Executives
Roger Ballou - President and Chief Executive Officer
Mark Kerschner - Executive Vice President and Chief Financial Officer
Vince Webb - Vice President of Investor Relations
Analysts
Jeff Silber - BMO Capital Markets
Bill Sutherland - Boenning & Scattergood Inc
James Janesky - Stifel Necolaus & Company Inc.
Ty Govatos - C.L. King
CDI Corp. (CDI) Q2 2008 Earnings Call July 31, 2008 11:00 AM ET
Operator
Welcome to the CDI Corporation second quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host Vince Webb, Vice President of Investor Relations.
Vince Webb
At this point, you should have a copy of the second quarter 2008 press release. If not, please call our office at 215-636-1185 and we'll be happy to send you one immediately after the call. A replay of today's call will begin one hour after we're finished and will run for one week. It can be accessed by dialing 706-645-9291 and entering the pass code 53322869. In addition, a live broadcast will also be made available on the internet at cdicorp.com for the next 14 days.
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 the line will be opened up for questions.
This conference call 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 that the cautionary language regarding forward-looking statements is contained in the news release and remind everyone that that same language applies to any comments made during this morning’s conference call.
Now, at this time, I'd like to turn things over to Mr. Roger Ballou; go ahead Roger.
Roger Ballou
Following my opening remarks, Mark and I will be happy to answer questions.
CDI delivered a mixed performance during the second quarter in a rapidly changing economic environment. I use the term mixed because during the quarter we generated solid strategic momentum in our engineering solutions business an initiated a significant profit turn around in our IT Solutions business, while at the same time experiencing a rapid drop in permanent placement hiring in key sectors of the U.K. construction marketplace.
We were able to deliver solid bottom line performance and accomplish a number of strategic goals which should enable the company in later quarters to more rapidly grow our international presence and profitably expand our revenue base by providing higher margin services in key engineering verticals.
Top line revenue declined by 2.2% versus the year ago quarter. We had anticipated overall revenue growth in the range of plus 2% to plus 4% even with an anticipated short-term moderation in revenue momentum in the engineering solutions segment as we continue to rotate out of lower margin business into higher margin engineering services business. However the previously mentioned slow down and U.K. permanent placement and a significant cutback in automotive industry IT staffing and our IT solutions business were the primary drivers of the revenue slowdown.
Bottom line performance remained solid indicating strength in our business model and resiliency in our ability to react to changing economic conditions. As reported we generated earnings of $0.34 per diluted share during the quarter compared to prior year second quarter earnings from continuing operations of $0.37 per diluted share. Included the current quarter was a pretax charge of approximately $300,000 in real estate exit costs in our engineering solutions segment.
In the second of 2007 net earnings included an approximately $0.4 million reduction in income tax expenses due to the recognition of foreign research and development tax credits, offset somewhat by certain charges against deferred tax assets. When adjusting for the year ago tax credit and the real estate item, second quarter earnings were essentially flat compared to the prior year quarter.
Let’s now look at second quarter performance in our business units. As anticipated revenue momentum slowed in engineering solutions as we continued to exit some lower margin business. With the addition of higher margin solutions business we were able to increase operating profit by 14.3% compared to the prior year quarter. When adjusted for the previously mentioned real estate exit costs, operating profit would have increased by over 18%.
We made significant advances during the quarter in building a strategic framework in ES that should drive future profitable revenue growth. That strategic framework has three components. First we want to build our global mix of business to ensure that we continue to meet client needs and to generate new client relationships throughout the world. During the quarter we announced two joint ventures; one in Mexico and one in Kuwait. These JVs should create opportunities to grow engineering services in Latin America and in the Middle East.
Second we want to leverage our business development assets to capture high margin, high client value engineering outsourcing business and alternative energy. During the quarter we won a number of alternative energy projects that will ramp up in later quarter, including solar plant engineering design and project management work in Germany, Russia, Italy and the U.S.
Third, we are committed to building both our skill sets and our business scale in those industries that we’ve identified as having long-term economic drivers and which could remain relatively unaffected by macroeconomic disruptions.
Following the close of the second quarter we announced that we’d required TK engineering, a Cincinnati based aerospace engineering firm with approximately 300 aerospace professionals; the skill sets primarily focused on turbine engineering. This acquisition will expand our capabilities to provide a broader range of engineering services to our aerospace clients and will create an aerospace engineering center of excellence in Cincinnati of about 500 engineers. We expect this acquisition to be accretive to earnings in the second half of 2008.
As we’ve indicated previously we are interested in finding acquisitions that add skill and scale to our engineering business. We saw solid year-over-year revenue growth of 23.6% in government services as defense sector spending continued to driver sales. We saw a slight decline of 1% in process and industrial as increased alternative energy spending was offset by declines in some lower margin business.
Aerospace revenue decline 13.5% during the quarter due to continued project delays from a large client; however, we hope to meliorate this ongoing delay through business development efforts with other client targets and through the growth generated by the TK acquisition.
Management Recruiters International reported essentially flat revenue in the second quarter compared to the prior year quarter. We saw a continued weakness in domestic U.S. royalties on a year-over-year basis. Placement strength in the healthcare and technology sectors was offset by weakness in consumer products and the industrial sectors; due to the weakness in permanent placement demand and royalties operating profit declined by 18.4% versus the year ago quarter.
Contracts staffing revenues at MRI remain positive on a year-over-year basis, but the rate of growth declined. We remain cautious in our outlook on the U.S. employment market. While there is weakness in perm hiring demand in some business sectors and geographic areas, we’ve not yet seen a downturn as broad as we’ve seen in past economic cycles.
U.K. based AndersElite saw a significant slowdown during the quarter in permanent placement activity and property development and residential construction; two sectors representing about 30% to 35% of our permanent placement business. We are redirecting our recruiters to stronger sectors increasing the focus on team based national accounts and reaching it to new geographies and of course managing expenses. Overall contract staffing demand is keeping pace with last year.
We anticipate continuing solid demand in rail, underground construction and in infrastructure rebuild spending throughout the U.K. and we anticipate strong demand to continue to be generated by the planning and construction work for the 2012 London Olympics. Additionally we anticipate continued revenue momentum in Australia and growth opportunities in the Middle East construction market. We feel that the U.K. housing and property development business will remain a significant challenge throughout the balance of this year.
We remain unable to estimate any potential liability regarding the ongoing U.K. Office of fair trading investigation into alleged anticompetitive behavior by a number of U.K. companies including Anders. We’ll disclose any estimate of liability or actual liability when we have sufficient information in the OFT.
IT solutions revenue declined 6.6% versus the year ago quarter, reflecting declines in contract IT staffing demand from our automotive clients. This decline offset revenue gains in virtually every other sector of our staffing business. Direct margin improved by 90 basis point versus the year ago quarter as margins improved to 19.3% due to growth of higher margin services across the business.
We anticipate renewed revenue growth in the fourth quarter and earlier at 2009 as we ramp up the previously announced predominant supplier agreement for the large IT solutions client. We’re please with this new business opportunity and expect that it will generate returns in excess of our hurdle rates, which are 20% plus.
With that as segment detail I would like to now provide some financial details for the quarter. Our balance sheet remains strong. We finished the quarter with cash and cash equivalents of $121 million after generating $9.5 million of free cash flow during the quarter. With our cash on hand and untapped borrowing capacity, we should have sufficient resources to support organic revenue growth, capital spending, our stock repurchase program, share holder dividends and strategic acquisitions.
During the second quarter we did not repurchase any shares of our common stock under the previously announced stock repurchase program. Year-to-date we’ve repurchased 72,400 shares for a total of $1.8 million. Corporate overhead expenses decreased by 15.4% on a year-over-year basis, primarily reflecting lower compliance spending and consulting services of $0.6 million and lower variable compensation cost of $0.2 million.
Following the close of the second quarter we received a preliminary indication from a foreign tax authority that our application for certain research and development tax credits for the year’s 2005 and 2006 will be approved. Upon receipt of final approval we recognized a reduction of approximately $2.3 million for income tax expense.
Based on these credits and tax planning efforts we anticipate the full year tax rate to be in the range of 32% to 34% as we previously had indicated, in spite of this quarter’s higher tax rate. CDI will also pay a quarterly dividend of $0.13 per share at all shareholders of record as of August 14, 2008 to be paid on August 28, 2008.
Looking ahead we anticipate continued softness in the U.K. property development and residential construction sectors and U.S. consumer products and industrial sectors to drive lower permanent placement and royalty revenues. We also anticipate a slight up tick in revenue on our ITS and ES businesses during the third quarter versus the prior year quarter. We could therefore see revenue for the quarter slightly down or flat when compared to the third quarter of 2007.
For the full year we’d anticipate relatively flat revenue compared to the previous year. We expect that our pre-tax profit from continuing operations could be down slightly in the third quarter and relatively flat for the full year compared to the prior year periods, even while absorbing significant start up cost associated with the previously mentioned joint ventures and contract wins.
Now with that Mark and I would be happy to take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question is coming from Jeff Silber of BMO Capital Markets.
Jeff Silber - BMO Capital Markets
I just wanted to get some color on the TK Engineering acquisition; first of all, that acquisition has it closed as yet?
Mark Kerschner
Yes, it has.
Jeff Silber - BMO Capital Markets
Okay, so is that included in your guidance?
Mark Kerschner
Yes, it is.
Jeff Silber - BMO Capital Markets
Okay, so just kind of quantify that and I know you’ve been a little bit reluctant to, but the 300 engineers that you’ve had, how many engineers did you have in the aerospace engineering business?
Mark Kerschner
Around 600…
Jeff Silber - BMO Capital Markets
Okay so we’ve added about 50 capacity more or less?
Mark Kerschner
Yes.
Jeff Silber - BMO Capital Markets
Okay, and in terms of comparing those folks, the folks that you had already, it’s the same kind of business model as the time and materials model?
Mark Kerschner
Yes it is.
Jeff Silber - BMO Capital Markets
And are the billing rates or margins dramatically different from what you have in aerospace?
Mark Kerschner
No they are pretty comparable.
Jeff Silber - BMO Capital Markets
Okay, alright that’s helpful, I appreciate that. Just a couple of numbers and questions and I’ll let somebody else jump on. In terms of your share repurchase, what’s left in the reauthorization?
Mark Kerschner
$48 point something million…
Jeff Silber - BMO Capital Markets
I’m sorry that’s $48 point something million dollars, right?
Mark Kerschner
Yes, correct dollars.
Jeff Silber - BMO Capital Markets
You mentioned the tax guidance when do you think you’ll be getting the tax credit; is that in the third quarter or fourth quarter?
Mark Kerschner
At this time we’d anticipate it coming through in the third quarter.
Jeff Silber - BMO Capital Markets
Okay, so we’ll build that into our model accordingly; and then stock based compensation in the quarter what was that?
Mark Kerschner
It was $965,000.
Jeff Silber - BMO Capital Markets
Okay great and then one final one; I don’t know if missed this last quarter, but it looks like you restated or reclassified engineering solutions and IP solutions, was that something you just did this past quarter in terms of classifications?
Mark Kerschner
No, we didn’t do anything with them this quarter we did that earlier.
Operator
Thank you our next question is coming from Bill Sutherland of Boenning & Scattergoods.
Bill Sutherland - Boenning & Scattergood Inc
What’s the comment; can you give us a feel for the level of weakness you're seeing in the royalty revenue in MRI?
Roger Ballou
Yes, we are seeing a reduction in revenue that’s running in the order of low to mid single -- if I look at a cash into our franchises, we are running in the low single digits, so its in the 3% to 5% range of reduction in billings.
Bill Sutherland - Boenning & Scattergood Inc
And that was a pick up or decrease I guess from Q1?
Roger Ballou
No too much change versus Q1 and it has a different flow through to our royalties because as it happens we’ve got a few of our big guys who have because of their scale slightly lower royalty rates and we’re off more than some of the little guys. So the effective royalties are a little bit higher than that, but that’s generally speaking the range that we’re saying in terms of the billings volume and it is different sections of the country and different industry groups, but it really is in particularly retail trades and constructions that we’re seeing the short fall.
Bill Sutherland - Boenning & Scattergood Inc
Retail and constructions, so as you look into Q3, it’s pretty murky as far as whether it’s going to spread.
Roger Ballou
I mean at this point I can’t predicted whether it’s going to spread or not Bill but what we’ve seen for the first two quarters it’s been pretty consistent. That those two segments are up and technology and medical continue to drive -- healthcare can be very strong. Healthcare is growing quite strongly, tech is growing well and our financial services practices as I indicated previously is running flattish; it’s not down but we don’t tend to serve Wall Street and big investment banks and things like that.
Bill Sutherland - Boenning & Scattergood Inc
And over to Andres Roger, the profitability level that you’re running in Q2 you think that’s sustainable?
Roger Ballou
We would hope to see an up tick in Q3 because it’s seasonally a bigger part of the year for us and then probably a downtick again in Q4, but we think the level we’re at now, I’d say should go up in Q3 and then probably back down to this level in Q4 or something like that.
Bill Sutherland - Boenning & Scattergood Inc
And how quickly do you think you can begin to get better perm by the redirecting of recruiters and so far?
Roger Ballou
We’re seeing some effects in the Middle East already. Part of our hope is that as we get some of our recruiters focusing on alternate markets, property development is still going on. I mean big U.K. clients are doing property development; it’s just that it’s going on outside of the U.K. geography. So we’ve already had some placements in Middle East in Q3 up from virtually none in Q2, so we should see a little bit of traction on that.
Bill Sutherland - Boenning & Scattergood Inc
And then finally I guess the one other sort of segment detail I want to get more color on is within the P&I vertical. Can you kind of walk us through because it obviously covers a lot of different sub-segments and just give us a sense of -- because that model was lighter in revenue?
Roger Ballou
Yes I mean that’s the segment where we’ve rotated out some lower margin stuff and where we have -- because we moved into alternative energy, we’re seeing more lumpiness now than we would have seen a year ago and candidly the two things that went on there were as I said the elimination of some lower margin work and then secondly that we just didn’t have as much of the solar or alternative energy work in P&I in the second quarter as we would hope to have as we will toward the third and fourth quarter.
So it will be a little lumpier there as we go forward. We will have some quarters up a little and some quarters down a little, but the biggest driver there this quarter one is the continuing roll off of some lower margin stuff and the second is that there is a little lumpiness in alternative energy. There’s got a good pipeline of wins in alternative energy though, so we expect to see continuing good strong revenue.
Bill Sutherland - Boenning & Scattergood Inc
So if we step back now after that color which I appreciate and just when I try to understand the bigger picture in terms of being flat now, expected to be flat more or less for the rest of the year -- go ahead.
Roger Ballou
I mean I think the big thing here is we’d mentioned start up costs and it probably be helpful for everybody to understand it. At this point given what we understand right now about the roll out rates on our big IT win and these couple of joint ventures and some of the other wins we’ve got, we’re anticipating in Q3 and Q4 that we could absorb over $2 million of start up costs. So what we’re saying is we will be flat while absorbing over $2 million of start up costs.
Bill Sutherland - Boenning & Scattergood Inc
That’s just Q3 Roger?
Roger Ballou
Q4.
Bill Sutherland - Boenning & Scattergood Inc
Q3 and Q4?
Roger Ballou
The cumulative $2 million, a little over $2 million for Q3 and Q4.
Bill Sutherland - Boenning & Scattergood Inc
Combined with second half, okay.
Roger Ballou
Yes combined, sorry; but without that obviously we’d be up relatively appreciably.
Bill Sutherland - Boenning & Scattergood Inc
One last follow-up on that comment on the JV’s; I’m only thinking of the Mid East, is there a second one I’m not…
Roger Ballou
Mexico; our Mexican JV as well.
Operator
Our next question is coming from Adam Koser from Stifel Nicolaus.
James Janesky – Stifel Necolaus & Company, Inc.
Hi, this is Jim Janesky. The MRI margins coming in at about 18% this quarter, where should we expect those to ahead over the next couple of quarters?
Roger Ballou
Next couple of quarters they should probably stay in around the same sort of range they’re at now and that’s driven by a mixed change that’s gone on there over the last couple of years. We’ve been growing our contract staffing business, where we are supporting our franchisees and putting interim executives out and that business runs in the 30% gross margin base, but as lower operating margins and then royalties have slowed, where royalties are running very, very high it’s obviously 100% gross margin business and very good operating margins.
Royalty profitability stayed where it was, it’s just that’s become a smaller percentage of the business as we’ve grown the contract staffing. Contract staffing in normal businesses would be seen as very, very attractive for us because it’s generating a 40% return on net assets deployed, it’s just that you’re building in that next to a business where you’ve over a 100% return on net assets deploy, so the operating margin is falling somewhat, obviously still very acceptable.
James Janesky – Stifel Necolaus & Company, Inc.
Right and that stabilization is just based upon trends not deteriorating significantly in the royalty revenue; right?
Roger Ballou
That’s correct.
James Janesky – Stifel Necolaus & Company, Inc.
Okay and the same way with your answer to the question on AndersElite margins in the third and fourth quarter it’s going to depend upon what is happing. Can you as you said kind of redeploy some recruiters toward other areas of perm placements so those margins are going to be dependent upon movements there as well, right?
Roger Ballou
Yes, I mean to a certain degree. I mean we are not anticipating significant progress in the redeployment; if we did you’d probably see the margins go up, but what we’re anticipating is relative stability through the movements we’re making.
James Janesky – Stifel Necolaus & Company, Inc.
Okay, within the engineering solutions, have you taken a look at what level of revenues that you would need on either a quarterly basis or a run rate that would allow you to absorb new projects coming online without any significant potential movement on the profitability line because of start-up costs?
Roger Ballou
The answer is hard Jim, in the sense that if you think about it, something like the Middle East joint venture is a very large joint venture for us. This is an organization that we’re putting in place that’s intended to participate in about a trillion dollars of spending that will go on, on construction in the Middle East in power, water and energy over the next five years. So, we’re making a pretty big investment in that in terms of management talent and premises and things like that on the front end and that clip we’re spending there, it will show up in almost any quarter that we had.
The biggest spending on start-up costs, I will tell you though is if you remember a couple of years ago when we won the IBM business originally, we called out that in a two quarter period I believe we had something like $1 million plus of start-up costs on IBM. This new IBM win at this point we are anticipating to have a similar large affect on our P&L of over $1 million of start-up costs. So, the biggest factor in the start-up costs of that over $2 million we’re talking about is in the IT segment and it is related to that win.
The ES start-up costs are not that big, but and again Jim if added one polysilicon or one bio-diesel project per quarter to what we’re doing now. The margins it would generate alone on a single project per quarter would mitigate any affect of our start-up costs; they would disappear into it, on just one project a quarter. So, if I add one of those where you’re talking about really, really high margins, it would let us handle start-up costs and they’ll disappear. I think I was handling 20% margin work; it might take $20 million to $30 million of incremental work to mitigate it.
James Janesky – Stifel Necolaus & Company, Inc.
Okay, so it depends upon where you get the incremental?
Roger Ballou
Yes. In alternative energy the margins are north of 50%
James Janesky – Stifel Necolaus & Company, Inc.
Mark, can you tell us where you expect cash to be August 31 after acquisitions and dividends?
Mark Kerschner
We don’t project where the cash will be, but I think that if you take the forecasts of where we’re going to be on after tax income and look at that number, it helps to give you a sense of what the cash generative power of the company is.
Roger Ballou
I mean in the quarter we would expect to generated cash -- if you look at this quarter from an operating income perspective or operating cash flow, we generated 13 and change in a quarter where we had operating income of 11-ish, pre-tax income of 11-ish. So, if you look at the third quarter, we would expect sort of similar kind of flow from that. Dividends, obviously we’re paying out two and change a quarter. Cap spending is probably going to run two and change a quarter. We didn’t disclose the acquisition price; you’ll be able to figure it out off the Q when we file for the next quarter, but suffice to say we should have plenty of cash to continue to do as we said acquisitions, dividends, buybacks, generally.
James Janesky – Stifel Necolaus & Company, Inc.
I was just trying to figure out interest income number, that’s all.
Roger Ballou
Yes, I mean we would expect interest income next quarter to be somewhere as near this quarter.
Operator
Thank you. Our next question is coming from Ty Govatos from C.L. King.
Ty Govatos - C.L. King
Technical question on the SG&A; I was surprised at how fast it came down on the second quarter. Can you give us any kind of an outlook as to what that might be going forward?
Roger Ballou
I guess, I’ll give you a little bit of color in the sense of saying, going down fast. I mean part of that is obviously things like seasonal timing, so what occurs there is we have heavier spending on things like external audit and internal audit in the first quarter as you’re closing the books to the year. So, our compliance spending is significantly higher in the first quarter than in the second, third and fourth quarters.
Secondly, another big driver of the variability there is the variable comp. In a quarter where our earnings were not as strong as they were, as say the plan was, because we tend to have a variable comp based on planned income; our management team has a significant variance in our bonus compensation and performance-based stock compensation if our earnings fall short to targets. So, those are the big drivers.
Ty Govatos - C.L. King
Could you quantify variable comp at all?
Mark Kerschner
I mean total comp was down about 200,000 in corporate overhead, the variable comp was actually down 600,000 from the prior year in the quarter and as we said the compliance and the consulting costs were another 600,000. Although there were other things that went up, but there’s pretty big movement in those factors and then we have a number of other things that vary with volume as well; commission plans and things like that in the operating units.
There is a fair amount of our cost structure that will vary up and down naturally with revenue flows and operating profit and as I indicated earlier we’ve also taken steps to reduce our costs as we saw the shortfalls in places like Anders and MRI based on the perm placement shortfalls. So, we’ve taken steps to close some offices and taken steps to eliminate positions etc to cut the cost structure going forward as well.
In the Q3, Q4 you should see -- I mean SG&A could go back up if we have a significant out performance, but if it runs roughly like we’re talking now it should run fairly consistent with this quarter.
Operator
Thank you. Our next question is a follow-up from Jeff Silber of BMO Capital Markets.
Jeffrey Silber - BMO Capital Markets
In prior quarters and in this quarter you talked about weaning yourself off of some of your low margin business specifically in the engineering solution area; how much more of that can we expect?
Mark Kerschner
We are most to the way through that. I mean some of it still has a tail in terms of year-over-year comparisons obviously Jeff, but what we’d anticipated right now is that by Q1 next year we will have aged off the big ones that we walked away from or that we decided not to rebid etc, so I think you should expect to see us have some continuing effect through Q3, Q4, but when we roll into Q1 next year, all of that should be gone, so we’ll be running off, our year-over-year comparison should get a lot easier as we roll into Q1 next year in the engineering business.
Jeffrey Silber - BMO Capital Markets
I appreciate that and just one more numbers questions. What are you looking for capital spending for the year?
Roger Ballou
It should run relatively close to our depreciation for the full-year, so somewhere in the $10 million to $10.5 million range, so probably another 5-ish for the rest of the year, something like that.
Operator
Thank you. Our final question is a follow-up from Bill Sutherland.
Bill Sutherland - Boenning & Scattergood Inc
Roger, first of all a clarification. You said due to the tax credit your full-year effective rate would be in the range of 32% to 34%?
Roger Ballou
Yes.
Bill Sutherland - Boenning & Scattergood Inc
Okay, so I’ll figure out the back half to get there.
Roger Ballou
The first half was 36.9, for the full-year it’ll be 32 to 34; obviously, the back half is going to be somewhere in the 20s, high 20s.
Mark Kerschner
Under tax accounting we have discrete items that you take the full impact in the current quarter.
Roger Ballou
So, that two-three would go in the current third quarter.
Bill Sutherland - Boenning & Scattergood Inc
It will all be caught up in the third quarter. Thank you.
Roger Ballou
Yes, so you can see a very low Q3 rate, because of that there’ll be a higher Q4, the blend will get you to 32, 34 for the year.
Bill Sutherland - Boenning & Scattergood Inc
And does this imply anything about ’09, this tax credit, tax rate?
Roger Ballou
It’s something that we’ve received for ’03 and ’04 and ’05 and ’06. We believe we’ll receive the ’05 and ’06; we’ve received indication, we will. We will obviously continue to apply for the tax credit on a going forward basis, but it is not something that we feel is a guaranteed number, but the program still exists, we still apply for ’07 than we would apply for ’08.
Bill Sutherland - Boenning & Scattergood Inc
Okay, so in lieu with that, I guess Mark the effective rate estate for ’09 would be in ballpark of…
Mark Kerschner
So, we haven’t given the guidance ahead yet, we haven’t done that yet.
Bill Sutherland - Boenning & Scattergood Inc
So, it wouldn't be that unchanged from -- there’s no reason to expect that to unchanged from ’08?
Mark Kerschner
Te effective tax rate is pretty complicated and it includes the sources of your income from different countries as well as states, so we haven’t put…
Roger Ballou
As well as how we invest cash and all kinds of the other thing. So, we’ll give you guidance as we closer to the tale end of the year or that.
Bill Sutherland - Boenning & Scattergood Inc
But I was thinking you should do some of these projects, so it could change. Roger, you’ve gotten a notch on the belt here with the TK acquisition, how does the pipeline look now?
Roger Ballou
I think we’ve got an active acquisition hunting program going. It is something that we’ve talked about, the company and the board are committed to investing in the engineering solutions business particularly, so we are actively looking for acquisitions and we’re optimistic we’ll find others.
Bill Sutherland - Boenning & Scattergood Inc
Okay. So you’re saying that beyond just activity there could be others fairly near-term or I mean it might not, you never know timing, but it’s not out of the realm.
Roger Ballou
I’m just saying we’re optimistic we’ll find others. That’s all I can say. We’re active and we’re optimistic and we’re pleased that the TK acquisition, it’s significantly accretive and it’s a nice business.
Bill Sutherland - Boenning & Scattergood Inc
Okay. On the IT business, as you are look ahead to be IBM being pulled down and the better mix; what will be your target near-term operating margin in your mind?
Roger Ballou
Well, remember that again I just want to be clear in the sense that there will be significant startup costs in the IT business in Q3 and Q4.
Bill Sutherland - Boenning & Scattergood Inc
Right, I’m sorry, I’m not looking into at least next year.
Roger Ballou
As you look at ’09, we’d expect to see operating margins in IT; I’d have to think for just a minute; probably looking at 3% plus operating margins, something like that in ’09.
Bill Sutherland - Boenning & Scattergood
Good and then finally, could you mention when you discuss process in industrial anything about the large commodity chemical clients and how they’re doing for you?
Roger Ballou
Did not, what I was saying to you is that in the domestic commodity chemicals market, both chemicals market that we have seen a slowdown in spending on new projects there. The good news is an awful lot of our work in the domestic commodity, its chemical space is plant upgrades, plant de-bottlenecking, EPA compliance kind of work, that’s still ongoing, but there is really low level of projects spending in the domestic, both chemicals market most of its going on overseas.
Bill Sutherland - Boenning & Scattergood
So you guys aren’t surprise at all that where you are with PNI year-to-date. Right?
Roger Ballou
No. The things that were not anticipated by us as we came into the year where the significant slowdown in the perm placement activity at Anders and obviously we could not anticipate this specifics of the industry slowdowns that occurred in MRI. I mean if you look year-over-year Anders drop in income from prior year in this quarter was $2 million. So, as you look at this quarter remember we’ve got an after tax income as we look at it on an adjusted basis for the one charge-off of real estate and tax item in the prior year that’s flat, and that’s while absorbing a $2 million drop at Anders. So actually Anders, the rest of the company would have had really substantial up tick.
Bill Sutherland - Boenning & Scattergood
Okay. I guess one out of the one that just occurred to me, you mentioned, if there is a polysilicon or similar deal for the third or fourth quarters, does that mean that just for the timbering there is nothing keyed up in that space…
Roger Ballou
Don’t mistake that, I was trying to answer Jim’s hypothetical question of what would it take versus the current run rate to have the start up cost mitigated. What I would say to you is, we talked in the dialogue here about wins in Russia, Italy, Germany and the U.S. and we have an extremely active pipeline of bit activity and alternative energy particularly in bio-diesel and in the Polysilicon area, well also in area of nuclear and in the area of wins.
So, lot of activity going lot of wins already, I’m not sure that if we shared all this; there is nothing in the pipe here. I’m just saying if you took the second quarter this year and you look at the effect that we had of somebody’s startup cost as we look forward. We could absorb those through just any single project in alternative energy. One incremental win, would mitigate that.
Bill Sutherland - Boenning & Scattergood
But your second half guidance kind of begs questions, because its looks, it feels based on the guidance that you’re not looking for mitigating factor.
Roger Ballou
What we are saying Bill is again, let me try to be clear with everyone. What we are saying is our third and fourth quarter going to get us the flat for the full year. Year-to-date we are a switch down part very prior year and we are calling for the third quarter to be down. That obviously means we are calling for the fourth quarter to be up and that means we are doing that while absorbing at this point and anticipated over $2 million of startup cost.
Bill Sutherland - Boenning & Scattergood
But not all in Q4 to be clear.
Roger Ballou
Q3 and Q4 between in two, so the net effect is second half has to be slightly better than flat to last year while absorbing over $2 million in startup costs.
Roger Ballou
Hi Brianna I am going to move to closing comments, okay.
Operator
Okay.
Roger Ballou
In the short-term we anticipate, facing continues headwinds in the permanent placement environment and property development and residential construction in the U.K. and in certain factors of the domestic U.S. marketplace. These headwinds will probably impede revenue and earning momentum in the third and fourth quarters, but we are confident that the joint ventures, significant account wins and our recent acquisitions should give us a solid platform to generate future momentum.
In addition with ample cash resources to fund further acquisitions we could expect to accelerate both top line and bottom line results as we continue to execute our strategy to vigorously and methodically move our service delivery capabilities up the value continuum, to leverage the capital spending cycle driven by high energy prices and to ensure that CDI has global reach and global service delivery capabilities.
Thanks very much for joining the call today.
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