructure costs, partially offset by increased costs to facilitate growth in the EC&I industry vertical. Operating results during 2015 included a $10.9 million goodwill impairment charge in the AIE industry vertical and $2.2 million in restructuring and other related costs, compared to $14.7 million of goodwill and other asset impairment charges and $2.1 million in restructuring and other related costs during 2014.

Operating loss increased slightly for 2015 as compared to 2014 primarily due to the decrease in gross profit predominately offset by decreases in impairment charges and, to a lesser extent, operating and administrative expenses.



31



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Management Recruiters International (MRI)

The following table presents changes in revenue by category along with selected financial information for the indicated periods:
 
2015
 
2014
 
Increase (Decrease)
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Contract Staffing
$
40,044

 
75.3
%
 
$
45,807

 
77.8
%
 
$
(5,763
)
 
(12.6
)%
Royalties and Franchise Fees
13,116

 
24.7

 
13,097

 
22.2

 
19

 
0.1

Total revenue
53,160

 
100.0

 
58,904

 
100.0

 
(5,744
)
 
(9.8
)
Cost of services
27,010

 
50.8

 
31,189

 
52.9

 
(4,179
)
 
(13.4
)
Gross profit
26,150

 
49.2

 
27,715

 
47.1

 
(1,565
)
 
(5.6
)
Operating and administrative expenses
20,138

 
37.9

 
20,925

 
35.5

 
(787
)
 
(3.8
)
Restructuring and other related costs (1)

 

 
259

 
0.4

 
(259
)
 
NM

Operating profit
$
6,012

 
11.3

 
$
6,531

 
11.1

 
$
(519
)
 
(7.9
)
 
(1) 
In 2014, the Company's MRI segment recorded a $0.3 million restructuring charge related to the 2014 Restructuring Plan announced in the fourth quarter of 2014.

Revenue decreased predominantly due to a decrease in contract staffing revenue. Contract staffing revenue decreased primarily due to a decrease in billable staffing headcount. Royalties and franchise fees increased slightly as increases in domestic royalties were offset by declines in international royalties.

Gross profit decreased primarily due to the reduction in contract staffing revenue. Gross profit margin increased due to the shift in revenue mix to higher margin royalties and franchise fees.

Operating and administrative expenses decreased primarily due to lower sales expenses related to contract staffing, partially offset by increased spending on payroll and other staff related costs.
Operating profit decreased as the decrease in gross profit was partially offset by a decrease in operating and administrative expenses and the absence of restructuring and other related costs in 2015.




32



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Liquidity and Capital Resources

The Company's principal sources of liquidity are cash flows from operations and borrowings under its credit facilities. The Company's principal uses of cash are operating expenses, capital expenditures, working capital requirements 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 October 30, 2015, the Company and several of its subsidiaries (collectively, the “Borrowers”) entered into a secured lending facility (the “2015 Credit Agreement”) with Bank of America, N.A. and other lenders. The 2015 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. In connection with the sale of Anders, the Company executed an amendment to the Credit Agreement to release all liens and security interests on the UK collateral and allocate the available UK borrowings to the U.S. borrowings. Borrowings under the 2015 Credit Agreement may be used by the Borrowers for general business purposes including capital expenditures and permitted acquisitions and investments. See Note 7Credit Facilities, in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K Report for more information relating to the 2015 Credit Agreement.

As of December 31, 2016, the Company had no outstanding borrowings and letters of credit outstanding of $3.3 million under the 2015 Credit Agreement. As of December 31, 2016, the Company had cash and cash equivalents of $3.2 million and $122.3 million available to borrow under the 2015 Credit Agreement. The Company was in compliance with all covenants under the 2015 Credit Agreement as of December 31, 2016.

The Company's primary source of cash is cash generated from operations. The Company provides services to customers, which it typically bills on a weekly, bi-weekly or monthly basis. Payment terms with customers can range from advance payments to more than 75 days. Expansions and contractions of the Company's business operations can have a significant impact on accounts receivable and available cash. Expansions of the Company's business operations generally result in an initial decrease in cash due to increased payroll costs and an initial increase in outstanding accounts receivable associated with higher business volumes. Contractions in the Company's business operations generally result in an initial increase in cash due to the continued collections of outstanding accounts receivable and decreased payroll costs associated with lower business volumes. The Company's accounts receivable balances were $178.4 million and $205.7 million as of December 31, 2016 and 2015, respectively.

Payroll is the Company's largest expenditure, with the majority of billable employees paid weekly or bi-weekly. As a result of the timing differences between the billing and cash collection cycle and the payroll cycle, the Company typically needs to fund its operations.

Capital expenditures are primarily for the replacement of aging fixed assets and upgrades of systems for efficiencies and for expenditures associated with business growth.

As of December 31, 2016, approximately 94% of the Company's cash and cash equivalents were held by certain non-U.S. subsidiaries, principally Canadian entities and denominated in Canadian dollars. 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.

On January 25, 2016, the Company announced that its Board of Directors approved a stock repurchase program (the "Stock Repurchase Program"). Under the Stock Repurchase Program, CDI is authorized to repurchase up to $20 million of its common stock from time to time and at prices considered appropriate by the Company. Repurchases have been and may be made via privately negotiated transactions, open market purchases, block trades or by other means at management's discretion in compliance with applicable securities laws. The timing of repurchases and number of shares of common stock to be purchased will depend upon market conditions and other factors. The Company is not required to repurchase any specific number of shares and the Stock Repurchase Program may be modified, suspended or discontinued at any time without prior notice. Through December 31, 2016, the Company repurchased 1,190,356 shares for $7.3 million in cash under the Stock Repurchase Program. As of December 31, 2016, approximately $12.7 million remained authorized for repurchase of shares.

33



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

The following table summarizes the net cash flows, by category, from the Company's consolidated statements of cash flows for the indicated periods:
 
Year ended December 31,
 
Change
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
 
 
 
 
 
 
 
 
 
Operating Activities
$
13,493

 
$
14,265

 
$
14,788

 
$
(772
)
 
$
(523
)
Investing Activities
(3,805
)
 
(38,448
)
 
(8,699
)
 
34,643

 
(29,749
)
Financing Activities
(23,346
)
 
5,788

 
(13,771
)
 
(29,134
)
 
19,559


Operating Activities
During 2016, net cash provided by operating activities was $13.5 million, a decrease of $0.8 million as compared to 2015. The slight decrease in net cash generated by operations was primarily due to the decline in net operating results, after adjusting for non-cash items, substantially offset by improvements in working capital requirements and income tax payments. Working capital requirements on a comparative basis were favorably impacted by the timing of receipts and payments including the receipt of a federal tax refund in 2016.

During 2015, net cash provided by operating activities was $14.3 million, a decrease of $0.5 million as compared to 2014. The decrease in net cash generated by operations was primarily due to the decline in net operating results, after adjusting for non-cash items, substantially offset by improvements in working capital requirements and lower income tax payments.

During 2014, net cash provided by operating activities was $14.8 million, a decrease of $1.3 million as compared to 2013. The decrease in net cash generated by operations was primarily due to the decline in net income, after adjusting for non-cash items, partially offset by improvements in working capital requirements and lower income tax payments. Working capital requirements decreased primarily due to improved collections.
 
Investing Activities
During 2016, net cash used in investing activities was $3.8 million, a decrease of $34.6 million as compared to 2015. The decrease was primarily the result of the difference between the net proceeds of $5.7 million received in 2016 related to the sale of Anders, partially offset by the payment of a $2.1 million working capital adjustment related to the EdgeRock acquisition compared to the payment of $31.3 million upon the closing of the EdgeRock acquisition in 2015. Capital expenditures remained relatively flat.

During 2015, net cash used in investing activities was $38.4 million, an increase of $29.7 million as compared to 2014 primarily due to the $31.3 million and $0.9 million purchases of EdgeRock and the recruitment business from Ship Shape Resources, respectively, partially offset by $1.2 million in proceeds from the sale of a non-operating corporate asset.

During 2014, net cash used in investing activities was $8.7 million, an increase of $1.3 million as compared to 2013. The increase was primarily due to higher capital expenditures to support growth in Engineering Solutions and the implementation of a new recruiting platform in Enterprise Talent.

Financing Activities
During 2016, net cash used in financing activities was $23.3 million, an increase of $29.1 million as compared to 2015. During 2016, the Company used cash to make net repayments under the Company's credit facility and purchase shares under the Stock Repurchase Program offset partially by book overdrafts. During 2015, the Company had net borrowings under the Company's credit facility offset slightly by the payment of dividends and debt issuance costs related to the 2015 Credit Agreement.

During 2015, net cash provided by financing activities was $5.8 million, a $19.6 million increase in cash as compared to 2014. The increase in net cash provided by financing activities was primarily due to 2015 borrowings related to the acquisition of EdgeRock and to support working capital requirements in the UK. This was offset by the payment of debt issuance costs related to entry into the 2015 Credit Agreement.
 
During 2014, net cash used in financing activities was $13.8 million, a $7.4 million increase in the use of cash as compared to 2013. The increase in net cash used in financing activities was primarily due to the increase in cash dividends paid, a change in book overdrafts and an increase in net repayments under the Company's credit agreement. During December 2012, the Company accelerated the payment of the first quarter 2013 dividend typically paid in March in the amount of $2.5 million, or $0.13 per share, to holders of record as of the close of business on December 14, 2012.
 

34



CDI CORP. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in tables are in thousands, except percentages)

Contractual Obligations and Commitments
The following table summarizes the Company's outstanding contractual obligations and commitments as of December 31, 2016:
 
 
Total
 
Less than
1 Year
 
1-3 Years
 
4-5 Years
 
More than
5 Years
 
 
 
 
 
 
 
 
 
 
 
Operating lease commitments (1)
 
$
34,491

 
$
9,001

 
$
13,632

 
$
4,899

 
$
6,959

Letters of credit (2)