1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
--------------
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 1-5519
------
CDI CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2394430
- ------------------------- -----------------------
(State or other jurisdic- (I.R.S. Employer
tion of incorporation or Identification Number)
organization)
1717 Arch Street, 35th Floor, Philadelphia, PA 19103-2768
----------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (215) 569-2200
--------------
Indicate whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Outstanding shares of each of the Registrant's classes of common stock as
of July 31, 2002 were:
Common stock, $.10 par value 19,288,696 shares
Class B common stock, $.10 par value None
2
CDI CORP
Table of Contents
-----------------
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of December 31, 2001 and 3
June 30, 2002
Consolidated Statements of Earnings for the three months 5
ended June 30, 2001 and 2002 and for the six months ended
June 30, 2001 and 2002
Consolidated Statements of Shareholders' Equity for the 7
three months ended June 30, 2001 and 2002 and for the
six months ended June 30, 2001 and 2002
Consolidated Statements of Cash Flows for the six months 9
ended June 30, 2001 and 2002
Notes to Condensed Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial 19
Condition and Result of Operations
Item 3. Quantitative and Qualitative Disclosures about Market 26
Risks
Part II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8K 28
SIGNATURES 29
3
PART 1. FINANCIAL INFORMATION
CDI CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
June 30,
2002 December 31,
(unaudited) 2001
------------- -------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 54,915 26,255
Accounts receivable, less allowance
for doubtful accounts of $ 7,325 -
June 30, 2002; $8,162 - December 31, 2001 219,489 252,721
Short-term investments 15,033 -
Prepaid expenses 6,907 6,577
Recoverable income taxes 1,468 -
Deferred income taxes 16,848 16,786
Assets of discontinued operations - 14,840
----------- ---------
Total current assets 314,660 317,179
Fixed assets, at cost:
Computers and systems 81,284 97,545
Equipment and furniture 31,035 30,382
Leasehold improvements 12,480 12,207
----------- ---------
124,799 140,134
Accumulated depreciation (88,922) (90,145)
----------- ---------
Net fixed assets 35,877 49,989
Deferred income taxes 14,727 5,709
Goodwill, net 66,280 87,469
Other assets 11,152 12,226
----------- ---------
$ 442,696 472,572
=========== =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
CDI CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
June 30,
2002 December 31,
(unaudited) 2001
------------- -------------
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Obligations not liquidated because
of outstanding checks $ 8,883 10,304
Accounts payable 27,912 29,684
Withheld payroll taxes 7,678 5,597
Accrued expenses 79,475 88,628
Income taxes payable - 2,512
Current portion of long-term debt 6,985 7,913
Liabilities of discontinued operations - 3,513
---------- --------
Total current liabilities 130,933 148,151
---------- --------
Deferred compensation 10,855 12,396
Minority interests 1,166 1,375
Shareholders' equity:
Preferred stock, $.10 par value -
authorized 1,000,000 shares; none
issued - -
Common stock, $.10 par value -
authorized 100,000,000 shares;
issued 20,225,922 shares - June 30,
2002; 20,078,972 shares - December 31,
2001 2,023 2,008
Class B common stock, $.10 par value -
authorized 3,174,891 shares; none
issued - -
Additional paid-in capital 20,888 17,629
Retained earnings 300,645 315,698
Accumulated other comprehensive loss (1,256) (2,038)
Unamortized value of restricted stock
issued (591) (690)
Less common stock in treasury, at cost -
950,965 shares - June 30, 2002;
950,502 shares - December 31, 2001 (21,967) (21,957)
----------- ----------
Total shareholders' equity 299,742 310,650
----------- ----------
$ 442,696 472,572
=========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
5
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share data; unaudited)
Three months ended Six months ended
June 30, June 30,
----------------- ----------------
2002 2001 2002 2001
------ ----- ------ ------
Revenues $298,415 382,239 611,549 777,313
Cost of services 220,489 285,364 454,299 575,084
--------- -------- -------- --------
Gross profit 77,926 96,875 157,250 202,229
Operating and administrative
costs 75,569 94,627 155,208 193,723
Provision for restructure - - 4,053 -
-------- -------- --------- --------
Operating profit (loss) 2,357 2,248 (2,011) 8,506
Interest expense, net 43 924 128 1,862
-------- -------- --------- --------
Earnings (loss) from continuing
operations before income
taxes, minority interests and
cumulative effect of
accounting change 2,314 1,324 (2,139) 6,644
Income tax (expense) benefit (802) (515) 791 (2,553)
--------- --------- --------- --------
Earnings (loss) from continuing
operations before minority
interests and cumulative
effect of accounting change 1,512 809 (1,348) 4,091
Minority interests 69 139 135 244
-------- -------- --------- --------
Earnings (loss) from continuing
operations before cumulative
effect of accounting change 1,443 670 (1,483) 3,847
Discontinued operations (70) 319 398 887
-------- -------- -------- --------
Earnings (loss) before
cumulative effect of
accounting change 1,373 989 (1,085) 4,734
Cumulative effect of change in
accounting for goodwill, net
of tax - - (13,968) -
--------- --------- -------- --------
Net earnings (loss) $1,373 989 (15,053) 4,734
========= ========= ======== ========
Continued on next page
See accompanying notes to unaudited condensed consolidated financial statements.
6
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share data; unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------- -----------------
2002 2001 2002 2001
--------- --------- -------- --------
Earnings (loss) per share:
Basic:
Continuing operations before
accounting change $ 0.08 0.04 (0.08) 0.20
Discontinued operations $ - 0.02 0.02 0.05
Cumulative effect of
accounting change, net of tax $ - - (0.73) -
Net earnings (loss) $ 0.07 0.05 (0.79) 0.25
Diluted:
Continuing operations before
accounting change $ 0.07 0.03 (0.08) 0.20
Discontinued operations $ - 0.02 0.02 0.05
Cumulative effect of
accounting change, net of tax $ - - (0.73) -
Net earnings (loss) $ 0.07 0.05 (0.79) 0.25
See accompanying notes to unaudited condensed consolidated financial statements.
7
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands; unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
2002 2001 2002 2001
--------- --------- -------- --------
Common stock
Beginning of period $ 2,013 2,002 2,008 2,002
Exercise of stock options 9 - 12 -
Stock Purchase Plan 1 1 3 1
---------- -------- ------- -------
End of period $ 2,023 2,003 2,023 2,003
========== ======== ======= =======
Additional paid-in capital
Beginning of period $ 18,745 16,759 17,629 16,677
Exercise of stock options 1,882 - 2,554 -
Restricted stock issued - (29) - 57
Restricted stock-vesting/
forfeiture - (45) 4 (45)
Restricted stock -
change in value 14 8 22 4
Stock Purchase Plan 247 124 679 124
---------- -------- ------- -------
End of period $ 20,888 16,817 20,888 16,817
========== ======== ======= ========
Retained earnings
Beginning of period $ 299,272 335,053 315,698 331,308
Net earnings (loss) 1,373 989 (15,053) 4,734
---------- ------- -------- --------
End of period $ 300,645 336,042 300,645 336,042
========== ======= ======= =========
Accumulated other comprehensive loss
Beginning of period $ (2,445) (2,594) (2,038) (1,999)
Translation adjustment 1,189 195 782 (943)
Loss on investment
recognized in earnings - - - 543
---------- ------- ------- -------
End of period $ (1,256) (2,399) (1,256) (2,399)
========== ======= ======= =======
Unamortized value of restricted stock issued
Beginning of period $ (633) (245) (690) (230)
Restricted stock issued - - - (70)
Restricted stock-vesting/
forfeiture - - 10 23
Restricted stock-change in
value (14) (8) (22) (4)
Restricted stock-
amortization of value 56 120 111 148
----------- -------- ------- -------
End of period $ (591) (133) (591) (133)
=========== ======== ======= =======
Continued on next page
See accompanying notes to unaudited condensed consolidated financial statements.
8
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands; unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
2002 2001 2002 2001
--------- --------- -------- --------
Treasury stock
Beginning of period $ (21,967) (21,986) (21,957) (21,963)
Restricted stock issued - 29 - 29
Restricted stock
vesting/forfeiture - - (10) (23)
------- ------- -------- --------
End of period $ (21,967) (21,957) (21,967) (21,957)
=========== ========= ======== ========
Comprehensive income
Net earnings (loss) $ 1,373 989 (15,053) 4,734
Translation adjustment 1,189 195 782 (943)
Loss on investment
recognized in earnings - - - 543
---------- ------- -------- -------
$ 2,562 1,184 (14,271) 4,334
========== ====== ======== =======
See accompanying notes to unaudited condensed consolidated financial statements.
9
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands; unaudited)
Six months ended
June 30,
------------------------
2002 2001
------------- ------------
Operating activities:
Net(loss) earnings $(15,053) 4,734
Net income from discontinued operations (398) (887)
Cumulative effect of change in accounting
for goodwill, net of tax 13,968 -
--------- ---------
(Loss) earnings from continuing operations (1,483) 3,847
Minority interests 135 244
Depreciation 16,181 10,513
Amortization of goodwill - 2,864
Non cash provision for restructure 3,205 -
Income tax (expense) benefit (less than)
tax payments (2,519) (8,493)
Change in assets and liabilities:
Decrease in accounts receivable 33,232 21,451
(Decrease) in payables and accrued expenses (10,398) (1,571)
Other 660 929
--------- ---------
39,013 29,784
--------- ---------
Investing activities:
Purchases of fixed assets (4,853) (9,519)
Purchase of short term investment (15,033) -
Acquisitions, net of cash acquired (791) (7,804)
Other 1,451 28
--------- ---------
(19,226) (17,295)
--------- ---------
Financing activities:
Borrowings on long-term debt - 8,539
Payments on long-term debt (928) (22,709)
Obligations not liquidated because of
outstanding checks (1,421) (4,234)
Proceeds from stock plans 2,604 (50)
--------- ---------
255 (18,454)
--------- ---------
Net cash flows from continuing operations 20,042 (5,965)
Net cash flows from discontinued operations 8,618 1,423
--------- ---------
Increase (decrease) in cash 28,660 (4,542)
Cash at beginning of period 26,255 11,432
--------- ---------
Cash at end of period $ 54,915 6,890
======== =========
See accompanying notes to unaudited condensed consolidated financial statements.
10
CDI Corp.
Notes to Condensed Consolidated Financial Statements
June 30, 2002
(In thousands, except share data)
(unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of CDI Corp.
(CDI or the Company) are unaudited. The balance sheet as of December 31, 2001 is
condensed from the audited balance sheet of the Company at that date. These
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission pertaining to reports on Form 10-Q and
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto for the year ended December 31, 2001 reported
in Form 10-K. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
The condensed consolidated financial statements for the unaudited interim
periods presented include all adjustments (consisting of only normal, recurring
adjustments except for restructuring and event-driven items and the effect of
the change in accounting for goodwill as noted) necessary for a fair
presentation of financial position, results of operations and cash flows for
such interim periods. Certain amounts in prior periods have been reclassified to
conform to the current period classification.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Results for the three months and six months ended June 30, 2002 are
not necessarily indicative of results that may be expected for the full year or
any portion thereof.
Effective January 1, 2002, the Company adopted the Statement of Financial
Accounting Standards No. 142 - "Goodwill and Other Intangible Assets" (SFAS
142). The Company ceased amortizing goodwill effective January 1, 2002, tested
goodwill carried in its balance sheet as of January 1, 2002 for impairment and
will test for impairment at least annually thereafter. A portion of the goodwill
carried in the Company's balance sheet as of January 1, 2002 has been determined
to be impaired and has been written off. In accordance with SFAS 142, the write
off of this goodwill, net of income tax benefit, is reflected as a change in
accounting as of January 1, 2002 and is presented in the Consolidated Statements
of Earnings as such. See note 6 for additional disclosures related to goodwill.
Effective January 1, 2002, the Company also implemented Emerging Issues
Task Force Consensus No. 01-14 "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred" (the Consensus).
The Consensus requires that certain reimbursable costs incurred and rebilled to
customers be included in both revenues and cost of services, rather than
"netting" these amounts in revenues. The effect of the Consensus was to increase
revenues and cost of services by $11,677 and $10,376 in the first and second
quarters of 2002, respectively. The impact for the first and second quarters
2001 was $14,350 and $16,769, respectively.
11
Effective January 1, 2002, the Company also adopted Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144). This Statement supersedes Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
to be Disposed Of" and certain provisions of Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" related to the disposal of a segment of a business.
2. Provision for Restructure
During 2002, the Company continued to execute the Plan of Restructure (the
Plan) adopted by CDI's Board of Directors in December 2001 and took additional
actions in conjunction with the Plan during the first quarter of 2002. Initial
implementation of the Plan resulted in charges of $22,426 in the fourth quarter
of 2001 and $4,053 in the first quarter of 2002 related to severance of
terminated employees, lease termination costs related to closed locations and
asset impairment charges related to certain elements of the management
information systems and other assets.
As of June 30, 2002, the remaining accrual for restructuring activities is
as follows:
Net Provision Net
Accrual at recorded Cash Accrual at
December in First Reduction Expendi- June 30,
31,2001 Quarter of Assets tures 2002
----------- --------- --------- -------- -----------
Asset
impairment $ - 848 (848) - -
Provision for
severance 3,999 991 - (2,538) 2,452
Provision for
termination of
operating leases 3,479 2,214 - (1,856) 3,837
------- ------- ------ -------- -------
$7,478 4,053 (848) (4,394) 6,289
======= ====== ====== ======== =======
The Company anticipates that the net accruals at June 30, 2002, which are
included in accrued expenses in the accompanying balance sheet, will be
substantially paid by December 31, 2002.
The breakdown of the 2002 provision for restructure among operating
segments is as follows:
Professional Services $ 605
Project Management 3,411
Todays Staffing 8
Corporate 29
-------
$ 4,053
=======
12
3. Discontinued Operations
During the six months ended June 30, 2002, the Company sold the net
operating assets of its Modern Engineering, Inc. (Modern) subsidiary, which
operated in its Project Management operating segment. Modern provides technical
staffing services to the automotive industry. In conjunction with the
implementation of SFAS 144, a pre-tax loss for disposal of these assets of
$1,264 has been recognized. The operations of Modern were a component of CDI, as
that term is defined in SFAS 144, and accordingly, are reflected as discontinued
operations in the accompanying unaudited financial statements.
The earnings from discontinued operations for the three and six months
ended June 30, 2002 and 2001, and related net assets at June 30, 2002 and
December 31, 2001, were as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
2002 2001 2002 2001
--------- --------- -------- --------
Revenues 14,748 22,462 32,674 47,411
------- -------- -------- --------
Gross profit 2,773 4,211 5,720 8,761
Operating and administrative
costs 2,702 3,720 5,842 7,350
Provision for disposal of assets 170 - 1,264 -
------- -------- -------- --------
(Loss) earnings before income
taxes (99) 491 (1,386) 1,411
Income tax benefit (expense) 29 (172) 1,784 (524)
--------- -------- -------- --------
(Loss)earnings from discontinued
operations $ (70) 319 398 887
========= ======== ======== ========
June 30, December 31,
Net Assets 2002 2001
------------------ ----------------
Assets (principally accounts receivable
and deferred income taxes) $ - 14,840
Liabilities (principally accounts
payable and
accrued expenses) - (3,513)
----------- ------------
Net assets $ - 11,327
=========== ============
13
4. Earnings (loss) Per Share
Earnings (loss) used to calculate both basic and diluted earnings per
share are the reported earnings in the Company's consolidated statements of
earnings. All reported earnings (loss) pertain to common shareholders and no
assumed adjustments are necessary. The number of common shares used to calculate
basic and diluted earnings per share for the three and six months ended June 30,
2002 and 2001 were determined as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
2002 2001 2002 2001
--------- --------- -------- --------
Basic
- -----
Average shares outstanding 19,227,486 19,072,651 19,191,738 19,071,478
Restricted shares issued
not vested (45,500) - (42,750) -
----------- ---------- ----------- -----------
19,181,986 19,072,651 19,148,988 19,071,478
========== ========== ========== ===========
Diluted
- -------
Shares used for basic 19,181,986 19,072,651 19,148,988 19,071,478
Dilutive effect of stock
options 377,354 17,457 - 8,728
Dilutive effect of
restricted shares issued
not vested 19,397 - - -
Dilutive effect of units
issuable under Stock
Purchase Plan 95,371 92,006 - 91,351
----------- ---------- ---------- ----------
19,674,108 19,182,114 19,148,988 19,171,557
=========== ========== ========== ==========
In the six months ended June 30, 2002, the same number of shares are
used for both the basic and diluted earnings per share calculations because the
inclusion of common stock equivalents in the diluted earnings per share
calculation would have been antidilutive.
14
5. Operating Segments
In conjunction with the Plan, the Company reorganized its management and
reporting relationships effective January 1, 2002 along four operating segments:
Professional Services, Project Management, Permanent Placement and Temporary
Staffing. The Permanent Placement and Temporary Staffing operating segments
consist of CDI's Management Recruiters International and Todays Staffing
operations, respectively. The Professional Services segment consists of the
staffing components of the former Technical Services and Information Technology
Services operating segments along with the Company's AndersElite operations in
the United Kingdom. The Project Management operating segment consists of CDI's
engineering, information technology and telecommunications project management
businesses. Prior periods have been reclassified to conform to the current
presentation.
Segment data is as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
2002 2001 2002 2001
--------- --------- -------- --------
Revenues
Professional Services 158,304 212,241 327,854 429,619
Project Management 78,788 90,724 159,731 183,812
Management Recruiters 22,443 27,328 45,152 57,870
Todays Staffing 38,880 51,946 78,812 106,012
----------- ---------- -------- ----------
298,415 382,239 611,549 777,313
========= ========== ======== ==========
Earnings (loss) from continuing
operations before income taxes,
minority interests and
cumulative effect of accounting
change
Operating profit (loss)
Professional Services $ 1,468 2,336 900 5,630
Project Management 2,149 (1,018) 9 734
Management Recruiters 2,372 4,653 4,227 10,393
Todays Staffing 1,170 1,448 2,219 3,374
Corporate expenses (4,802) (5,171) (9,366) (11,625)
-------- --------- -------- --------
2,357 2,248 (2,011) 8,506
Interest expense 43 924 128 1,862
-------- --------- -------- --------
$ 2,314 1,324 (2,139) 6,644
======== ========= ======== ========
June 30, December 31,
2002 2001
----------------- -----------------
Assets
Professional Services $ 184,570 212,148
Project Management 94,173 120,032
Management Recruiters 42,871 47,247
Todays Staffing 48,407 50,171
Corporate 72,675 28,134
Assets of discontinued
operations - 14,840
----------- -----------
$ 442,696 472,572
=========== ===========
Inter-segment activity is not significant. Revenues reported for each
operating segment are substantially all from external customers.
15
Corporate assets increased as of June 30, 2002 compared to December 31,
2001 primarily because of additional funds accumulated during 2002.
6. Goodwill
The adoption of SFAS 142, as described in Note 1, required testing as of
January 1, 2002 for impairment of goodwill carried in the Company's balance
sheet as of that date. The valuations performed on the various units identified
by the Company indicated that goodwill for certain of those units was impaired.
The fair values of these units determined by the valuations using current and
projected earnings and cash flows and market comparables in the valuation
process were less than the carrying cost of the underlying net assets of these
units. Testing for impairment of goodwill prior to January 1, 2002 was based
upon undiscounted cash flows from the related assets compared to the fair value
approach required under SFAS 142.
Impairment charges for the write off of goodwill of $21,401 (Professional
Services - $15,007; Project Management - $164; Management Recruiters - $6,230)
or $13,968 after income tax effect, have been recorded and are presented in the
Company's Consolidated Statements of Earnings as the effect of a change in
accounting.
Under SFAS 142, amortization of goodwill ceased January 1, 2002. The
following table compares operating profit (loss) for each operating segment,
earnings (loss) from continuing operations before cumulative effect of
accounting change, discontinued operations and net earnings (loss) (as well as
per share amounts) for the three months and six months ended June 30, 2002 with
the respective periods in 2001 as if SFAS 142 had been in effect for 2001.
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
2002 2001 2002 2001
--------- --------- -------- --------
Operating profit (loss)
Professional Services $1,468 2,336 900 5,630
Project Management 2,149 (1,018) 9 734
Management Recruiters 2,372 4,653 4,227 10,393
Todays Staffing 1,170 1,448 2,219 3,374
Corporate expenses (4,802) (5,171) (9,366) (11,625)
-------- ------- ------- --------
2,357 2,248 (2,011) 8,506
-------- ------- ------- --------
Goodwill amortization
Professional Services - 508 - 1,022
Project Management - 209 - 418
Management Recruiters - 333 - 666
Todays Staffing - 388 - 758
-------- ------ ------- -------
- 1,438 - 2,864
-------- ------ ------- --------
As adjusted, operating
profit (loss)
Professional Services 1,468 2,844 900 6,652
Project Management 2,149 (809) 9 1,152
Management Recruiters 2,372 4,986 2,219 11,059
Todays Staffing 1,170 1,836 4,227 4,132
Corporate expenses (4,802) (5,171) (9,366) (11,625)
--------- ------- ------- --------
$2,357 3,686 (2,011) 11,370
========= ======= ======= ========
Continued on next page
16
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
2002 2001 2002 2001
--------- --------- -------- --------
Earnings (loss) from
continuing operations
before cumulative effect
of accounting change
Reported $1,443 670 (1,483) 3,847
Add goodwill amortization,
after tax - 1,088 - 2,175
-------- ------- -------- --------
As adjusted $1,443 1,758 (1,483) 6,022
======== ======= ======== ========
Discontinued operations
Reported $ (70) 319 398 887
Add goodwill amortization,
after tax - 7 - 15
--------- ------- -------- --------
As adjusted $ (70) 326 398 902
========= ======= ======== ========
Net earnings (loss)
Reported $1,373 989 (15,053) 4,734
Add goodwill amortization,
after tax - 1,095 - 2,190
--------- -------- -------- --------
As adjusted $1,373 2,084 (15,053) 6,924
========= ======== ======== ========
Continued on next page
17
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
2002 2001 2002 2001
--------- --------- -------- --------
Basic earnings (loss) per share:
Continuing operations before
accounting change - reported $ 0.08 0.04 (0.08) 0.20
Continuing operations before
accounting change -
as adjusted $ 0.08 0.09 (0.08) 0.31
Discontinued operations -
reported $ - 0.02 0.02 0.05
Discontinued operations -
as adjusted $ - 0.02 0.02 0.05
Net earnings (loss)-
reported $ 0.07 0.05 (0.79) 0.25
Net earnings (loss)-
as adjusted $ 0.07 0.11 (0.79) 0.36
Diluted earnings (loss) per share:
Continuing operations before
accounting change - reported $ 0.07 0.03 (0.08) 0.20
Continuing operations before
accounting change - as adjusted $ 0.07 0.09 (0.08) 0.31
Discontinued operations -
reported $ - 0.02 0.02 0.05
Discontinued operations - as
adjusted $ - 0.02 0.02 0.05
Net earnings (loss)- reported $ 0.07 0.05 (0.79) 0.25
Net earnings (loss)- as adjusted $ 0.07 0.11 (0.79) 0.36
18
Changes in the carrying amount of goodwill for the six months ended June 30,
2002 were as follows:
Professional Project Management Todays
Services Management Recruiters Staffing Total
------------------------------------------------------
Balance December 31,
2001 $33,220 14,526 16,199 23,524 87,469
Purchase of minority
shareholder
interest 447 - - - 447
Impairment losses (15,007) (164) (6,230) - (21,401)
Other (235) - - - (235)
--------- ------- -------- ------- --------
Balance June 30,
2002 $18,425 14,362 9,969 23,524 66,280
========= ======= ======== ======= ========
7. Note Receivable from Officer
In March of 2002, the Company advanced $1,800 to the President and Chief
Executive Officer in conjunction with his relocation. The loan was repayable no
later than July 31, 2002, bore interest at the prime rate, and was
collateralized by the Executive's former residence. The remaining balance of
$293 at June 30, 2002 was paid in July of 2002.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
Results of Operations
---------------------------
Overview
- --------
During 2002, CDI continued to execute its strategy of reducing costs,
focusing its business on higher-margin services and exiting lower-margin
customer relationships. In conjunction with this strategy, the Company recorded
a provision for restructure of $4.1 million in the first quarter of 2002 related
to severance ($1.0 million), termination of operating leases ($2.2 million) and
asset impairments ($0.9 million)(see note 2 for breakdown among operating
segments). The Company also consummated the sale of the net operating assets of
Modern Engineering, a subsidiary that provided technical staffing to the
automotive industry in CDI's Project Management operating segment. In
conjunction with the sale and the implementation of SFAS 144, these operations
are reflected as discontinued operations in the accompanying unaudited financial
statements. Prior periods are reclassified to conform to this presentation.
Impairment charges of $21.4 million ($14.0 million net of income tax effects)
relating to goodwill have been recorded as a result of the adoption of SFAS 142
effective January 1, 2002. These charges are reflected as a change in accounting
in the accompanying financial statements.
As previously disclosed in CDI's annual report on Form 10-K, effective
January 1, 2002 the Company reorganized its management and operations along four
operating segments: Professional Services, Project Management, Temporary
Services (Todays Staffing) and Permanent Placement (Management Recruiters). The
discussions that follow are based on the Company's new segment reporting
structure.
Results of Operations for the three and six months ended June 30, 2002 as
- -------------------------------------------------------------------------
compared to the three and six months ended June 30, 2001:
- --------------------------------------------------------
Revenues from continuing operations for the three months ended June 30, 2002 and
2001 were $298.4 million and $382.2 million respectively - an $83.8 million or
21.9% decrease. Revenues from continuing operations for the six months ended
June 30, 2002 were $611.5 million compared to $777.3 million for the same period
in 2001- a $165.8 million or 21.3% decrease. The declines in both periods were
expected by management and reflect primarily both the overall decline in the
economy, coupled with the decision to exit lower-margin customer relationships
in the Professional Services segment.
Gross profit for the three months ended June 30, 2002 was $77.9 million as
compared to $96.9 million in the second quarter of 2001- a $19.0 million or
19.6% decrease. Gross profit margin improved to 26.1% in the three months ended
June 30, 2002 from 25.3% in the same quarter a year ago. This improvement
reflects the impact of exiting the lower-margin customer relationships. However,
gross profit for the six months ended June 30, 2002 was 25.7% as compared to
26.0% for the same period of last year. This reduction is due to a business mix
change primarily from the decline in both the higher-margin telecommunications
business and the franchised business component of Management Recruiters.
20
Operating and administrative expenses for the three months ended June 30, 2002
were $75.6 million compared to $94.6 million for the three months ended of last
year- a $19.0 million, or 20.1% decline. For the six months ended in June 2002
operating and administrative expenses, excluding the $4.1 million of provision
for restructure noted above, were $155.2 million compared to $193.7 million for
the same six month period a year ago - down $38.5 million or 19.9%. This is the
result of the implementation of management's strategy to reduce fixed costs
throughout the Company.
In addition to the $4.1 million provision for restructure noted above (see
note 2 for breakdown among operating segments), operating and
administrative expenses include the following event-driven items:
Three months ended
June 30,
---------------------
2002 2001
-------- --------
Accelerated depreciation of the Company's
Enterprise Resource Planning (ERP) system
and leasehold improvements in exited offices $3.7 million -
Provision for termination of contract - (0.3 million)
Provision for reduction in staff and office
closures - 1.2 million
Arbitration settlement .4 million -
------------- -------------
$4.1 million .9 million
============ =============
Six months ended
June 30,
-----------------------
2002 2001
------- ----------
Accelerated depreciation of the Company's
Enterprise Resource Planning (ERP) system
and leasehold improvements in exited offices $7.1 million -
Provision for termination of contract - .3 million
Provision for reduction in staff and office
closures - 1.2 million
Arbitration settlement .4 million -
Write-down of a strategic investment - 1.0 million
Provision for severance for former executive - .6 million
------------ -------------
$7.5 million 3.1 million
============ =============
21
As discussed in CDI's December 31, 2001 Annual Report on Form 10K, the Company's
Plan of Restructure adopted in December 2001 called for the decommissioning of
its ERP system by June 30, 2002 as well as the closing of several regional
offices. Accordingly, CDI recorded accelerated depreciation of approximately
$3.3 million in each of the first two quarters of 2002 coinciding with the
decommissioning, and $.4 million of depreciation on the leasehold improvements
on offices that were exited and have been recorded as a component of indirect
and administrative expense. Other expenses in 2002 consist of certain costs
associated with the streamlining of the Company's Project Management operations
as well as loss of a binding arbitration dispute associated with a former
acquisition. The event-driven items in 2001 relate to the impairment in value of
a strategic investment in an e-business solutions provider, the termination of
an agreement with a web-based solutions provider, the termination of the former
President of the Company's Information Technology Services division within the
Professional Services segment and the reduction of staff employees as well as
the closure of four offices. All of these charges are reflected in indirect and
administrative expense. The breakdown of these costs among operating segments is
as follows:
Three months ended
June 30,
-----------------------
2002 2001
------------ -------------
Professional Services $3.1 million .6 million
Project Management .8 million .1 million
Management Recruiters - .1 million
Todays Staffing .2 million .1 million
Corporate - -
------------ ------------
$4.1 million .9 million
============ ============
Six months ended
June 30,
----------------------
2002 2001
---------- -----------
Professional Services $5.7 million 1.2 million
Project Management 1.6 million .1 million
Management Recruiters - .1 million
Todays Staffing .2 million .1 million
Corporate - 1.6 million
------------ --------------
$7.5 million 3.1 million
============ ==============
Starting in 2002 operating and administrative expenses do not include
goodwill amortization, which ceased as of January 1, 2002 under the provisions
of SFAS 142. Goodwill amortization totaled approximately $1.4 million in each of
the first and second quarters of 2001 (see note 6 for breakdown among operating
segments).
Operating profit for the three months ended June 30, 2002 was $2.4 million
compared to $2.2 million for the second quarter of last year. Excluding the
event-driven items noted above in both quarterly periods and goodwill
amortization in 2001, operating profit would have been $6.5 million in the
second quarter of 2002 and $4.5 million in the second quarter of 2001. Operating
loss for the six months ended June 30, 2002 was $2.0 million compared to an
operating profit for the six months ended June 30, 2001 of $8.5 million.
Excluding the provision for restructure and event-driven items noted above, and
goodwill amortization in 2001, operating profit would have been $9.6 million in
2002 and $14.4 million in 2001.
22
Interest expense is shown net of interest income. Net interest expense for
the second quarter of 2002 was $43 thousand compared to $924 thousand for the
second quarter of 2001. Net interest expense for the six months ended June 30,
2002 was $128 thousand as compared to $1.9 million for the same six-month period
of last year. During the fourth quarter of 2001, the Company eliminated all bank
borrowings. The reduced interest expense in 2002 represents the effect of no
bank borrowings and interest income on funds accumulated starting last year.
CDI's effective income tax rate in 2002 is lower than the effective rate
in 2001. The reduced rate in 2002 is due to lower expenses permanently
non-deductible for tax purposes primarily related to the adoption of SFAS 142
whereby goodwill amortization ceased effective January 1, 2002.
In June, 2002, the Company sold the net operating assets of Modern
Engineering, Inc. (Modern) subsidiary, which operated in its Project Management
operating segment. Accordingly, the activity is reflected as discontinued
operations in the accompanying unaudited financial statements. Loss from
discontinued operations was $70 thousand in the second quarter of 2002 compared
to earnings of $319 thousand in the second quarter of 2001. Earnings from
discontinued operations for the six months ended June 2002 were $.4 million
compared to $.9 million for the same period in 2001. Results in 2002 compared to
2001 reflect lower sales to Modern's automotive industry customers and a loss on
the write-off of the net assets that were sold. Income taxes for discontinued
operations in 2002 include a one-time credit of $1.4 million that will be
realized as a result of the disposition of Modern.
For the six months ended June 30, 2002, the Company recorded impairment
charges for the write-off of goodwill of $21.4 million, ($14.0 million after
income tax effect). These charges are presented as a change in accounting as of
January 1, 2002 in accordance with the provisions of SFAS 142.
23
Operating Segment Results
The following table compares operating segment revenues and operating segment
profit as reported under generally accepted accounting principles, with
operating segment profit, after adding back the provision for restructure,
event-driven items and goodwill amortization in 2001 (goodwill amortization was
terminated in 2002 per SFAS 142.) The discussion of segment results that follows
references operating profit as adjusted because such amounts better reflect the
current operating cost structure of the Company.
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
2002 2001 2002 2001
------- ----- ------ ------
Revenues, as reported
Professional Services $158,304 212,241 327,854 429,619
Project Management 78,788 90,724 159,731 183,812
Management Recruiters 22,443 27,328 45,152 57,870
Todays Staffing 38,880 51,946 78,812 106,012
-------- ------- ------- --------
$298,415 382,239 611,549 777,313
======== ======= ======= ========
Operating profit (loss), as reported
Professional Services $ 1,468 2,336 900 5,630
Project Management 2,149 (1,018) 9 734
Management Recruiters 2,372 4,653 4,227 10,393
Todays Staffing 1,170 1,448 2,219 3,374
Corporate expenses (4,802) (5,171) (9,366) (11,625)
-------- ------- ------- --------
$ 2,357 2,248 (2,011) 8,506
======== ======= ======== ========
Operating profit (loss), as adjusted
Professional Services $ 4,556 3,442 7,266 7,855
Project Management 2,936 (690) 4,993 1,271
Management Recruiters 2,372 5,036 4,256 11,159
Todays Staffing 1,390 1,918 2,447 4,174
Corporate expenses (4,802) (5,171) (9,366) (10,025)
--------- ------- -------- --------
$ 6,452 4,535 9,596 14,434
======== ======= ======== ========
Professional Services
The Professional Services operating segment revenues declined in the
three and six months ended June 30, 2002 as compared to 2001. These revenue
reductions principally reflect the continued slowdown in the United States
economy, as well as the impact of the Company's planned exit from lower-margin
customer accounts. For the quarter ended June 30, 2002 the improvement in
operating profit, as adjusted, is primarily due to the reduction of operating
and administrative costs as a result of management's restructuring programs that
more than offset the reduction in gross profit created by lower revenues in
2002. For the six months ended June 30, 2002, reduced operating and
administration costs in large part, offset reduced gross profit from the decline
in revenues.
24
Project Management
Project Management operating segment revenues in the three and six
months ended June 30, 2002 were lower as compared to 2001. The lower revenues
are primarily attributable to the segment's telecommunication services
operations, which have been severely impacted by the extreme slowdown in the
telecommunications industry. The improvements in operating profit as adjusted in
2002 are primarily due to the significant reduction of operating and
administrative costs as a result of management's restructuring programs that
offset the reduced gross profit from the decline in revenues in CDI's
telecommunications operations.
Management Recruiters (MRI)
MRI's revenue and operating profit, as adjusted, decreased in the three
and six months ended June 30, 2002 as compared to 2001. This reduced level of
performance reflects reductions in demand for MRI's permanent placement services
throughout the network of company-owned and franchised offices.
Todays Staffing
Todays operating segment declines in revenues and operating profit, as
adjusted, for the three and six months ended June 30, 2002 as compared to 2001,
reflect the effects of the slowdown in the United States economy, as well as
pricing pressure from competitors.
Corporate
The reduction of corporate expenses, as adjusted, for the three and six
months ended June 30, 2002 as compared to 2001, reflect management's expense
reduction efforts.
25
Liquidity and Capital Resources
Cash flow from operations was $39.0 million in the first six months of
2002, compared to $29.8 million for the comparable period last year - an
increase of $9.2 million- even though the Company incurred a net loss in 2002
compared to net earnings in the six months ended June 30, 2001. CDI benefited
from a continuing reduction in accounts receivable of $33.2 million, partially
offset by a reduction in payables and accrued expenses.
Cash used in investing activities of $19.2 million in the first six
months of 2002 includes an investment of $15 million of the cash generated since
the fourth quarter of 2001 in a certificate of deposit that will be held until
it matures in May 2003. Excluding this investment, investing activities in 2002
totaled $4.2 million compared to $17.3 million in the first six months of 2001.
Capital expenditures of $4.9 million for the six months ended June
30, 2002 fell by $4.7 million, as compared to 2001 because management has
curtailed the purchase of new assets, particularly in the area of systems.
Acquisition spending was insignificant in the first six months of 2002, compared
to $7.8 million in 2001, which included one small acquisition, payments related
to prior acquisitions and the purchase of an additional interest in a
majority-owned subsidiary. Other investing activities in 2002 provided $1.4
million of cash as CDI realized funds from the sale of certain assets.
Cash provided by financing activities was $.3 million for the six
months ended June 30, 2002 as compared to $18.5 million of cash used in the
first six months of 2001. The primary use of cash in financing activities during
2001 was $14.2 million for repayment of debt, net of long-term borrowings.
At June 30, 2002, the Company had $54.9 million of cash and cash
equivalents, $15.0 million of short-term investments and no bank borrowings. CDI
continues to liquidate its remaining financed obligations of $7.0 million, all
of which are classified as current. During July 2002, the Company reduced its
financed obligations by $6.0 million repaying two notes payable to the former
owner of AndersElite. There have been no changes in the Company's credit
arrangements.
The Company believes that its available cash, future cash flows from
operations as well as available borrowing arrangements will be sufficient to
meet its cash requirements during 2002.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risks
There has been no material change from our Annual Report on Form 10K
related to the Company's exposure to interest rate risk.
New Accounting Pronouncements
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142 - "Goodwill and Other
Intangible Assets". See notes 1 and 6 to CDI's condensed consolidated financial
statements for information regarding the adoption of this statement.
In July 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 146 (SFAS 146) "Accounting for Costs
Associated with Exit or Disposal Activities." Generally, SFAS 146 will spread
out the reporting of expenses related to restructurings initiated after 2002.
SFAS 146 is effective for years beginning after December 31, 2002. The Company
has not yet assessed the impact this statement will have on the Company's
financial position or results of operations.
Forward-looking Information
Certain information in this report, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements as such term is defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Certain forward-looking statements can be identified by the use of
forward-looking terminology such as, "believes", "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "estimates," or
"anticipates" or the negative thereof or other comparable terminology, or by
discussions of strategy, plans or intentions. Forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. These include risks and
uncertainties such as competitive market pressures, material changes in demand
from larger customers, availability of labor, the Company's performance on
contracts, changes in customers' attitudes toward outsourcing, government
policies or judicial decisions adverse to the staffing industry, changes in
economic conditions and delays or unexpected costs associated with
implementation of the Company's Plan of Restructure. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company assumes no obligation to update such
information.
27
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 7, 2002 the Company held its annual meeting of shareholders. The
matters of business conducted at the meeting were the election of eight
Directors of the Company, two amendments to the Company's 1998 non-qualified
stock option plan, approval of a bonus plan and stock option grant for the
Company's Chief Executive Officer and the ratification of KPMG LLP as the
Company's independent auditors for 2002.
The name of each director elected at the meeting and a tabulation of the
voting by nominee follows:
Votes Votes
for withheld
---------- ---------
Roger H. Ballou 16,297,958 446,097
Walter E. Blankley 16,302,187 441,868
Michael J. Emmi 15,893,253 850,802
Walter R. Garrison 16,148,277 595,778
Kay Hahn Harrell 15,891,812 852,243
Lawrence C. Karlson 16,237,677 506,378
Alan B. Miller 16,302,037 442,018
Barton J. Winokur 15,740,102 1,003,953
There were no abstentions and there were no broker non-votes.
The vote for two amendments to the Company's 1998 non-qualified stock option
plan was as follows:
For Against Abstain
---------- ------- -------
12,422,590 1,360,562 647,492
There were 2,313,411 broker non-votes.
The vote for the approval of a bonus plan and stock option grant for the
Company's Chief Executive Officer was as follows:
For Against Abstain
---------- ------- -------
12,929,901 846,918 653,825
There were 2,313,411 broker non-votes.
The vote for the ratification of KPMG LLP as independent auditors for 2002
was as follows:
For Against Abstain
---------- ------- -------
16,130,140 606,195 7,720
There were no broker non-votes.
28
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.(i) Articles of incorporation of the Registrant, as amended.
(ii) Bylaws of the Registrant.
(b) The Registrant did not file a report on Form 8-K during the three month
period ended June 30, 2002.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CDI CORP.
---------------------------------------
August 14, 2002 By: /s/ Gregory L. Cowan
------------------------------------
GREGORY L. COWAN
Executive Vice President and Chief
Financial Officer
(Duly authorized officer and
principal financial officer of
Registrant)
30
INDEX TO EXHIBITS
Number Exhibit Page
- -------------- --------------------------------------------------- -----
3. (i) Articles of incorporation of the Registrant, 31
as amended.
(ii) Bylaws of the Registrant. 44