CDI Corp. Q2 2010 Earnings Call Transcript

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 |  About: CDI Corporation (CDI)
by: SA Transcripts

Operator

Good morning, and welcome to the Second Quarter 2010 Conference Call. I would like to remind all the participants that 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, you may begin.

Vince Webb

Great thank you. Good morning. At this point you should have a copy of the second 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 call will begin one hour after the call is concluded, and it will be available for the next 14 days at 203-369-1084 with the password 7051.

On the line with us today are CDI President and Chief Executive Officer Roger Ballou; our Executive Vice President and Chief Financial Officer Mark Kerschner. We will begin with some remarks by Roger, then we will open up the line for questions.

Prior to start of the call, I want to remind you that the conference call includes forward-looking statements, which are subject to risk 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 news release. And remind everyone that that same language applies to any comments made during this conference call.

At this time, I would like to turn the call over to Roger.

Roger Ballou

Thanks Vince. Good morning, and thanks to all of you for joining us this morning to discuss CDI Second Quarter 2010 Results. Following my opening remarks, Mark and I will be happy to take your questions.

We were pleased to see both year-over-year and sequential revenue growth during the second quarter. We believe that this provides an indication that a modest recovery cycle is under way, consistent with patterns that we’ve seen since the fourth quarter of 2009.

For the second quarter, revenues were $219 million, up 1.7% or 0.9% in constant currency from the year-ago second quarter and up 4.3% on a sequential basis. We saw a similar pattern in revenue growth that I commented on in the first quarter.

Revenue growth in the various CDI business units typically begins at different times in recovery cycle. CDI business units influenced by improvements by GDP and in white-collar employment typically improve earlier in the cycle. And those business units influenced by growth and capital spending by clients typically improve later in the cycle.

CDI’s early cycle recovery businesses are our IT Solutions segment and our Management Recruiters International Business. Late cycle businesses are our Engineering Solutions and AndersElite.

The second quarter illustrated this pattern. CDI IT Solutions revenue increased by 31.8% over the prior year quarter. This rate is significantly above market rate growth and was driven by solid business development efforts by the ITF team in generating both new accounts and new project wins.

MRI revenue increased by 14.2% over the year-ago second quarter, as all three MRI revenue areas; royalties, contract staffing, and franchise sales increased on the year-over year basis, reflecting increased hiring demand for white-collar professionals who were replaced by MRI franchise offices.

Additionally continued permanent placement [inaudible] MRI may indicate that the hiring rebound could extend to future quarters, as our MRI franchise owners reported a sequential increase in domestic billings of over 8% and year over year billings growth of over 22%, consistent with royalty growth over the same period.

As a result of a lagging recovery in customer capital spending both Engineering Solutions and our U.K.-based AndersElite segment continue to reflect weak demand in your key market segments, consistent with a late cycle recovery model.

ES revenue decreased 7% versus the prior year second quarter, 8.8% in constant currency and Anders saw a year over year decline of 33.7%, 31.6% in constant currency, compared to the second quarter of 2009.

For the quarter ended June 30th 2010, the company reported net earnings of $2.6 million or $0.13 per diluted share, versus $0.1 million in net earnings or $.0 per diluted share in the year ago-second quarter.

The second quarter results include a benefit of $1.8 million related to lower estimated penalties and legal fees associated with the claim made under the Federal False Claim Act that the company received from the Civil Division of the U.S. Department of Justice.

We previously recorded a $4.3 million reserve, which we disclosed in the fourth quarter 2009. This benefit was somewhat offset by second quarter pre-tax charges of $0.4 million for severance and real estate exit costs, and $0.3 million in cost associated with the purchase of the business of L. Robert Kimball and Associates Inc. that we announced on June 28th 2010.

Excluding these items pre-tax earnings for the second quarter were $1.9 million. Second quarter 2009 pre-tax earnings, when excluding severance charges totally $0.7 million disclosed in that prior year period, were approximately $8 million.

We were very pleased to announce the acquisition of the L. R. Kimball in late June. This acquisition was consistent with a number of our strategic goals. It will provide CDI with new skill sets in architectural design and civil engineering services in the infrastructure marketplace; a marketplace that we believe will benefit from long-term drivers to replace and improve highways, bridges, educational, aviation, government, and public safety facilities throughout the U.S. and North America.

Additionally L. R. Kimball will further ship their services portfolio up the value continuum to higher value engineering outsourcing services. And should enable us to create a more balanced portfolio of engineering services to mitigate our Engineering Solutions revenue cyclicality.

We’ll report L. R. Kimball revenue in a new vertical CDI infrastructure.

Now, let’s look at each business unit in a bit more detail.

Engineering Solutions revenue declined 7%, 8.8% in constant currency versus the year-ago quarter. We saw decreases in the [Inaudible] space, government services, and the processes and industrial verticals reflecting customer’s capital project delays.

Second quarter new project awards and bid activity indicate that we could see a moderate rebound in the second half of 2010.

In the process of industrial vertical, we continue to see project delays by customers in the chemical, petrochemical and alternative energy industries. We remain cautiously optimistic that the stability of the financial market and steady commodity prices, particularly in oil, will encourage customer funding of process and industrial projects.

CDI Aerospace revenue declined 14.7% versus the prior-year quarter due to continued weakness in commercial aviation sector. We’re encouraged, however, with bid activity in the commercial sector.

CDI government services revenue decreased 10.7% primarily related to 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 profits decreased by 11.5% versus the year-ago second quarter driven primarily by a decline in higher margin project engineering and permanent placement revenue, as well as by $0.3 million severance and real estate exit costs, partially offset by the $1.8 million benefit related to previously mentioned DOJ matter.

MRI’s business fundamentals continued to improve as revenue increased by 14.2% versus the prior year quarter. All of the MRI revenues streams improved as franchise royalties, contract staffing revenue, and franchise sales revenue increased on a year over year basis.

MRI’s operating profit increased by $1.3 million versus the second quarter of 2009, driven primarily by the increase in higher margin royalties and by ongoing expense controls.

Revenue on our U.K.-based AndersElite segment continue to reflect weak market conditions in the U.K. construction industry as revenue declined 33.7%, or 31.6% in constant currency versus the year-ago quarter.

We’re seeing some signs of stability in the U.K. construction market. And we are beginning to see some momentum in Australia, driven by the natural resources and extraction industries. Anders’ operating loss was reduced by a million dollars versus the 2009 second quarter reflecting expense control efforts and increases in higher margin permanent placement revenue offset by a decline in staffing services revenue.

CDI IT Solutions continued to outpace the industry with year over year revenue gains of 31.8%. The gains were driven by solid business development efforts across a broad spectrum of both retail and national accounts and by new account wins.

Operating profits increased by 52 1/2% driven by the strong revenue growth and positive operating leverage.

Now let’s look at some other financial data.

We continued to carefully manage costs. We reduced operating administrative expenses by 60 basis points net of the previously-mentioned out-of-pattern items during the second quarter compared to the year ago quarter.

We finished the quarter with $27.4 million in cash and cash equivalents versus $76.3 million at the close of previous quarter. Our primary use of cash included the purchase of L. R. Kimball, and funding of organic growth primarily in our ITS segment.

With our cash, and cash equivalents, and borrowing capacity, we should have sufficient resources to support company growth and ongoing capital needs.

We also announced the cash dividend $0.13 per share payable on August 26th, 2010, to shareholders of record as of August 12th , 2010. While our income tax rate was 14% for the quarter, we anticipate the full year tax rate 2010 will be in the range of 43% or 46%.

If the current business momentum continues in both our ITS and MRI segments and if we see an anticipated rebound in capital spending by our ES customers, we would expect to see improvements in operating leverage due to previous cost reduction efforts.

We anticipate that due to this momentum overall, third quarter 2010 year-over year revenue increase could range from 1% to 4% on an organic basis and 8% to11% when including revenue from the L. R, Kimball acquisition.

With that, Mark and I will be glad to take your questions.

Question-and-Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions)

Ty Govatos. You may ask your question.

Ty Govatos – CL King & Associates

That was fast. Can you talk about the RCN? Is that still an open bid or has that pretty much been abandoned?

Roger Ballou

I wouldn’t make any further comments beyond what we have said publically, Ty, in the materials we have released. We haven’t retracted that. It still stands.

Ty Govatos – CL King & Associates

Okay. That’s what I needed, thank you. While I have you; I don’t think you get a lot of questions. Are you also looking at other potential acquisitions?

Roger Ballou

Yes we are. Predominantly in Engineering Solutions and IT Solutions are the areas we’ve talked about previously. But we do have an active pipeline acquisitions that we are looking at.

Ty Govatos – CL King & Associates

Thanks an awful lot.

Rober Ballou

Okay, Ty.

Operator

And our next question comes from Bill Sutherland. Bill your line is now open.

Bill Sutherland – Boenning & Scattergood

Yes, can you guys here me?

Roger Ballou

Sure.

Bill Sutherland – Boenning & Scattergood

Okay, morning. I wanted to know, Roger I’m trying to understand how the perspective here on Anders. Is it fair to call Q2 maybe a trough, or Q3 should be not materially different than Q2, or is that kind of where we are?

Roger Ballou

Yes. I mean, we’re still – the way I characterize it is we’re still at the bottom of the trough here somewhere. The U.K. economy, it’s very, very hard to sort through what is going to happen over there. You’ve got a little bit of a recovery going on in some segments of private construction, but you’ve got the government pulling back massively.

The new government there is canceling public spending projects at a clip. Gor example I believe that they canceled something on the order of 25% to 30% of the planned public school construction projects that were on the drawing board in the U.K. in the last two weeks.

So there is a big pullback in construction spending going on in the public sector, a moderate recovery going on in the private sector. The net mix of which is leading to a situation where depending upon the client groups you’ve got you could either be getting very bad news or moderately good news.

That’s kind of the state of place. It’s a little hard to determine on how it is going to play forward because of the public changes that are going on. They’re pulling back hugely unlike in the U.S. at this point.

Bill Sutherland – Boenning & Scattergood

Remind me the mix of Anders traditionally in terms of government or public sector versus private.

Roger Ballou

Again there, it is a little different tricky in the sense that some of our private sector clients are doing public sector work. So we’re doing work for the client, but the client is doing a public sector project. We’ll be doing WS Atkins, but they might be building a city hall, or a town office, or something like that.

I couldn’t give you a good answer in terms of the percentage of our spending that is driven by public spending as opposed to the percentage that’s purely directly with the public sector. But I’d say it’s a meaningful percentage that is coming out of the public funds in one form or another, probably in the order of 35% to 40%, somewhere up in that range, between the rail and the other chunks. Not quite 50/50 but not too far off of it.

Bill Sutherland – Boenning & Scattergood

IT, in addition to the growth a remarkably, the margin was higher than I expected. Sustainability of that margin?

Roger Ballou

We feel pretty comfortable with the margin at this point. There are ups and downs, moving parts all through it, but we are seeing good growth in the whole base of accounts so that you have a combination of affects where you got Solutions growing at a reasonable clip, our relationship with our major accounts growing at a good clip. But our retail business growing as well.

The combination is producing, you know, the retail is obviously at significantly higher margins, the national accounts somewhat lower, Solutions at the highest mix, the highest margin. The blend we’ve got right now, and the growth we’re seeing, it should stay right in the same range.

Bill Sutherland – Boenning & Scattergood

What roughly is the mix of business currently, the profile of Solutions retail large account?

Roger Ballou

We’ve not broken out the large account versus retail of historically. We do break out the Solution’s component in our K – in the Q’s, you’ll get that number in the Q. My recollection is it’s running a little north of 10% of the business in a Solution segment, Bill

Bill Sutherland – Boenning & Scattergood

New accounts was – how much of the growth? Can you break that out?

Roger Ballou

We’ve not broken it out before. We just don’t disclose that. We call out individual wins bout we don’t disclose that.

Bill Sutherland – Boenning & Scattergood

Okay. Any other color you can provide on this really strong growth showing for IT? I mean, you’re right, you are well above any market or industry number that you want to look at.

Roger Ballou

We like to attribute it to brilliant management, but – Look, I think it actually is the result of diligent hard work. During in the downturn; we invested in business development talent. We doubled our sales force the last two years.

We’ve won significant new accounts. We’ve provided them with good service and we’re getting a lot of growth out of them. And our mix of clients is healthy mix. We’ve got clients who are in the IT outsourcing segment, we’ve got clients who are strong players in the financial services segment, we’ve got clients in the healthcare segment. Those are all good.

We’ve seen a significant recovery in the automotive industry where we’ve got big clienteles. A little bit of it is, like anything in life, some of it is luck.

The automotives, where we had a big footprint a year and a half were causing us a lot of concern. Obviously the bankruptcy plans and the turnaround there has helped us. That’s beyond our control, but good.

The flipside of the coin, our growth in healthcare is a result of a targeted plan to grow healthcare. Our growth in financial services is similarly. It is the result of combination of an investment business development, an investment in good account management, some good strategy in terms of targeting sectors of the economy and within the sectors healthy firms. And then some luck in things like the automotive turn around.

Bill Sutherland – Boenning & Scattergood

And obviously, you’ll begin to hits comps here that you can’t sustain this kind of number. But how do you guys look at kind of like the budget for this, for this group at this point, sequential growth?

Roger Ballou

We’d expect to see sequential growth in Q3, certainly as part of our look at that business, yes.

Bill Sutherland – Boenning & Scattergood

Okay. That’s about as far out as you sharpen your pencil.

Roger Ballou

Yes. Yes, we’ll give guidance a little later. But as you know, the uncertainty in the financial markets and about what’s going to happen with GDP causes people to have pretty short horizons looking forward here. Our expectations are we’ll have good sequential growth in Q3 certainly in that IT business. The momentum looks solid there still.

Bill Sutherland – Boenning & Scattergood

Okay. Then real quick. on engineering services specifically, if you were to take out the impact of Kimball in this third quarter would you be looking for sequential growth?

Roger Ballou

Yes.

Bill Sutherland – Boenning & Scattergood

Okay, okay. And then the operating margin, s you report in segment, will that benefit from Kimball?

Roger Ballau

Yes. Kimball, as we said at the time of the [inaudible] should be accretive in Q3. And certainly should raise the operating margin on ES business.

Bill Sutherland – Boenning & Scattergood

Okay. I appreciate it Roger. Thank you.

Roger Ballou

Okay Bill.

Operator

And our next question comes from Paul Condra. Your line is now open.

Paul Condra – BMO Capital Markets

Great thank you. A couple quick ones. The $0.3 million related to the Kimball acquisition, is that mostly coming out of just costs of operations? Or is that effecting the operating margins just for the ES client?

Roger Ballou

It is actually coming in several places. It’s coming through in other income, as well as in operating expenses and ES,

Paul Condra – BMO Capital Markets

Okay. What would be the EPS impact of the combination of those severance charges? And then the claim adjustment for the quarter?

Roger Ballou

The way we tried to looked at it internally, and again, this is judgmental to a degree, is we looked at it that if you looked at the $1.9 million pre-tax income that we called out in the earnings release, then you applied to that the 43% to 44% tax rate for the full year just try to normalize it a little bit than on a sort of on a normalized tax rate basis. We saw it as producing a $0.05 to $0.06 EPF on a normal income basis from that $1.9 million if you applied a normalized full year tax rate to it.

Paul Condra – BMO Capital Markets

Okay.

Roger Ballau

If you applied this quarter’s 14%, obviously its higher

Paul Condra – BMO Capital Markets

Right, right.

Roger Ballou

For argument’s sake, we thought the safest way to look at it would be to use a normalized tax effect and look at what it would’ve produced on that normalized basis.

Paul Condra – BMO Capital Markets

Just lastly, on your cash flow data, the operating – the cash used by operating activities is largely negative. Was there any particular reasons for that?

Roger Ballou

Yes. It is specifically driven by the growth, particularly in the IT business, if you look at it quarter over quarter, IT grew from – I’m going to look it up here. Grew from $64 million first quarter to $76 million second quarter. If you take that $12.5 millionish – $12.4 millionish and annualize it, you’re looking at about $50 – $52 million of growth. With our AR days running, our DSO’s days in that business running 80 plus, you’re looking at that chewing up on the order of $12-$13 million of cash right there. That’s single biggest user other than – I mean, that is the single biggest user right there.

Paul Condra – BMO Capital Markets

Okay. The IT segment was all organic growth?

Roger Ballou

Yes.

Paul Condra – BMO Capital Markets

Okay. That’s it. Thank you.

Roger Ballou

Okay not a problem Paul, thanks.

Operator

And at this time we show no further questions. I will now turn the call back to Roger Ballou.

Roger Ballou

Thank you. We were pleased with the momentum we saw in the second quarter in IT Solutions and in MRI. And we do see signs of that momentum continuing at the later quarters.

Additionally we were encouraged that business development activity in Engineering Solutions could bode well for later year performance. If, as we anticipate and as most economist expect, the economy is on the path to recovery, we feel that CDI is well positioned to benefit from increased demand for our Engineering and IT Solutions and our Professional Staffing services.

We have an experienced management team. We have effectively and efficiently lowered our cost structure. We’ve added skill and scale through our acquisition of L. C. Kimball. And we have the discipline to execute our business strategy into an improving economic climate.

Thanks again for your continuing interest in CDI.

Operator

Thank you for participating in today’s conference. You may disconnect at this time.

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