Executives
Vince Webb – VP, Corporate Communications and Marketing
Roger Ballou – President and CEO
Mark Kerschner – EVP and CFO
Analysts
Jim Janesky – Stifel Nicolaus
Paul Condra – BMO Capital Markets
Bill Sutherland – Boenning & Scattergood
Ty Govatos – CL King & Associates
CDI Corp. (CDI) Q1 2010 Earnings Call Transcript April 29, 2010 11:00 AM ET
Operator
Welcome, and thank you for standing by. As a reminder, today’s conference is being recorded. If you have any objections you may disconnect at this time. I will now turn today's meeting over to your host, Vince Webb, Vice President of investor relations. You may begin.
Vince Webb
Good morning and welcome to CDI’s first quarter 2010 conference call. At this point, you should have a copy of the first quarter press release. If not, please call our office at 215-636-1162, and we'll be happy to send you a copy or you can find a copy on our website at cdicorp.com.
A telephone replay of today's call will begin one hour after this call is concluded, and will be available for the next 14 days at the website, and at 402-220-0205 using password 7051.
On the line with us today are CDI President and Chief Executive Officer, Roger Ballou and our Executive Vice President and Chief Financial Officer, Mark Kerschner. We'll begin with some remarks by Roger and then we will open up the line for some questions.
I do want to remind you that this includes forward-looking statements which are subject to risks and uncertainties. Actual results might differ materially from those projected in these forward-looking statements. We would therefore like to point out the cautionary language regarding forward-looking statements contained in the new release and remind everyone that that same language applies to any comments made during today’s call.
At this time, I'd like to turn the call over to Mr. Roger Ballou. And Roger, good morning. Let us begin.
Roger Ballou
Thanks Vince. Good morning and thanks to all of you for joining us to discuss CDI’s first quarter 2010 results. Following my opening remarks, Mark and I will be happy to take your questions.
As I noted in my comments during the fourth quarter 2009 conference call, various CDI business units’ revenue growth typically begins at different times in the recovery cycle. CDI business units influenced by improvements in GDP and in white-collar employment typically improved earlier in the cycle, and those business units influenced by growth in capital spending typically improved later in the cycle.
Now I commented on that trend in the fourth quarter, and I can confirm the pattern continued into the first quarter. As our IT solutions business fuelled by robust hiring in many industry segments grew 12% on a year-over-year basis. Additionally, permanent placement momentum particularly at our Management Recruiters International demonstrated that a hiring rebound might be underway in the college educated white-collar employment marketplace, as our MRI franchise owners reported an 8% sequential increase in domestic US royalties, and an 18% sequential increase in customer billings from Q4 2009 to Q1 2010 for their permanent placement fees.
Now these billings generally translate into royalty payments and therefore CDI revenue 6 to 8 weeks later. Also, CDI’s capital spending driven business segments, primarily in our Engineering Solutions project outsourcing sector, and into construction industry based AndersElite continue to perform as expected in the recovery cycle. Their revenue rebound generally occurs later in the business recovery cycle, when capital spending begins to pick up.
Influenced both by the past disruptions in the credit market, and by the current uncertainty in the energy sector, CDI customers in oil and gas, refining, chemicals and specialty chemicals and alternative energy have held back on investment decisions during the first quarter. However, during the first quarter we were pleased to see an up tick in engineering project bid activity and in staffing RFP activity that could augur well for a resumption of revenue growth in these segments later in 2010.
Overall, I was moderately pleased by our performance this quarter as both revenue and operating profit were roughly in line with our expectations. For the quarter ended March 31, 2010 the company reported a net loss of 0.2 million or $0.01 per diluted share compared to a net loss of 0.9 million or $0.05 per diluted share in the prior year quarter. Included in the current quarter results are 0.4 million in charges for adjustments of deferred tax assets related to stock-based compensation.
Excluding these charges, net earnings for the first quarter 2010 were 0.2 million or $0.01 per diluted share. First-quarter revenue declined 8.2% or 10.8% in constant currency to 209.9 million compared to revenue of 228.7 million in the year ago quarter. Despite some uncertainties that remain in our business environment, particularly in our capital spending driven businesses, we believe CDI is in a fundamentally solid position to generate profitable growth.
Our goal in the upcoming quarters is to strategically leverage our lower cost operating and administrative base with revenue growth in an improving economic environment. Our strategic platform focuses on capturing higher value, higher margin engineering and IT outsourcing projects as well as permanent placement revenue.
Our strategic goals continue to focus on increasing our global service delivery capabilities and continuing to build our skill sets and business development capabilities in those industries that will benefit from long-term market drivers. Our successful execution of this strategy should enable us to drive long-term profitable growth.
Now let us look at each business unit in a bit more detail. Engineering Solutions revenue declined 14.7% or 17.2% in constant currency versus the year-ago. Our primary area of weakness continues to be in the process and industrial segment were revenue is down 15.3% versus the year ago period. Reflecting continued project delays by customers in the chemical, petrochemical and alternative energy industries. We are, however, seeing an up tick in bid activity for small to mid-sized projects and are hopeful that many of these projects will be funded and could result in project spending later in the year.
Our cautious optimism on the likelihood of customer funding for many of these process and industrial projects is based on the stabilizing financial market and improving housing and domestic auto market, and a rebound in commodity prices, particularly oil. CDI Aerospace revenue declined 19.7% versus the year ago quarter, due primarily to weakness in the commercial aviation sector. Again, in this area we have seen an up tick in bid activity in commercial aviation and in the transportation sector, and we're optimistic that this bid activity can translate into project engineering revenue later in 2010.
The 8.4% year-over-year decline in government services vertical was driven primarily by the completion of the ramp up of a previously announced large project win, and a project stoppage due to a budget funding gap in a large defense contract, which we anticipate will be reauthorized later in 2010.
Engineering Solutions operating profit declined 57.4% versus the year ago first quarter primarily due to the decline in revenue and decrease in higher margin engineering services.
Moving to MRI, the MRI business trends have improved significantly compared to the first quarter of 2009. Revenue for the quarter was relatively flat compared to the year ago quarter, however, MRI did see a significant year-over-year deceleration in the rate of decline in royalty revenues. As I noted earlier, franchise office billings to their customers for permanent placement services were up 18% on a sequential basis from the fourth quarter to the first quarter, the first sequential increase in nine quarters, indicating a strengthening of the employment market for technical, professional and managerial positions.
Franchise sales increased over the prior year quarter, while contract staffing revenue declined slightly versus the first quarter of 2009. MRI operating profit increased by 1.4 million versus the prior year, primarily due to effective expense controls and a shift in mix to franchise sales and royalties, which have higher margins.
Revenue in our UK based AndersElite segment continued to reflect weak market conditions in the UK construction industry, as revenue declined 23.1% or 29.9% in constant currency versus the first quarter of 2009. Anders reported an operating loss of
0.5 million versus a year ago operating loss of 1.2 million, reflecting effective expense controls somewhat offset by the decrease in revenue.
Anders is seeing some stabilization in the construction market, and we anticipate increasing our recruiter and business development headcount. As previously mentioned, CDI IT solutions continues to post year-over-year gains as revenue increased 12% versus the first quarter of 2009. We saw revenue gains across most of our retail and national accounts as the IT teams successfully implemented business development efforts to capture new accounts both in the staffing and solutions area. Operating profit increased by over 45% driven by the revenue growth, operating leverage and effective cost control efforts.
Now, let us look at some other financial data in more detail. We continued to carefully reduce costs to align with current revenue run rates. We reduced operating and administrative expenses net of year ago restructuring expenses by almost $6 million during the first quarter, compared to the year ago first quarter, and we anticipate that approximately half of these savings are structural.
We finished the quarter with 76.2 million in cash and cash equivalents versus 73.5 million at the close of the previous quarter. Our untapped borrowing capacity and our cash and cash equivalents should provide the resources to support revenue growth, capital spending, shareholder dividends and strategic acquisitions. We also announced a cash dividend of $0.13 per share payable on May 27, 2010 to shareholders as a record as of May 13, 2010.
While income taxes for the quarter exceeded our pre-tax earnings due to the previously mentioned non-cash adjustments to defer tax assets, we do anticipate that the full-year tax rate for 2010 will be in the range of the low to mid-40s. Based on current business trends, we expect that overall second-quarter 2010 revenues could increase by 2% to 5% above second-quarter 2009 levels or 1% to 4% in constant currency.
Additionally, due to previous expense reduction efforts we believe that revenue growth could produce significant operating leverage.
With that, Mark and I will be happy to take your questions.
Question-and-Answer Session
Operator
(Operator instructions) Our first question comes from Jim Janesky from Stifel Nicolaus. Your line is now open.
Jim Janesky – Stifel Nicolaus
Yeah, hi, Roger and Mark. With respect to MRI and permanent hiring, have been hearing mixed results in the market with respect to permanent hiring. We're going to use temps longer into the next cycle, then you're hearing some companies are reporting better perm. A couple of questions around that, I mean do you – where do you see the strength – I think you mentioned technical, professional and managerial, but industries and to what extent do you think it's back filling in, kind of pent up demand where no one hired last year, and that it could slow down before it picks back up again.
Roger Ballou
Well, what we've seen is a gathering momentum in permanent placements that really started in the third quarter of last year as we look at our underlying indicators. So our third quarter last year, we saw things started to turn up a little bit, fourth quarter got stronger, first quarter got stronger, and again the single biggest piece of evidence we have of what's going on is this 18% billings growth through the franchise network Q1 versus Q4, but it isn't just a blip. I mean, it has been a shift.
The inflection point was around midyear last year, and from the midyear point on, you know, our trend line has turned in a different direction. So initially it was a deceleration in the shrinkage, then it moved to you know, for the first quarter when we talked, when we did our fourth-quarter release, we said we've seen some up tick in billings. That accelerated through the quarter and wound up being up 18%.
So we see a very broad-based lift. My belief Jim, if you ask me what I think is behind it is that if you look at the broad data this is the first recession I've ever seen where productivity rose at the bottom of the recession, indicating that people had cut staff significantly more than the revenue drop, and what I think you're seeing people doing is first catching up to get back to where they've got the staff to handle the revenue that was in place, and now they're starting to staff up against the growth that's starting to occur. So at this point, all our evidence would indicate very strong upward momentum.
Jim Janesky – Stifel Nicolaus
Okay. And, Roger, how about the size of businesses, you know, small medium-sized business versus larger corporations, who's doing the hiring? Does any size stand out?
Roger Ballou
Yes, I would say you know, for us the client base that we serve is generally speaking a broad midsized perm market in the United States. I mean our MRI franchisees don't tend to be concentrated in large firms. They tend to be concentrated in midsized firms. So sort of that real heartland America of businesses and that's where we're seeing hiring broad-based across a whole array of industries.
Jim Janesky – Stifel Nicolaus
Okay. And last question is, in the past I recall even in the strength of the last cycle, you folks talked about mid to upper teens incremental operating margins. Was that correct?
Roger Ballou
Yes, we did then. Yes, that's correct.
Jim Janesky – Stifel Nicolaus
Has that gone up because of some of the structural changes to the operating expense?
Roger Ballou
You know, yes, based on the changes we've made, we would certainly expect you know, and – let me try to give you even a little bit more color. Because of the phases in our business, what I say to you is that, what we’ve seen is that group that generates the highest variable contribution margin, permanent hiring through MRI et cetera is showing the most strength right now. We – normally that would come as you said earlier, potentially after the staffing up tick, but we would anticipate at some staffing up tick kicking in now where we got lower variable contribution margin than we do in perm, but then later in the year we’d expect to see the project business kick in and actually to have higher. If you look at it on a blended basis, if we grew our blended book of business today versus, you know, prior period, I'd expect to see a 2 to 3 point higher variable contribution at least than we saw previously.
Jim Janesky – Stifel Nicolaus
Okay. That's great. I appreciate it. Thanks.
Operator
And our next question comes from Paul Condra of BMO Capital. Your line is now open.
Paul Condra – BMO Capital Markets
Great, thank you. I had a follow-up on the, you mentioned in the Government Services segment a stoppage of this defense project. And I wonder if you could just provide a little more detail about that and when you expect it might resume and maybe what kind of impact it had on your results for the quarter?
Roger Ballou
The – you know, I can't get into the specific project but you know, a large client with an ongoing relationship, we're still continuing to do lots of other work for them, but there was a funding gap based on, you know, federal budget year, et cetera where we burn through the approved funding for the fiscal year, and we would expect as the new fiscal year rolls in and third beginning fourth quarter, the funding should return and we should see it ramping back up. And I don't want to break out the specifics, but I would tell you that the entire shrinkage was driven by that. So ex that project having stopped, the business would have been up a little bit.
Paul Condra – BMO Capital Markets
Okay, great, thank you. And also just in the Anders segment, you mentioned some stabilization in the construction market. I wondered what type of construction projects do you see the most stabilization in.
Roger Ballou
Public sector and rail. You know, publicly funded projects. So schools, hospitals, public housing, things like that and the real projects, significant real projects, also highway spending. So there is, you know, not unlike here a lot of the stimulus money there went into those types of things, which you've also got to continuing spending on the Olympics infrastructure and a really, really substantial real upgrade project or projects across the country. That's what we're seen in.
Paul Condra – BMO Capital Markets
Okay, great. And then I guess just one last one, could up update us on your credit facility position?
Roger Ballou
On our which?
Paul Condra – BMO Capital Markets
Do you have a current credit facility?
Roger Ballou
No, we do not have the credit facility at this point in time. We obviously have the ability to put one in place very quickly, but at this moment we don't have one. We do have as we said $75 million as cash, $76 million.
Paul Condra – BMO Capital Markets
Yes. Okay, great. Thanks. Good quarter guys, , thanks.
Roger Ballou
Okay, thanks.
Operator
(Operator instructions) Our next question comes from Bill Sutherland of Boenning & Scattergood. Your line is now open.
Bill Sutherland – Boenning & Scattergood
Thanks and good morning, Roger.
Roger Ballou
Good morning Bill.
Bill Sutherland – Boenning & Scattergood
On the revenue guidance range, could you provide a little color between the low and the high end as you're thinking about it?
Roger Ballou
Yes, I mean, I think the gap between the low and the high end would be accounted for almost exclusively by the degree to which we see some of the project funding kick in in the Engineering Solutions business. If some of those projects get funded, smaller short term projects, we could see things move towards the higher end.
You know, the IT business is expected to continue ticking along very strongly, if anything I'd expect to see a stronger second quarter than first from IT. Anders will remain soft, MRI will continue its up tick. So I'd expect to see them be up next quarter. So, you know, you're going to see a good quarter at MRI, good quarter in IT, continuing, you know, slow pace at Anders, and the movement between 2 and 5 would all be moved if the project businesses can kick up a little bit.
Bill Sutherland – Boenning & Scattergood
So I guess what you're really saying on the engineering front, Roger, is that the sales cycle is really all over the map because of the different nature of deals that are going on.
Roger Ballou
Yes, I mean, to give you an example, we've got some deals we've been working on for 12 to 18 months, which has been contingent upon funding availability and you know, zoning and a whole series of things like that, permitting that could go. I mean, you know, they could. The flip side of the coin, we're seeing some nice short term projects in the you know, 1 million, 2 million range that are probably going to start up. So if enough of those go and then maybe one of the bigger ones goes, you could move towards the high end, but the sales cycle is everything from fairly short to 18 months long. So it's a little hard to predict one of those 18 months, when it is going to come to a closure.
Bill Sutherland – Boenning & Scattergood
Do you have more visibility about the tick up in the requisitions in staffing in engineering?
Roger Ballou
Yes, we do. Yes, I mean, we're feeling, you know, we know what's going on in the staffing side. As I said, I would narrow the gap to, you know, the two is based on things that we've got pretty good visibility into. The five is really a swing back that is going to be driven by whether project picks up a little bit more or not. So the staffing looks very solid, the IT looks very solid, the MRI looks very solid, Anders looks, you know, continuing softness. Projects will certainty you know, look better versus prior year in the second quarter and it's a question of whether we just get you know, a couple of things over the line and get a little more up tick or not. I mean, remember, you know, to move the needle a point or two we only are going to get you know, $2 million moves at a point.
Bill Sutherland – Boenning & Scattergood
Does this apply to Aerospace as much as P&I?
Roger Ballou
Yes, we are seeing, you know, in Aerospace you know, we have seen a number of new things that are starting to ramp and really some of this is going to come down to the pace of ramping. You know, we had several new wins that are ramping up and as they ramp, we’ll see. I mean, again we've had a significant win in our P&I vertical that in fact there meeting on implementation on it today, how fast that implements will be one of the swing factors on this quarter.
Bill Sutherland – Boenning & Scattergood
Okay. That's great. Any other, this is for Mark, I guess, any other non-operating adjustments expected this quarter or forward to earnings?
Mark Kerschner
Are you referring to the tax items?
Bill Sutherland – Boenning & Scattergood
Yeah. I didn't know if there was anything else that we should keep an eye on.
Roger Ballou
Nothing that we are aware of.
Mark Kerschner
I mean, if we knew, we would book.
Bill Sutherland – Boenning & Scattergood
Okay, okay. And then that tax rate guidance, does that include you know, the impact from the Q1 –
Mark Kerschner
Yes, the way the discrete items work, you pick them up fully in that quarter. You don't spread them.
Bill Sutherland – Boenning & Scattergood
What you're saying 40 – low to mid 40s is full year estimate, including that?
Mark Kerschner
It's full year estimate, which includes that, yes.
Bill Sutherland – Boenning & Scattergood
So, obviously it's going to be lower the next three quarters. Okay.
Mark Kerschner
I hope so.
Bill Sutherland – Boenning & Scattergood
That's it, guys. Thanks.
Roger Ballou
Okay.
Operator
Thank you. Our next question comes from Ty Govatos of CL King. Your line is now open.
Ty Govatos – CL King & Associates
How are you doing?
Roger Ballou
Good Ty. How are you?
Ty Govatos – CL King & Associates
Okay. Let me go back to the incremental margins, I understand on a blended base it might be closer to mid to high teens. But it would seem that over the next three to four quarters, it would probably be over 20% if MRI and perm are the biggest contributors. I am reading this wrong?
Roger Ballou
That’s right.
Ty Govatos – CL King & Associates
That's all I wanted to clarify. Thanks an awful lot. And it must be nice to see a positive side up there by the revenues.
Roger Ballou
That definitely is.
Ty Govatos – CL King & Associates
Long overdue. Have a good one.
Roger Ballou
Yes, thank you.
Operator
And at this time we show no further questions. I will now turn the call over to Roger Ballou.
Roger Ballou
Okay, you know, throughout this economic downturn, we made difficult but necessary decisions to effectively and efficiently lower our cost structure. We made these decisions carefully and always with an eye towards knowing that we would depend on our lower, leaner operating base as we moved into an economic rebound. As we do move into the second quarter we continue to see signs of a building recovery. As momentum continues in ITS, as the permanent placement hiring environment continues to improve, and as the level of RFPs continues to grow in the project engineering arena.
Within this improving macroeconomic environment, we are confident that CDI is well positioned to generate significant operating leverage, as we drive productivity to generate profitable revenue growth for our shareholders. Thanks for joining us today.
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