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 March 31, 2003
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
--- ---
Indicate whether the Registrant is an accelerated filer (as defined in
Section 12b-2 of the Exchange Act.)
Yes X No
--- ---
Outstanding shares of each of the Registrant's classes of common stock as
of April 25, 2003 were:
Common stock, $.10 par value 19,379,404 shares
Class B common stock, $.10 par value None
CDI CORP.
Table of Contents
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31,
2002 and March 31, 2003 (unaudited) 3
Consolidated Statements of Earnings for the
three months ended March 31, 2002 and 2003 (unaudited) 5
Consolidated Statements of Shareholders' Equity
for the three months ended March 31, 2002 and 2003
(unaudited) 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2003 (unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risks 18
Item 4. Controls and Procedures 18
Part II:OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21
Index to Exhibits 23
2
PART 1. FINANCIAL INFORMATION
Item 1
CDI CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
March 31, 2003
(unaudited) December 31, 2002
---------------- -------------------
Assets
Current assets:
Cash and cash equivalents $ 28,013 41,148
Accounts receivable,
less allowance for doubtful
accounts of $7,832 - March 31, 2003;
$7,683 - December 31, 2002 203,939 189,557
Short-term investments 65,356 58,477
Prepaid expenses 8,295 6,403
Income taxes receivable 4,519 6,101
Deferred income taxes 12,013 13,195
---------------- -------------------
322,135 314,881
Fixed assets, at cost:
Computers and systems 78,941 75,815
Equipment and furniture 26,547 27,213
Leasehold improvements 12,040 12,082
---------------- ------------------
117,528 115,110
Accumulated depreciation (87,812) (85,976)
---------------- ------------------
29,716 29,134
Deferred income taxes 11,280 11,750
Goodwill, net 68,334 68,334
Other assets 4,643 8,675
---------------- ------------------
$ 436,108 432,774
================ ==================
See accompanying notes to consolidated financial statements.
3
CDI CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
Continued
(In thousands, except per share data)
March 31, 2003
(unaudited) December 31, 2002
--------------- -------------------
Liabilities and Shareholders' Equity
Current liabilities:
Obligations not liquidated because
of outstanding checks $ 12,334 5,978
Accounts payable 23,231 25,008
Withheld payroll taxes 4,791 2,773
Accrued expenses 73,904 82,242
Current portion of long-term debt 279 480
--------------- -------------------
114,539 116,481
Deferred compensation 7,993 8,492
Minority interests
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 20,335,119
shares March 31, 2003; 20,313,915
shares - December 31, 2002 2,034 2,031
Class B common stock, $.10 par
value - authorized 3,174,891
shares; none issued - -
Additional paid-in capital 23,424 22,975
Retained earnings 311,799 306,339
Accumulated other comprehensive
loss (810) (610)
Unamortized value of restricted
stock issued (737) (800)
Less common stock in treasury,
at cost - 958,465 shares -
March 31, 2003; 958,465
shares - December 31, 2002 (22,134) (22,134)
--------------- -------------------
313,576 307,801
--------------- -------------------
$ 436,108 432,774
=============== ===================
See accompanying notes to consolidated financial statements.
4
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share data; unaudited)
Three months ended
March 31,
----------------------------------
2003 2002
--------------- --------------
Revenues $ 269,526 313,134
Cost of services 201,150 233,810
--------------- --------------
Gross profit 68,376 79,324
Operating and administrative
expenses 60,014 79,639
Provision for restructure - 4,053
--------------- --------------
Operating profit (loss) 8,362 (4,368)
Interest (income) expense, net (374) 85
--------------- --------------
Earnings (loss) from continuing
operations before income taxes,
minority interests and cumulative
effect of accounting change 8,736 (4,453)
Income tax (expense) benefit (3,276) 1,593
--------------- --------------
Earnings (loss) from continuing
operations before minority
interests and cumulative
effect of accounting change 5,460 (2,860)
Minority interests - 66
--------------- --------------
Earnings (loss) from continuing
operations before cumulative
effect of accounting change 5,460 (2,926)
Discontinued operations - 468
Cumulative effect of accounting
change, net of tax - (13,968)
--------------- --------------
Net earnings (loss) $ 5,460 (16,426)
=============== ==============
Basic earnings (loss) per share:
Earnings (loss) from
continuing operations $ 0.28 (0.15)
Discontinued operations $ - 0.02
Cumulative effect of accounting
change $ - (0.73)
Net earnings (loss) $ 0.28 (0.86)
Diluted earnings (loss) per share:
Earnings (loss) from
continuing operations $ 0.28 (0.15)
Discontinued operations $ - 0.02
Cumulative effect of accounting
change $ - (0.73)
Net earnings (loss) $ 0.28 (0.86)
See accompanying notes to consolidated financial statements.
5
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands; unaudited)
Three months ended
March 31,
-------------------------------
2003 2002
-------------- -------------
Common stock
Beginning of period $ 2,031 2,008
Exercise of stock options 1 3
Restricted stock - -
Stock purchase plans 2 2
-------------- -------------
End of period $ 2,034 2,013
============== =============
Additional paid-in capital
Beginning of period $ 22,975 17,629
Exercise of stock options 139 672
Restricted stock-vesting/forfeiture - 4
Restricted stock-change in value (6) 8
Stock purchase plans 316 432
-------------- -------------
End of period $ 23,424 18,745
============== =============
Retained earnings
Beginning of period $ 306,339 315,698
Net earnings (loss) 5,460 (2,458)
-------------- -------------
End of period $ 311,799 313,240
============== =============
Accumulated other comprehensive loss
Beginning of period $ (610) (2,038)
Translation adjustment (200) (407)
-------------- -------------
End of period $ (810) (2,445)
============== =============
Unamortized value of restricted stock issued
Beginning of period $ (800) (690)
Restricted stock-vesting/forfeiture - 10
Restricted stock-change in value 6 (8)
Restricted stock-amortization of value 57 55
-------------- -------------
End of period $ (737) (633)
============== =============
Treasury stock
Beginning of period $ (22,134) (21,957)
Restricted stock-vesting/forfeiture - (10)
-------------- -------------
End of period $ (22,134) (21,967)
============== =============
Comprehensive income (loss)
Net earnings (loss) $ 5,460 (16,426)
Translation adjustment (200) (407)
-------------- -------------
$ 5,260 (16,833)
============== =============
See accompanying notes to consolidated financial statements.
6
CDI CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands; unaudited)
Three months ended
March 31,
-------------------------------
2003 2002
-------------- -------------
Continuing Operations
Operating activities:
Net earnings (loss) $ 5,460 (16,426)
Net income from
discontinued operations - (468)
Cumulative effect of accounting
change, net of tax - 13,968
-------------- -------------
Earnings (loss) from
continuing operations 5,460 (2,926)
Minority interests - 66
Depreciation 3,085 8,343
Non-cash provision
for restructure expenses - 4,053
Income tax benefit (expense)
greater (less) than tax payments 3,234 (2,362)
Change in assets and liabilities,
net of effects from acquisitions:
(Increase) decrease in accounts
receivable (14,382) 10,239
Decrease in payables
and accrued expenses (8,097) (3,268)
Other 1,782 (723)
-------------- -------------
(8,918) 13,422
-------------- -------------
Investing activities:
Purchases of fixed assets (4,207) (2,671)
Purchases of short-term investments (6,879) -
Acquisitions, net of cash acquired - (791)
Other 577 1,240
-------------- -------------
(10,509) (2,222)
-------------- -------------
Financing activities:
Payments on long-term debt (201) (685)
Obligations not liquidated
because of outstanding checks 6,356 6,635
Proceeds from stock plans 139 687
Other (2) -
-------------- -------------
6,292 6,637
-------------- -------------
Net cash flows from
continuing operations (13,135) 17,837
Net cash flows from
discontinued operations - 5,635
-------------- -------------
(Decrease) increase in cash
and cash equivalents (13,135) 23,472
Cash and cash equivalents
at beginning of period 41,148 26,255
-------------- -------------
Cash and cash equivalents at
end of period $ 28,013 49,727
============== =============
See accompanying notes to consolidated financial statements.
7
CDI Corp.
Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2003
(Dollars in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements of CDI Corp. ("CDI" or the
"Company") are unaudited. The balance sheet as of December 31, 2002 is derived
from the audited balance sheet of the Company at that date. These statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission pertaining to reports on Form 10-Q and should
be read in conjunction with the Company's consolidated financial statements and
the notes thereto for the year ended December 31, 2002 reported in Form 10-K,
filed March 27, 2003. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The consolidated financial statements for the unaudited interim periods
presented include all adjustments (consisting of only normal, recurring
adjustments) necessary for a fair presentation of financial position, results of
operations and cash flows for such interim periods. Certain amounts in prior
periods have been reclassified to conform to the current period classification.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. Actual results could differ from those estimates. Results for the
three months ended March 31, 2003 are not necessarily indicative of results that
may be expected for the full year or any portion thereof.
2. New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 146 ("SFAS 146") Accounting for Costs
Associated with Exit or Disposal Activities, which supersedes Emerging Issues
Task Force Number 94-3, ("EITF No. 94-3"), Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred, rather than at the date of a commitment to an exit or disposal plan as
required by EITF No. 94-3. SFAS 146 is effective for restructuring activities
initiated after December 31, 2002. This Statement does not require companies to
adjust restructuring reserves recorded before 2003. The Company will apply SFAS
146 to future restructurings.
Effective December 15, 2002, the Company adopted FASB Interpretation Number 45
("FIN 45") Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has assessed this
Interpretation and has provided the necessary disclosures on Form 10-K filed
with the SEC on March 27, 2003 in Note 16 of the Notes to Consolidated Financial
Statements. For the three months ended March 31, 2003, there were no significant
changes from year-end.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 148 ("SFAS 148") - Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123 ("SFAS 123"); Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
required interim disclosure is shown below. The transition provisions of SFAS
148 are effective for years beginning after December 15, 2002.
Stock Based Plans
The Company uses the intrinsic value method of accounting for stock options and
other forms of stock-based compensation granted to employees and directors, in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees. No compensation cost has been
recognized for grants of stock options because option exercise prices are not
less than the fair market value of the underlying common stock at dates of
grant. Compensation cost has been recognized for restricted stock issued and for
units granted under the Stock Purchase Plan and Stock Unit Plan.
SFAS 123 uses a fair value based method of accounting for stock-based
compensation. The following table reflects the pro-forma effect on net earnings
(loss) and earnings (loss) per share for the three months ended March 31, 2003
and 2002 as if the Company had adopted the fair value recognition provisions of
SFAS 123:
Three months ended
March 31,
-------------------------------
2003 2002
-------------- -------------
Net income (loss), as reported $ 5,460 (16,426)
Stock-based employee and
director compensation cost
included in reported earnings
(loss), net of income tax effect 234 274
Stock-based employee and director
compensation cost under
fair value-based method, net
of income tax effect (584) (432)
-------------- -------------
Pro forma net income (loss) $ 5,110 (16,584)
============== =============
Net earnings (loss) per share:
Basic - as reported $ 0.28 (0.86)
Basic - pro forma 0.26 (0.87)
Diluted - as reported $ 0.28 (0.86)
Diluted - pro forma 0.26 (0.87)
9
3. Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments as of March 31, 2003 and
December 31, 2002 were comprised of the following:
March 31, 2003 December 31, 2002
---------------- -------------------
Cash $ 15,417 12,659
Cash equivalents 12,596 28,489
---------------- -------------------
$ 28,013 41,148
================ ===================
Short-term investments:
Available-for-sale $ 50,036 43,252
Held-to-maturity 15,320 15,225
---------------- -------------------
$ 65,356 58,477
================ ===================
These investments are in liquid, high quality debt securities with
diversification among the investments based upon the Company's guidelines.
Amortized cost approximates fair value. Realized gains and losses during the
three months ended March 31, 2003 were immaterial and there were no transfers of
investments between classifications of short-term investments.
All of the Company's available-for-sale securities reflect investments in
corporate bonds, various government agencies and commercial paper. The Company's
held-to-maturity investment is a certificate of deposit, which had a one-year
maturity when purchased.
Contractual maturities of available-for-sale securities as of March 31, 2003 of
$6,664 were for securities maturing in one year or less and $43,372 for
securities maturing in one to four years.
4. Goodwill
The adoption of FASB Statement of Financial Accounting Standard No. 142 ("SFAS
142"), Goodwill and Other Intangible Assets, 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 some of the units was impaired. The fair
value of these units was less than the carrying cost of the underlying net
assets. The valuation was determined by using the current and projected
earnings, cash flows and market comparables. Testing for impairment of goodwill
prior to January 1, 2002 was based upon undiscounted cash flows from the related
assets, as compared to the fair value approach required under SFAS 142.
As of January 1, 2002, impairment charges for the write-off of goodwill were
$21,401 (Professional Services - $15,007; Project Management - $164; Management
Recruiters - $6,230), or $13,968 net of income tax. These charges were recorded
in the Company's Consolidated Statements of Earnings as a cumulative effect of a
change in accounting.
SFAS 142 also requires the Company to test for impairment on an annual basis.
The Company will conduct its annual goodwill impairment test as of July 1 of
each year.
5. Provision for Restructure
During the three months ended March 31, 2003, there were no restructuring
charges, as compared to the $4.1 million recorded in the same period in 2002.
The restructuring charges recorded in the first quarter of 2002 primarily
impacted the Project Management segment ($3.4 million) and the Professional
Services segment ($0.6 million).
During the period ended March 31, 2003, the Company disbursed $1.9 million
related to its restructure accruals. The table presented below shows the current
period activity:
10
Net Accrual at Cash Net Accrual at
December 31, 2002 Expenditures March 31, 2003
------------------- -------------- ----------------
Provision for severance $ 3,360 (1,141) 2,219
Provision for termination 5,539 (751) 4,788
of operating leases ------------------ -------------- -----------------
$ 8,899 (1,892) 7,007
================== ============== =================
The remaining liability for severance will be paid during 2003. The Company
anticipates that the remaining liability for the termination of operating leases
will be substantially paid by December 31, 2005. It is management's intent to
liquidate its remaining lease obligations as soon as possible. The accrual for
the provision for restructure was included in accrued expenses in the
accompanying consolidated balance sheets.
6. Discontinued Operations
In June of 2002 the Company sold the net operating assets of its Modern
Engineering, Inc. ("Modern") subsidiary that operated in its Project Management
segment. Modern provided technical staffing services to the automotive industry.
The operations of Modern were a component of CDI, as that term is defined in
FASB Statement of Financial Accounting Standard No. 144 ("SFAS 144"), Accounting
for the Impairment or Disposal of Long Lived Assets, and accordingly, are
reflected as discontinued operations in the accompanying financial statements.
The earnings from discontinued operations for the three months ended March 31,
2002 were as follows:
Three months ended
March 31, 2002
--------------------
Revenues $ 17,926
====================
Gross profit $ 2,947
Operating and administrative expenses 3,140
Provision for asset impairment 1,094
--------------------
Loss before income taxes (1,287)
Income tax benefit 1,755
--------------------
Earnings from discontinued operations $ 468
====================
7. Earnings (Loss) Per Share
Earnings (loss) used to calculate both basic and diluted earnings (loss) per
share for all periods 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. In the three months ended
March 31, 2002, basic and diluted shares are the same because including the
effect of common stock equivalents would be antidilutive.
11
The number of common shares used to calculate basic and diluted earnings per
share for three months ended March 31, 2003 and 2002 was determined as follows:
Three months ended
March 31,
-------------------------------
2003 2002
-------------- -------------
Basic
Average shares outstanding 19,366,692 19,155,989
Restricted shares issued not
vested (45,375) (40,000)
--------------- -------------
19,321,317 19,115,989
=============== =============
Diluted
Shares used for basic 19,321,317 19,115,989
Dilutive effect of stock options 109,688 -
Dilutive effect of restricted shares
issued not vested - time based 6,258 -
Dilutive effect of restricted shares
issued not vested - performance based 125 -
Dilutive effect of units issuable
under stock purchase plans 116,850 -
---------------- -------------
19,554,238 19,115,989
================ =============
8. Operating Segments The Company is managed and operated along four operating
segments: Professional Services ("PS"), Project Management ("PM"), Todays
Staffing ("Todays") and Management Recruiters International ("MRI").
PS offers information technology, engineering and technical staffing solutions
to customers in targeted vertical markets.
PM provides a wide range of project management, technical outsourcing and
technical consulting services through several divisions organized by vertical
markets.
MRI provides franchise support services for the search, recruitment and
employment of management personnel. It also provides temporary administrative,
clerical and management staffing services through several specialized divisions.
Todays provides temporary administrative, clerical and legal staffing
services.
12
Operating segment data is presented in the following table:
Three months ended
March 31,
-------------------------------
2003 2002
-------------- -------------
Revenues:
Professional Services $ 140,357 169,550
Project Management 78,924 80,943
Todays Staffing 34,572 39,932
Management Recruiters 15,673 22,709
-------------- -------------
$ 269,526 313,134
============== =============
Earnings (loss) from continuing
operations before income taxes,
minority interests and the
cumulative effect of accounting
change
Operating profit (loss):
Professional Services $ 4,555 (568)
Project Management 5,161 (2,140)
Todays Staffing 1,392 1,049
Management Recruiters 683 1,855
Corporate (3,429) (4,564)
-------------- -------------
8,362 (4,368)
Interest (income) expense (374) 85
-------------- -------------
$ 8,736 (4,453)
============== =============
March 31, 2003 December 31, 2002
---------------- ------------------
Assets:
Professional Services $ 167,477 155,650
Project Management 92,987 89,996
Todays Staffing 43,212 44,779
Management Recruiters 33,759 38,934
Corporate 98,673 103,415
------------- -------------
$ 436,108 432,774
============= =============
Inter-segment activity is not significant; therefore, revenues reported for each
operating segment are substantially all from external customers.
13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
During the three month period ended March 31, 2003, CDI Corp. (the "Company")
continued to see benefits from its multi-phased Plan of Restructure (the
"Plan"), which was initially implemented in the fourth quarter of 2001 and
concluded in the third quarter of 2002. The successful execution of the Plan, as
well as continued fiscal discipline, have lowered the Company's overall cost
structure. Although the Company operates in a very challenging business
environment, CDI has begun to reap the benefits of its strategy of focusing on
longer cycle project work and higher margin revenues in general. Part of the
overall strategy has included upgrading its technology infrastructure, as well
as transitioning the Company's back-office processing to West Virginia over the
next several quarters.
The Company is managed and operated along four operating segments: Professional
Services ("PS"), Project Management ("PM"), Todays Staffing ("Todays") and
Management Recruiters International ("MRI"). The discussions that follow are
based on the Company's segment reporting structure. This report should be read
in conjunction with the Company's 2002 report on Form 10-K filed with the
Securities and Exchange Commission on March 27, 2003.
Consolidated Results of Operations for the three months ended March 31, 2003 as
compared to the three months ended March 31, 2002
The Company recorded consolidated revenues of $269.5 million in the first
quarter of 2003, down $43.6 million or 13.9%, as compared to the first quarter
of 2002. This overall decline was significantly due to the following reasons:
the decision to exit lower margin contracts in PS, the sale of company-owned
offices in MRI and the significant decline in CDI's Telecommunications business
that is part of PM. The sluggish economy also continued to adversely affect the
Company's performance. For example, PS is experiencing reduced demand for
information technology services. Todays', which competes in the temporary
clerical sector, has seen depressed demand for its services due to being highly
dependent on the economy. Finally, MRI is experiencing the effects of employers
continuing to delay hiring of permanent staff. Partially offsetting these
declines was double-digit growth in the current quarter in AndersElite, which is
reported in the PS segment.
The Company' s gross profit of $68.4 million in the first quarter of 2003 was
lower by $10.9 million or 13.8% as compared to the first quarter of 2002. This
decline was primarily due to the lower sales volume noted above. All segments
had increases in gross profit margin except for MRI. MRI`s gross profit margin
was negatively impacted by the sale of company-owned offices in the third
quarter of last year.
Operating and administrative expenses were $60.0 million in the first quarter of
2003, a decline of $19.6 million or 24.6% from the first quarter of 2002. This
improvement was due to the Company's lower cost structure resulting from the
Plan of Restructure and the lower sales volume in the first quarter of 2003.
Included in operating and administrative expenses in the first quarter of 2002
were $3.4 million of event-driven charges related to accelerated depreciation of
the Company's impaired former enterprise resource planning system ("ERP").
During the first quarter of 2003, the Company incurred approximately $1.0
million in preparation for a customer contract in the engineering unit of its PM
segment and to upgrade the technical infrastructure for its new West Virginia
back-office.
The Company recorded no restructuring expenses in the first quarter of 2003, as
compared to $4.1 million of restructuring expenses in the first quarter of 2002.
The items included in restructuring expenses last year were: $2.2 million for
the termination of operating leases relating to the closure of approximately 29
offices, $1.0 million for severance for approximately 90 staff employees and
$0.9 million for asset impairments.
Operating profits were $8.4 million in the first quarter of 2003, as compared to
an operating loss of $4.4 million in the first quarter of 2002. The significant
improvement in operating profit of $12.8 million was due primarily to the
reduction in operating and administrative expenses of $19.6 million, partially
offset by reduced gross profit of $10.9 million, as well as not having any
restructure expenses in the first quarter of 2003, as compared to $4.1 million
in the first quarter of 2002.
14
Net interest income was $0.4 million in the first quarter of 2003, as compared
to net interest expense of $0.1 million in the first quarter of 2002. The
improvement results from positive cash flow leading to higher invested funds.
CDI's income tax rate was 37.5% for the quarter ended March 31, 2003, as
compared to 35.8% for the first quarter of last year. The lower income tax rate
in the first quarter of 2002 was adjusted later in the year to arrive at an
annualized rate of 38.1%, due to the occurrence of certain non-deductible
expenses. Management believes that the 37.5% income tax rate incurred in the
first quarter of 2003 is a reasonable estimate for the full year.
The discontinued operations in 2002 of $0.5 million relate to the disposal of
its former subsidiary Modern Engineering, Inc. (Modern), which operated in the
PM segment. Accordingly, Modern's activity was recorded as discontinued
operations in the accompanying financial statements in 2002.
In connection with the implementation of SFAS 142 in 2002, the Company recorded
an impairment charge of $21.4 million, ($14.0 million after tax) for the
write-off of goodwill. This charge was presented as a cumulative effect of
accounting change in the Consolidated Statement of Earnings.
The Company's net income per diluted share was $0.28 for the first quarter of
2003, as compared to a loss per share of $0.86 in the first quarter of 2002.
Segment Results
Professional Services (PS)
The PS operating segment recorded revenues of $140.4 million for the quarter
ended March 31, 2003, a decrease of $29.2 million or 17.2%, as compared to the
first quarter of 2002. The revenue reduction principally reflects the planned
exit of lower margin customer contracts, as well as the continued softness in
the demand for information technology services. Partially offsetting this
decline was double-digit revenue growth in the first quarter of 2003 in the U.K.
based AndersElite business. AndersElite continues to experience strong demand in
the construction sector.
PS' gross profit of $29.2 million in the first quarter of 2003 was lower by $2.5
million or 7.9%, as compared to the first quarter of 2002. This decline was due
to the lower sales volume noted above, significantly offset by the gross profit
margin increase of 2.1% to 20.8% due to the exiting of lower margin customer
contracts and focusing on the higher margin vertical markets.
PS' operating profit was $4.6 million in the first quarter of 2003, as compared
to an operating loss of $0.6 million for the same period in 2002. The $5.2
million improvement was primarily due to operating and administrative expenses
declining $4.4 million, partially offset by the lower gross profit of $2.5
million. In addition, 2002 results were adversely affected by a charge of $2.6
million related to accelerated depreciation of the Company's ERP system and a
restructuring charge of $0.6 million. There were no such charges in 2003.
Project Management Services (PM)
The PM operating segment recorded revenues of $78.9 million for the quarter
ended March 31, 2002, a decrease of $2.0 million or 2.5%, as compared to first
quarter of 2002. The lower revenues were primarily attributable to declines in
the telecommunications industry, the aerospace and the pharmaceuticals sectors.
These declines were almost entirely offset by a double-digit increase in PM's
chemical sector.
PM's gross profit of $19.3 million, in the first quarter of 2003, was higher by
$0.4 million or 2.2%, as compared to the first quarter of 2002. The increase in
gross profit was primarily due to the significant improvement in gross profit
margin of 1.1% to 24.5%. The enhanced margins were the results of PM's efforts
to obtain higher-margin, longer cycle work.
PM's operating profit was $5.2 million in the first quarter of 2003, as compared
with an operating loss of $2.1 million in the first quarter of 2002. The
significant improvement in operating profit of $7.3 million was primarily
attributable to $4.2 million of restructuring and event-driven items last year,
combined with a reduction of $2.7 million in operating and administrative
expenses. In addition, PM benefited from a $0.4 million improvement in gross
profit.
15
Todays Staffing (Todays)
The Todays' operating segment recorded revenues of $34.6 million for the quarter
ended March 31, 2003, a decrease of $5.4 million or 13.4% percent, as compared
to the first quarter of 2002. The lower revenues reflect competitive pressures,
as well as the continued challenging economic environment in the United States
and Canada. The demand for temporary clerical help is particularly dependent on
the overall economy.
Todays' gross profit of $9.8 million in the first quarter of 2003 was lower by
$1.1 million or 10.1%, as compared to the first quarter of 2002. The reduction
in gross profit was primarily due to the revenue decline noted above, which was
partially offset by an improvement in gross profit margin of 1.0% to 28.4%.
Todays' operating profit was $1.4 million in the first quarter of 2003, as
compared to an operating profit of $1.0 million in the first quarter of 2002.
This improvement of $0.4 million was primarily attributable to the reduction of
operating and administrative expenses of $1.4 million, substantially offset by
the reduced gross profit of $1.1 million.
Management Recruiters International (MRI)
The MRI operating segment recorded revenues of $15.7 million for the quarter
ended March 31, 2003, a decrease of $7.0 million or 31.0%, as compared to first
quarter of 2002. The lower revenues were primarily attributable to the sale of
the company-owned offices in the third quarter of 2002 and lower royalty revenue
from franchisees, partially offset by growth in the specialty staffing areas.
MRI's gross profit of $10.1 million in the first quarter of 2003 was lower by
$7.8 million or 43.5%, as compared to the first quarter of 2002. This reduction
in gross profit was primarily due to the reduced revenue noted above, as well as
a 14.3% decrease in gross profit margin to 64.2%. The decline in gross profit
margin was primarily due to the reduction in high margin franchise based revenue
and the sale of company owned-offices.
MRI's operating profit was $0.7 million in the first quarter of 2003, as
compared to an operating profit of $1.9 million in the first quarter of 2002.
The reduction in operating profit of $1.2 million was primarily due to the
reduction in gross profit of $7.8 million, substantially offset by the reduction
in operating and administrative expenses of $6.5 million.
Corporate
In the three month period ended March 31, 2003, corporate expenses were $3.4
million compared to $4.6 million for the same period in 2002. The decline of
$1.2 million or 25.0% was the result of both the Plan of Restructure noted
above, as well as continued fiscal discipline.
Liquidity and Capital Resources
Total cash, cash equivalents and short-term investments at March 31, 2003 were
$93.4 million ($81.0 million net of outstanding checks), an increase of $43.7
million ($48.3 million net of outstanding checks) from the first quarter of
2002. The Company has no bank borrowings and terminated its $75.0 million credit
agreement with a syndicate of banks during the fourth quarter of 2002. This
agreement was due to expire on March 31, 2003. The Company believes its current
liquidity is adequate to meet its obligations during 2003.
Cash used in operations was $8.9 million in the first quarter of 2003, as
compared to $13.4 million of positive cash flow in 2002. The $22.3 million
reduction was primarily attributable to an increase in accounts receivable of
$14.4 million primarily due to a slowdown in cash inflows for several large
customers. Additionally, accounts payable and accrued expenses decreased $8.1
million, due primarily to payments of accrued bonuses and taxes.
Cash used in investing activities was $10.5 million in the first quarter 2003,
an increase of $8.3 million from the first quarter of 2002, primarily due to
increased short-term investments of $6.9 million. Additionally, capital
expenditures increased $1.4 million due primarily to the purchase of a new back
office system and upgrades at the new shared services center in West Virginia.
Cash provided by financing activities remainder relatively the same from 2002 to
2003. Cash provided by financing activities was $6.4 million in the first
quarter of 2003, as compared to $6.6 million in the first quarter of 2002.
16
Critical Accounting Policies
These financial statements were prepared in accordance with generally accepted
accounting principles, which requires management to make subjective decisions,
assessments and estimates about the effect of matters that are inherently
uncertain. As the number of variables and assumptions affecting the judgment
increases, such judgments become even more subjective. While management believes
its assumptions are both reasonable and appropriate, actual results may be
materially different than estimated. The critical accounting estimates and
assumptions identified in the Company's 2002 Annual Report on Form 10-K filed
March 27, 2003 with the Securities and Exchange Commission have not materially
changed.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 146 ("SFAS 146") Accounting for Costs
Associated with Exit or Disposal Activities, which supersedes Emerging Issues
Task Force Number 94-3, ("EITF No. 94-3"), Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred, rather than at the date of a commitment to an exit or disposal plan as
required by EITF No. 94-3. SFAS 146 is effective for restructuring activities
initiated after December 31, 2002. This Statement does not require companies to
adjust restructuring reserves recorded before 2003. The Company will apply SFAS
146 to future restructurings.
Effective December 15, 2002, the Company adopted FASB Interpretation Number 45
("FIN 45") Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has assessed this
Interpretation and has provided the necessary disclosures on Form 10-K filed
with the SEC on March 27, 2003 in Note 16 of the Notes to Consolidated Financial
Statements. For the three months ended March 31, 2003, there were no significant
changes from year-end.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 148 ("SFAS 148") - Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123 ("SFAS 123"); Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition provisions of SFAS 148 are effective for years beginning after
December 15, 2002. See Note 2 of the Notes to the Consolidated Financial
Statements for the required disclosure.
Forward-looking Information
The Company's growth prospects are influenced by broad economic trends. The pace
of customer capital spending programs, new product launches and similar
activities have a direct impact on the need for temporary and permanent
employees. Should the U.S. economy decline during 2003, the Company's operating
performance could be adversely impacted. The Company believes that its Plan of
Restructure and strategic focus on targeted vertical market sectors provides
some insulation from adverse trends. However, further declines in the economy
could result in the need for future cost reductions or changes in strategy.
Additionally, changes in government regulations could result in prohibition or
restriction of certain types of employment services or the imposition of new or
additional benefits, licensing or tax requirements with respect to the provision
of employment services that may reduce CDI's future earnings. There can be no
assurance that CDI
17
will be able to increase the fees charged to its clients in a timely manner and
in a sufficient amount to cover increased costs as a result of any of the
foregoing.
The staffing services market is highly competitive with limited barriers to
entry. CDI competes in global, national, regional and local markets with
numerous temporary staffing and permanent placement companies. Price competition
in the staffing industry is significant, particularly for the provision of
office clerical and light industrial personnel, and pricing pressures from
competitors and customers are increasing. CDI expects that the level of
competition will remain high in the future, which could limit CDI's ability to
maintain or increase its market share or profitability.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to risks associated with foreign currency fluctuations
and changes in interest rates. The Company's exposure to foreign currency
fluctuations relates to its operations in foreign countries conducted through
subsidiaries operating primarily in the United Kingdom and Canada. Exchange rate
fluctuations impact the U. S. dollar value of reported earnings derived from
these foreign operations as well as the carrying value of the Company's
investment in the net assets related to these operations. The Company generally
does not engage in hedging activities with respect to foreign operations except
for isolated situations involving inter-company payments that have not been
material. The effects of foreign currency exchange rate fluctuations have been
immaterial.
The Company's exposure to interest rate changes is not significant. As of March
31, 2003, there were no bank borrowings and only immaterial amounts of other
debt outstanding, none of which was variable rate debt. The Company's investment
in money market and other short-term instruments are primarily at variable
rates.
Item 4. Controls and Procedures
The Company has conducted an evaluation of the effectiveness of its disclosure
controls and procedures under the supervision of its Chief Executive Officer and
its Chief Financial Officer within 90 days of the filing date of this quarterly
report on Form 10-Q. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures provide reasonable assurance that information required to be
disclosed by the Company in reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported upon in such reports within
the time periods specified for their filing. It should be noted that the design
of any system of controls is based in part on certain assumptions about the
likelihood of future events. A control system, no matter how well designed and
implemented, can provide only reasonable, not absolute assurance, that the
objectives of the control system will be met.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.a Articles of incorporation of the Registrant, incorporated herein by
reference to the Registrant's report on Form 10-Q for the quarter
ended June 30, 2002 (File No. 1-5519).
3.b Bylaws of the Registrant, incorporated herein by reference to the
Registrant's report on Form 10-Q for the quarter ended June 30, 2002
(File No. 1-5519).
10.a. CDI Corp. Non-Qualified Stock Option and Stock Appreciation Rights
Plan. (Constitutes a management contract or compensatory plan or
arrangement.)
10.b. Amended and Restated CDI Corp. 1998 Non-Qualified Stock Option Plan.
(Constitutes a management contract or compensatory plan or
arrangement.)
10.d. CDI Corp. 2000 Stock Unit Plan. (Constitutes a management contract
or compensatory plan or arrangement.)
10.f. Supplemental Pension Agreement dated April 11, 1978 between CDI
Corporation and Walter R. Garrison. (Constitutes a management
contract or compensatory plan or arrangement.)
10.l. Non-Qualified Stock Option Agreement dated October 14, 2002 between
Registrant and Jay G. Stuart. (Constitutes a management contract or
compensatory plan or arrangement.)
10.m. Restricted Stock Agreement dated October 14, 2002 between Registrant
and Jay G. Stuart. (Constitutes a management contract or
compensatory plan or arrangement.)
10.p. Agreement Regarding Severance between Registrant and Gregory L.
Cowan effective November 15, 2002. (Constitutes a management
contract or compensatory plan or arrangement.)
99.a. Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.b. Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K during the three month period ended March 31, 2003.
None.
19
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.
--------------------------
May 8, 2003 By: /s/ Jay G. Stuart
--------------------------
Jay G. Stuart
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
20
CERTIFICATION
I, Roger H. Ballou, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CDI Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 8, 2003
By: /s/ Roger H. Ballou
--------------------------
ROGER H. BALLOU
President and Chief Executive Officer
21
CERTIFICATION
I, Jay G. Stuart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CDI Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 8, 2003
By: /s/ Jay G. Stuart
----------------------------
JAY G. STUART
Executive Vice President and
Chief Financial Officer
22
INDEX TO EXHIBITS
Number Exhibit
- -------- ---------------------------------------------------------------------
3.a Articles of incorporation of the Registrant, incorporated herein by
reference to the Registrant's report on Form 10-Q for the quarter
ended June 30, 2002 (File No. 1-5519).
3.b Bylaws of the Registrant, incorporated herein by reference to the
Registrant's report on Form 10-Q for the quarter ended June 30, 2002
(File No. 1-5519).
10.a. CDI Corp. Non-Qualified Stock Option and Stock Appreciation Rights
Plan. (Constitutes a management contract or compensatory plan or
arrangement.)
10.b. Amended and Restated CDI Corp. 1998 Non-Qualified Stock Option Plan.
(Constitutes a management contract or compensatory plan or
arrangement.)
10.d. CDI Corp. 2000 Stock Unit Plan. (Constitutes a management contract or
compensatory plan or arrangement.)
10.f. Supplemental Pension Agreement dated April 11, 1978 between CDI
Corporation and Walter R. Garrison. (Constitutes a management contract
or compensatory plan or arrangement.)
10.l. Non-Qualified Stock Option Agreement dated October 14, 2002 between
Registrant and Jay G. Stuart. (Constitutes a management contract or
compensatory plan or arrangement.)
10.m. Restricted Stock Agreement dated October 14, 2002 between Registrant
and Jay G. Stuart. (Constitutes a management contract or compensatory
plan or arrangement.)
10.p. Agreement Regarding Severance between Registrant and Gregory L. Cowan
effective November 15, 2002. (Constitutes a management contract or
compensatory plan or arrangement.)
99.a. Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.b. Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.