Hill International, Inc.
Hill International, Inc. (Form: 10-K, Received: 03/18/2013 16:21:32)

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2012

 

Commission file number 001-33961

 

HILL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-0953973

State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization

 

Identification No.)

 

 

 

303 Lippincott Centre, Marlton, NJ

 

08053

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:   (856) 810-6200

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.0001 par value

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None

 


 

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o   No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No  x

 

Indicate by check mark 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, and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o

 

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No  o

 

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large Accelerated Filer  o

 

Accelerated Filer  x

 

 

 

Non-Accelerated Filer  o

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  x

 

The aggregate market value of shares of common stock held by non-affiliates based upon the closing sale price of the stock on the New York Stock Exchange on June 30, 2012 was approximately $77,663,000. As of March 6, 2013, there were 38,663,782 shares of the Registrant’s Common Stock outstanding.

 

Documents Incorporated by Reference

 

Portions of the proxy statement for the 2013 Annual Meeting of Shareholders of Hill International, Inc. are incorporated by reference into Part III of this Form 10-K.

 

 

 



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

 

Index to Form 10-K

 

PART I.

 

 

 

 

 

Item 1.

Business

4

 

 

 

Item 1A.

Risk Factors

12

 

 

 

Item 1B.

Unresolved Staff Comments

22

 

 

 

Item 2.

Properties

22

 

 

 

Item 3.

Legal Proceedings

23

 

 

 

Item 4.

Mine Safety Disclosures

23

 

 

 

Part II.

 

 

 

 

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

 

 

 

Item 6.

Selected Financial Data

26

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 8.

Financial Statements and Supplementary Data

46

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

91

 

 

 

Item 9A.

Controls and Procedures

91

 

 

 

Item 9B.

Other Information

93

 

 

 

Part III.

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

94

 

 

 

Item 11.

Executive Compensation

94

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

94

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

95

 

 

 

Item 14.

Principal Accounting Fees and Services

95

 

 

 

Part IV.

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

96

 

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Table of Contents

 

PART I

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).  We may also make forward-looking statements in other reports filed with the United States Securities and Exchange Commission (“SEC”), in materials delivered to stockholders and in press releases.  Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact.  Although we believe that the expectations, estimates and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.  You can identify forward-looking statements by the use of terminology such as “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” “could,” “should,” “potential” or “continue” or the negative or other variations thereof, as well as other statements regarding matters that are not historical fact.

 

Those forward-looking statements may concern, among other things:

 

·                  The markets for our services;

 

·                  Projections of revenues and earnings, anticipated contractual obligations, capital expenditures, funding requirements or other financial items;

 

·                  Statements concerning our plans, strategies and objectives for future operations; and

 

·                  Statements regarding future economic conditions or performance.

 

Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements include:

 

·                  Modifications and termination of client contracts;

 

·                  Control and operational issues pertaining to business activities that we conduct pursuant to joint ventures with other parties;

 

·                  Difficulties we may incur in implementing our acquisition strategy;

 

·                  The need to retain and recruit key technical and management personnel; and

 

·                  Unexpected adjustments and cancellations related to our backlog.

 

Other factors that may affect our businesses, financial position or results of operations include:

 

·                  Special risks of our ability to obtain debt financing or otherwise raise capital to meet required working capital needs and to support potential future acquisition activities;

 

·                  Special risks of international operations, including uncertain political and economic environments, acts of terrorism or war, potential incompatibilities with foreign joint venture partners, foreign currency fluctuations, civil disturbances and labor issues; and

 

·                  Special risks of contracts with governmental entities, including the failure of applicable governing authorities to take necessary actions to secure or maintain funding for particular projects with us, the unilateral termination of contracts by the government and reimbursement obligations to the government for funds previously received.

 

We assume no obligation to update or revise any forward-looking statements. In accordance with the Reform Act, Item 1A of this Report entitled “Risk Factors” contains cautionary statements that accompany those forward-looking statements.  You should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends.  Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-K, in our other filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

 

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Item 1. Business.

 

General

 

Hill International, Inc. provides a broad spectrum of project management and construction claims services to clients worldwide, but primarily in the United States/Canada, Latin America, Europe, the Middle East, North Africa, and Asia/Pacific. Our clients include the United States and other national governments and their agencies, state and local governments and their agencies, and the private sector. Our diverse experience includes projects such as educational, governmental, commercial office, residential, hotels and resorts, retail, entertainment and cultural, hospitals and healthcare, transportation, power, environmental, oil and gas, industrial and process, among others. In this report, the terms “Company,” “we,” “us,” “our” or “Hill” refer to Hill International, Inc.

 

We are one of the leading firms in the world in both the Project Management and Construction Claims consulting businesses. We are a global company with approximately 3,700 personnel in approximately 100 offices worldwide.

 

We compete for business based on a variety of factors such as technical capability, global resources, price, reputation and past experience, including client requirements for substantial experience in similar projects and claims work. We have developed significant long-standing relationships, which bring us repeat business and would be very difficult to replicate. We have an excellent reputation for developing and rewarding employees which allows us to attract and retain superior professionals. In addition, we believe there are high barriers to entry for new competitors especially in the project management market.

 

Our Growth Strategy

 

Our growth strategy is to increase our revenue through organic growth and expand our geographic reach and service offerings through strategic acquisitions. We seek to achieve these objectives through the following strategies:

 

·                  Continue to Take Advantage of Organic Growth Opportunities.   We have long-standing relationships with a number of public and private sector entities. Meeting our clients’ diverse needs in managing construction risk and generating repeat business from our clients to expand our project base is one of our key growth strategies. We accomplish this objective by providing a broad range of project management and construction claims consulting services in a wide range of geographic areas that support our clients during every phase of a project, from concept through completion. We believe that nurturing our existing client relationships expands our project base through repeat business. In addition, we strategically open new offices to expand into new geographic areas and we aggressively hire individuals with significant contacts to accelerate the growth of these new offices and to strengthen our presence in existing markets.

 

·                  Continue to Pursue Acquisitions .  We operate in a highly fragmented industry with many smaller, regional competitors. Our acquisition strategy allows us to manage risk by diversifying our services, which enables us to compete better by integrating capabilities and obtaining new relationships. We pursue acquisitions primarily for three reasons: to expand into new geographic markets; add to professional resources and gain critical mass in existing markets to compete more effectively; and to enhance our specialization and capability in certain strategic areas. We intend to pursue both U.S. acquisitions to round out our domestic presence and enhance capabilities in specific areas and foreign acquisitions that bring new relationships as well as widen our geographic base to offer our global capabilities.

 

·                  Strengthen Professional Resources .  Our biggest asset is the people that work for Hill.  We intend to continue spending significant time recruiting and retaining the best and the brightest to improve our competitive position.  Our independent status has attracted top project management talent with varied industry experience. Additionally, our construction claims business provides us with a strong base of expertise that allows knowledge transfer across our businesses. We believe maintaining and bolstering our team will enable us to continue to grow our business.

 

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Reporting Segments

 

We primarily operate through two reporting segments: the Project Management Group and the Construction Claims Group. Our total revenue consists of two components: consulting fee revenue (“CFR”) and reimbursable expenses. Reimbursable expenses are reflected in equal amounts in both total revenue and total direct expenses. Because these revenue/costs are subject to significant fluctuation from year to year, we measure the performance of many of our key operating metrics as a percentage of CFR, as we believe that this is a better and more consistent measure of operating performance than total revenue. Throughout this report we have used CFR as the denominator in many of our ratios. The following table sets forth the amount and percentage of CFR from our operations in each reporting segment for each of the past three fiscal years (dollars in thousands):

 

Consulting Fee Revenue (“CFR”)

 

 

 

2012

 

2011

 

2010

 

Project Management

 

$

312,232

 

74.8

%

$

290,787

 

72.8

%

$

286,466

 

75.0

%

Construction Claims

 

105,366

 

25.2

 

108,467

 

27.2

 

95,633

 

25.0

 

Total

 

$

417,598

 

100.0

%

$

399,254

 

100.0

%

$

382,099

 

100.0

%

 

Project Management

 

Our Project Management Group provides fee-based or “agency” construction management services to our clients, leveraging our construction expertise to identify potential trouble, difficulties and sources of delay on a construction project before they develop into costly problems. Our services include program management, project management, construction management, project management oversight, troubled project turnaround, staff augmentation, estimating and cost management, project labor agreement consulting, commissioning, labor compliance and other services.

 

Our clients are typically billed a negotiated multiple of the actual direct cost of each consultant assigned to a project and we are reimbursed for our out-of-pocket expenses. We believe our fee-based consulting has significant advantages over traditional general contractors. Specifically, because we do not assume project completion risk, our fee-based model eliminates many of the risks typically associated with providing “at risk” construction services.

 

We have managed all phases of the construction process on behalf of project owners and developers, from concept through completion. Specific activities that we undertake as part of these services include: planning, scheduling, estimating, budgeting, design review, constructability analyses, value engineering, regulatory compliance, development of project procedures, procurement, project reporting, expediting, inspection, quality assurance/quality control, safety oversight, contract administration, change order processing, claims management, and on-site management of contractors, subcontractors and suppliers.

 

In its June 11, 2012 issue, Engineering News-Record magazine ranked us as the eighth largest construction management firm and the tenth largest program management firm in the United States.

 

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Construction Claims

 

Our Construction Claims Group advises clients in order to assist them in preventing or resolving claims and disputes based upon schedule delays, cost overruns and other problems on major construction projects worldwide.

 

We may be retained as a claims consultant at the onset of a project, during the course of a project or upon the completion of a project. We assist owners or contractors in adversarial situations as well as in situations where an amicable resolution is sought. Specific activities that we undertake as part of these services include claims preparation, analysis and review, litigation support, cost/damages assessment, delay/disruption analysis, adjudication, risk assessment, lender advisory, expert witness testimony and other services.

 

Clients are typically billed based on an hourly rate for each consultant assigned to the project, and we are reimbursed for our out-of-pocket expenses. Our claims consulting clients include participants on all sides of a construction project, including owners, contractors, subcontractors, architects, engineers, attorneys, lenders and insurance companies.

 

Global Business

 

We operate worldwide and currently have approximately 100 offices in nearly 35 countries. The following table sets forth the amount and percentage of our CFR by geographic region for each of the past three fiscal years (dollars in thousands):

 

Consulting Fee Revenue by Geographic Region:

 

 

 

2012

 

2011

 

2010

 

U.S./Canada

 

$

117,593

 

28.2

%

$

115,378

 

28.9

%

$

102,092

 

26.7

%

Latin America

 

51,820

 

12.4

 

48,188

 

12.1

 

2,464

 

0.6

 

Europe

 

84,267

 

20.2

 

90,049

 

22.5

 

97,003

 

25.4

 

Middle East

 

134,037

 

32.1

 

108,720

 

27.2

 

102,538

 

26.9

 

North Africa

 

13,591

 

3.3

 

17,451

 

4.4

 

66,179

 

17.3

 

Asia/Pacific

 

16,290

 

3.8

 

19,468

 

4.9

 

11,823

 

3.1

 

Total

 

$

417,598

 

100.0

%

$

399,254

 

100.0

%

$

382,099

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

114,368

 

27.4

%

$

112,098

 

28.1

%

$

99,885

 

26.1

%

Non-U.S.

 

303,230

 

72.6

 

287,156

 

71.9

 

282,214

 

73.9

 

Total

 

$

417,598

 

100.0

%

$

399,254

 

100.0

%

$

382,099

 

100.0

%

 

Growth Organically and Through Acquisitions

 

Over the years, our business has expanded through organic growth and the acquisition of a number of project management and claims consulting businesses. Over the past 15 years, we have completed 20 acquisitions of project management and claims consulting businesses.

 

We believe that our industry includes a number of small regional companies in a highly fragmented market. We believe that we have significant experience and expertise in identifying, negotiating, completing and integrating acquisitions and view the acquisition of these smaller competitors as a key part of our growth strategy. Our acquisition activity over the past three years is detailed below. Our acquisitions have enabled us to accelerate our growth, strengthen our geographic diversity and compete more effectively.

 

On February 28, 2011, our subsidiary, Gerens Hill International, S.A. (“Gerens Hill”), indirectly acquired 60 percent of the outstanding shares of common stock of Engineering S.A., one of the largest project management firms in Brazil with over 400 professionals. It has main offices in Rio de Janeiro and Sao Paulo and an additional office in

 

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Parauapebas. Engineering S.A. provides project management, construction management and engineering consulting services throughout Brazil.

 

During 2010, we made three acquisitions: McLachlan Lister Pty. Ltd. (“MLL”), the Construction Management Division of dck North America, LLC (“dck”) and TCM Group, Inc. (“TCM”). These acquisitions provided us with additional geographical presence in the Asia/Pacific region and the United States.

 

Clients

 

Our clients consist primarily of the United States and other national governments, state and local governments, and the private sector. The following table sets forth our breakdown of CFR attributable to these categories of clients for each of the past three fiscal years (dollars in thousands):

 

Consulting Fee Revenue By Client Type:

 

 

 

2012

 

2011

 

2010

 

U.S. federal government

 

$

12,877

 

3.1

%

$

11,667

 

2.9

%

$

24,731

 

6.5

%

U.S. state, regional and local governments

 

61,790

 

14.8

 

64,734

 

16.2

 

55,075

 

14.4

 

Foreign governments

 

96,242

 

23.0

 

85,756

 

21.5

 

120,226

 

31.5

 

Private sector

 

246,689

 

59.1

 

237,097

 

59.4

 

182,067

 

47.6

 

Total

 

$

417,598

 

100.0

%

$

399,254

 

100.0

%

$

382,099

 

100.0

%

 

The following table sets forth the percentage of our consulting fee revenue contributed by each of our five largest clients for the years ended December 31, 2012, 2011 and 2010:

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

 

Largest client

 

3.6

%

3.2

%

15.4

%

 

2 nd  largest client

 

2.6

%

2.3

%

3.0

%

 

3 rd  largest client

 

2.2

%

2.1

%

3.0

%

 

4 th  largest client

 

2.1

%

2.0

%

2.4

%

 

5 th  largest client

 

2.0

%

1.9

%

2.4

%

 

Top 5 largest clients

 

12.5

%

11.5

%

26.2

%

 

 

Business Development

 

The process for acquiring business from each of these categories of clients is principally the same, by participating in a competitive request-for-proposal (“RFP”) process, with the primary difference among clients being that the process for public sector clients is significantly more formal and complex than for private sector clients as a result of government procurement rules and regulations that govern the public-sector process.

 

Although a significant factor in our business development consists of our standing in our industry, including existing relationships and reputation based on performance on completed projects, our marketing department undertakes a variety of activities in order to expand our exposure to potential new clients. These activities include media relations, advertising, promotions, market sector initiatives and maintaining our website and related web marketing. Media relations include placing articles that feature us and our personnel in trade publications and other media outlets. Our promotions include arranging speaking engagements for our personnel, participation in trade shows and other promotional activities. Market sector initiatives are designed to broaden our exposure to specific sectors of the construction industry, such as, for example, participating in or organizing industry seminars.

 

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For the year ended December 31, 2012, CFR from U.S. and foreign government contracts represented approximately 40.9% of our total CFR. Doing business with governments is complex and requires the ability to comply with intricate regulations and satisfy periodic audits. We believe that the ability to understand these requirements and to successfully conduct business with government agencies is a barrier to entry for smaller, less experienced competitors. Most government contracts, including those with foreign governments, are subject to termination by the government, to government audits and to continued appropriations.

 

We are required from time to time to obtain various permits, licenses and approvals in order to conduct our business in many of the jurisdictions where we operate. Our businesses of providing project management and construction claims services are not subject to significant regulation by state, federal or foreign governments.

 

Contracts

 

The price provisions of our contracts can be grouped into three broad categories: cost-plus, time and materials, and fixed-price.

 

Cost-plus contracts provide for reimbursement of our costs and overhead plus a predetermined fee. Under some cost-plus contracts, our fee may be based partially on quality, schedule and other performance factors.

 

We also enter into contracts whereby we bill our clients monthly at hourly billing rates. The hourly billing rates are determined by contract terms. For governmental clients, the hourly rates are generally calculated as salary costs plus overhead costs plus a negotiated profit percentage. For commercial clients, the hourly rate can be taken from a standard fee schedule by staff classification or it can be at a discount from this schedule. In some cases, primarily for foreign work, a monthly rate is negotiated rather than an hourly rate. This monthly rate is a build-up of staffing costs plus overhead and profit. We account for these contracts on a time-and-materials method, recognizing revenue as costs are incurred.

 

Fixed-price contracts are accounted for using the “percentage-of-completion” method, wherein revenue is recognized as costs are incurred.

 

Backlog

 

We believe a strong indicator of our future performance is our backlog of uncompleted projects under contract or awarded. Our backlog represents management’s estimate of the amount of contracts and awards in hand that we expect to result in future consulting fee revenue. Project Management backlog is evaluated by management, on a project-by-project basis, and is reported for each period shown based upon the binding nature of the underlying contract, commitment or letter of intent, and other factors, including the economic, financial and regulatory viability of the project and the likelihood of the contract being extended, renewed or cancelled. Construction Claims backlog is based largely on management’s estimates of future revenue based on known construction claims assignments and historical results for new work. Because a significant number of construction claims may be awarded and completed within the same period, our actual construction claims revenue has historically exceeded backlog by a significant amount.

 

Our backlog is important to us in anticipating and planning for our operational needs. Backlog is not a measure defined in U.S. generally accepted accounting principles, and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog.

 

At December 31, 2012, our backlog was approximately $923,000,000 compared to approximately $795,000,000 at December 31, 2011. At December 31, 2012, backlog attributable to future work in Libya amounted to approximately $44,000,000. We estimate that approximately $382,000,000, or 41.4% of the backlog at December 31, 2012, will be recognized during our 2013 fiscal year.

 

HillStone International, LLC (“HillStone”) is a strategic technologies distribution and construction project development company. A majority-owned subsidiary of the Company, HillStone attempts to develop private and public ventures for the implementation of affordable, durable and environmentally sound housing technologies in regions of the world where housing solutions are a high priority of various governmental and private interests. HillStone has not been shown

 

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separately within our financial statements as it does not have any revenues to date. Its costs, which have not been material, have been included within the Corporate segment. We previously included $1,300,000,000 in our backlog related to a contract entered into by HillStone to supply building structural systems to TRAC Development Group Ltd. (“TRAC”) in connection with a major housing development in Iraq and $200,000,000 related to a contract we entered into to provide project management and construction management services to TRAC in connection with the development.  The contracts were executed in June 2011. However, to date the Iraq housing development has not moved forward. As a result, we have removed the $1,500,000,000 related to the TRAC contracts from our backlog as of December 31, 2012. In addition, given the very large amount of this backlog relative to the backlog of our Project Management segment, we have revised our historical backlog information to remove all references to this backlog.

 

Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur. Further, substantially all of our contracts with our clients may be terminated at will, in which case the client would only be obligated to us for services provided through the termination date. Historically, the impact of terminations and modifications on our realization of revenue from our backlog has not been significant, however, there can be no assurance that such changes will not be significant in the future. Furthermore, reductions of our backlog as a result of contract terminations and modifications may be offset by additions to the backlog.

 

We adjust backlog to reflect project cancellations, deferrals and revisions in scope and cost (both upward and downward) known at the reporting date. Future contract modifications or cancellations, however, may increase or reduce backlog and future revenue.

 

 

 

Total Backlog

 

12-Month Backlog

 

 

 

(dollars in thousands)

 

As of December 31, 2012:

 

 

 

 

 

 

 

 

 

Project Management

 

$

884,000

 

95.8

%

343,000

 

89.8

%

Construction Claims

 

39,000

 

4.2

 

39,000

 

10.2

 

Total

 

$

923,000

 

100.0

%

$

382,000

 

100.0

%

 

 

 

 

 

 

 

 

 

 

As of September 30, 2012:

 

 

 

 

 

 

 

 

 

Project Management

 

$

833,000

 

95.4

%

$

302,000

 

88.6

%

Construction Claims

 

40,000

 

4.6

 

39,000

 

11.4

 

Total

 

$

873,000

 

100.0

%

$

341,000

 

100.0

%

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011:

 

 

 

 

 

 

 

 

 

Project Management

 

$

753,000

 

94.7

%

$

280,000

 

87.0

%

Construction Claims

 

42,000

 

5.3

 

42,000

 

13.0

 

Total

 

$

795,000

 

100.0

%

$

322,000

 

100.0

%

 

Competition

 

The project management and claims consulting industries are highly competitive. We compete for contracts, primarily on the basis of technical capability, with numerous entities, including design or engineering firms, general contractors, other “pure” construction management companies, other claims consulting firms, the “Big Four” and other accounting firms, management consulting firms and other entities. Compared to us, many of these competitors are larger, well-established companies that have broader geographic scope and greater financial and other resources. During 2012, some of our largest project management competitors included: AECOM Technology Corp.; ARCADIS N.V.; Jacobs Engineering Group, Inc.; Parsons Brinckerhoff, Inc.; Parsons Corp.; Turner Construction Co.; and URS Corp. Some of our largest claims consulting competitors last year included: Exponent, Inc.; Navigant Consulting, Inc. and Systech Group, Ltd.

 

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Insurance

 

We maintain insurance covering professional liability, as well as for claims involving bodily injury and property damage. We have historically enjoyed a favorable loss ratio in all lines of insurance and our management considers our present limits of liability, deductibles and reserves to be adequate. We endeavor to reduce or eliminate risk through the use of quality assurance/control, risk management, workplace safety and similar methods to eliminate or reduce the risk of losses on a project. Although our actual rates have decreased, we have experienced and expect to continue to experience increases in the dollar amount of our insurance premiums because of the increase in our revenue.

 

Management

 

We are led by an experienced management team with significant experience in the construction industry. Additional information about our executive officers follows.

 

Executive Officers

 

Name

 

Age

 

Position

 

Irvin E. Richter

 

68

 

Chairman and Chief Executive Officer

 

David L. Richter

 

46

 

President and Chief Operating Officer, Director

 

Thomas J. Spearing III

 

46

 

President, Project Management Group (Americas)

 

Raouf S. Ghali

 

51

 

President, Project Management Group (International)

 

Frederic Z. Samelian

 

65

 

President, Construction Claims Group

 

John Fanelli III

 

58

 

Senior Vice President and Chief Financial Officer

 

Ronald F. Emma

 

61

 

Senior Vice President and Chief Accounting Officer

 

William H. Dengler, Jr.

 

46

 

Senior Vice President and General Counsel

 

Catherine H. Emma

 

53

 

Senior Vice President and Chief Administrative Officer

 

Shawn L. Pressley

 

34

 

Senior Vice President and Chief Information Officer

 

 

IRVIN E. RICHTER has been Chairman of our Board of Directors since 1985 and he has been Chief Executive Officer and a member of our Board of Directors since he founded the company in 1976. Mr. Richter is a Fellow of the Construction Management Association of America (“CMAA”). He is a member of the World Presidents’ Organization. He is the author of several books including Handbook of Construction Law & Claims and International Construction Claims: Avoiding and Resolving Disputes.  He serves or has served on a number of Boards of Directors, including Rutgers University, Temple University Hospital, CMAA, incNETWORKS, Inc., Energy Storage & Power and Proton Therapy, Inc. Mr. Richter holds a B.A. in government from Wesleyan University and a J.D. from Rutgers University School of Law at Camden, and he has been named a Distinguished Alumnus at both schools.

 

DAVID L. RICHTER has been our President and Chief Operating Officer since March 2004, and he has been a member of our Board of Directors since 1998. Prior to his current position, he was President of our Project Management Group from 2001 to 2004. Before that, Mr. Richter was Senior Vice President and General Counsel from 1999 to 2001 and Vice President and General Counsel from 1995 to 1999. Prior to joining us, he was an attorney with the New York City law firm of Weil, Gotshal & Manges LLP from 1992 to 1995. Mr. Richter is a Fellow of the CMAA. He is a member of the Young Presidents’ Organization, the Construction Industry Round Table, and the American Society of Civil Engineers.  Mr. Richter is a member of the Board of Trustees of the Southern New Jersey Development Council and served on the Board of Directors of the CMAA from 2001 to 2007. He earned his B.S. in management, his B.S.E. in civil engineering and his J.D. from the University of Pennsylvania. Mr. Richter is a son of Irvin E. Richter.

 

THOMAS J. SPEARING III has been President of our Project Management Group (Americas) since April 2009. He was Senior Vice President and Chief Strategy Officer, from September 2007 to March 2009. Prior to joining Hill, Mr. Spearing worked for more than ten years with STV Group, Inc., most recently as Principal-in-Charge of its western region. Before that, Mr. Spearing was a Vice President of business development with Hill. Mr. Spearing earned his B.B.A. in computer and information science from Temple University, his B.S. in construction management and his B.S. in civil engineering from Spring Garden College, and his M.S. in management from Rosemont College. He is an active member of the American Public Transportation Association, the Women’s Transportation Seminar, the New Jersey Business &

 

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Industry Association, Trustee and Transportation Co-Chair of the Southern New Jersey Development Council, and founding Co-Chair of the PenTrans Board of Directors, among others.

 

RAOUF S. GHALI has been President of our Project Management Group (International) since January 2005. He was Senior Vice President in charge of project management operations in Europe and the Middle East from June 2001 to December 2004. Mr. Ghali was a Vice President with us from 1993 to 2001. Prior to joining us, he worked for Walt Disney Imagineering from 1988 to 1993. Mr. Ghali earned both a B.S. in business administration and economics and an M.S. in business organizational management from the University of LaVerne.

 

FREDERIC Z. SAMELIAN has been President of our Construction Claims Group since January 2005. He was a Senior Vice President with us from March 2003 until December 2004. Before that, Mr. Samelian was President of Conex International, Inc., a construction dispute resolution firm, from 2002 to 2003 and from 2000 to 2001, an Executive Director with Greyhawk North America, Inc., a construction management and consulting firm, from 2001 to 2002, and a Director with PricewaterhouseCoopers LLP from 1998 to 2000. Before that, he had worked with Hill from 1983 to August 1998. He served as Hill’s President and Chief Operating Officer from 1996 to 1998. Mr. Samelian has a B.A. in international affairs from George Washington University and an M.B.A. from Southern Illinois University at Edwardsville. He is a Project Management Professional certified by the Project Management Institute and he is a licensed General Building Contractor in California and Nevada. Mr. Samelian is also a member of the Chartered Institute of Arbitrators.

 

JOHN FANELLI III has been our Senior Vice President and Chief Financial Officer since September 2006. Before that, Mr. Fanelli was Vice President and Chief Accounting Officer of CDI Corp. from June 2005 until June 2006, and he was Vice President and Corporate Controller of CDI Corporation (a subsidiary of CDI Corp.) from October 2003 until June 2006. CDI Corp. is a New York Stock Exchange-traded professional services and outsourcing firm based in Philadelphia with expertise in engineering, technical services and information technology. During 2003, Mr. Fanelli was a financial consultant to Berwind Corporation, an investment management company based in Philadelphia which owns a diversified portfolio of manufacturing and service businesses and real estate. Before that, Mr. Fanelli was employed for 18 years by Hunt Corporation, then a New York Stock Exchange-traded manufacturer and marketer of office products. At Hunt, he served as Vice President and Chief Accounting Officer from 1995 until 2003, and before that as Director of Budgeting, Financial Analysis and Control, from 1985 to 1995. Before that, Mr. Fanelli was employed with Coopers & Lybrand for eight years in various accounting and auditing positions. Mr. Fanelli earned his B.S. in accounting from LaSalle University, and he is a Certified Public Accountant in Pennsylvania.

 

RONALD F. EMMA has been our Senior Vice President and Chief Accounting Officer since January 2007. Mr. Emma had been Senior Vice President of Finance from August 1999 to January 2007. Before that, he was Vice President of Finance.  Mr. Emma has been with Hill since 1980. Before joining Hill, he was Assistant Controller of General Energy Resources, Inc., a mechanical contracting firm, and prior to that was a Staff Accountant with the accounting firm of Haskins & Sells. Mr. Emma has a B.S. in accounting from St. Joseph’s University and is a Certified Public Accountant in New Jersey.

 

WILLIAM H. DENGLER, JR. has been our Senior Vice President and General Counsel since March 2007. Mr. Dengler was previously Vice President and General Counsel from January 2002 to March 2007, and Corporate Counsel from 2001 to 2002. Mr. Dengler also serves as corporate secretary to Hill and its subsidiaries. Prior to joining Hill, Mr. Dengler served as Assistant Counsel to former New Jersey Governors Donald DiFrancesco and Christine Todd Whitman from 1999 to 2001. Mr. Dengler earned his B.A. in political science from Western Maryland College and his J.D. from Rutgers University School of Law at Camden. He is licensed to practice law in New Jersey, as well as before the U.S. Court of Appeals for the Third Circuit and the U.S. Supreme Court.

 

CATHERINE H. EMMA has been our Senior Vice President and Chief Administrative Officer since January 2007. Ms. Emma had been Vice President and Chief Administrative Officer from August 2005 to January 2007. Before that, she served as Vice President of Human Resources and Administration. Ms. Emma has been with Hill since 1982. She is certified by the Society for Human Resource Management as a Professional in Human Resources (PHR) and has held professional memberships with Tri-State Human Resources, the Society for Human Resource Management and the BNA Human Resources Personnel Policies Forum. Ms. Emma is the wife of Ronald F. Emma.

 

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SHAWN L. PRESSLEY has been our Senior Vice President and Chief Information Officer since May 2012. Mr. Pressley had been Vice President of Information Technology from March 2009 to May 2012.  Before that, he served as Hill’s Director of Project Management Systems and Development. Mr. Pressley has been with Hill since 2001. Mr. Pressley earned his B.S. in civil engineering and his M.E. in civil engineering and engineering management from Widener University and his M.B.A. in management from LaSalle University. He is a certified Planning and Scheduling Professional.

 

Employees

 

At March 6, 2013, we had 3,663 personnel. Of these individuals 3,027 worked in our Project Management Group, 536 worked in our Construction Claims Group and 100 worked in our Corporate Group. Our personnel at March 6, 2013 included 2,992 full-time employees, 216 part-time employees and 455 independent contractors. Our future success will depend significantly on our ability to attract, retain and motivate highly qualified personnel. We are not a party to any collective bargaining agreements and we have not experienced any strikes or work stoppages. We consider our relationship with our employees to be satisfactory.

 

Access to Company Information

 

We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (the “SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site www.sec.gov that contains periodic reports, proxy statements, information statements and other information regarding issuers that file electronically.

 

We make available, free of charge, through our website or by responding to requests addressed to our Legal Department, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed by us with the SEC pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act, as amended. These reports are available as soon as practicable after such material is filed with or furnished to the SEC. Our primary website is www.hillintl.com. We post the charters for our audit, compensation and governance and nominating committees, corporate governance principles and code of ethics on our website. The information contained on our website, or on other websites linked to our website, is not part of this document.

 

Item 1A. Risk Factors.

 

Our business involves a number of risks, some of which are beyond our control. The risks and uncertainties described below could individually or collectively have a material adverse effect on our business, assets, profitability or prospects. While these are not the only risks and uncertainties we face, we believe that the more significant risks and uncertainties are as follows:

 

Risks Affecting the Business

 

Acts of terrorism, political, governmental and social upheaval and threats of armed conflicts in or around various areas in which we operate could limit or disrupt markets and our operations, including disruptions resulting from the evacuation of personnel, cancellation of contracts or the loss of personnel.

 

Acts of terrorism, political, governmental and social upheaval and threats of armed conflicts in or around various areas in which we operate could limit or disrupt markets and our operations, including disruptions resulting from the evacuation of personnel, cancellation of contracts or the loss of personnel, and may affect timing and collectibility of our accounts receivable. Such events may cause further disruption to financial and commercial markets and may generate greater political and economic instability in some of the geographic areas in which we operate. In addition, any possible reprisals as a consequence of the wars and ongoing military action in the Middle East and North Africa, such as acts of terrorism in the United States or elsewhere, could have a material adverse effect on our business, consolidated results of operations and consolidated financial position.

 

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If our clients delay in paying or fail to pay amounts owed to us, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition.

 

Accounts receivable represent the largest asset on our balance sheet. While we take steps to evaluate and manage the credit risks relating to our clients, economic downturns or other events can adversely affect the markets we serve and our clients ability to pay, which could reduce our ability to collect all amounts due from clients. In addition, the political unrest in countries in which we operate has impacted and may in the future impact our collections on accounts receivable. If our clients delay in paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

 

We currently have existing contracts in Libya. Due to the political unrest in Libya that commenced in February 2011, we suspended our operations in and demobilized substantially all of our personnel from Libya. We are unable to predict when, or if, our work will resume in Libya, where we reopened our office in November 2011. At December 31, 2012, accounts receivable relating to the work performed prior to March 2011 under contracts in Libya was approximately $60 million. Although there has been positive economic and political progress made in Libya, we are unable to determine the effect this will have on the collectability of the aforementioned accounts receivable. If we are unable to collect these accounts receivable, there could be a significant adverse impact on our consolidated results of operations and consolidated financial condition.

 

Unfavorable global economic conditions could adversely affect our business, liquidity and financial results.

 

The markets that we serve are cyclical and subject to fluctuation based on general global economic conditions and other factors. Unfavorable global economic conditions, including disruption of financial markets in the United States, Europe and elsewhere, could adversely affect our business and results of operations, primarily by limiting our access to credit and disrupting our clients’ businesses. The reduction in financial institutions’ willingness or ability to lend has increased the cost of capital and reduced the availability of credit. Although we currently believe that the financial institutions with which we do business will be able to fulfill their commitments to us, there is no assurance that those institutions will be able or willing to continue to do so, which could have a material adverse impact on our business. The current European debt crisis and related European restructuring efforts may cause the value of European currencies, including the Euro and British pound sterling, to deteriorate, thus reducing the purchasing power of European clients and reducing the translated amounts of U.S. dollar revenues.  For the year ended December 31, 2012, 18.8% of our total revenue was attributable to European clients. In addition, continuation or worsening of general market conditions in the United States, Europe or other national economies important to our businesses may adversely affect our clients’ level of spending, ability to obtain financing, and ability to make timely payments to us for our services, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding and adversely affect our results of operations.

 

We cannot be certain that we will be able to raise capital or obtain debt financing to meet required capital needs.

 

We are currently party to a revolving credit agreement to assist in funding working capital needs. This agreement provides for a maximum total outstanding debt (that is, borrowings plus letters of credit) amounting to $65,000,000.  The Company is required to comply with certain financial covenants with respect to leverage ratios and a fixed charge ratio as well as other covenants. If our operating results and financial liquidity are not as positive as we expect, that could cause us to be in violation of these covenants.

 

In addition, our current revolving credit agreement may not provide us with sufficient credit to meet all of the future financial needs of our business.  We may be unable to increase availability under our current revolving credit agreement or obtain alternative debt or equity financing on terms that would be acceptable to us, or at all.

 

International operations and doing business with foreign governments expose us to legal, political, operational and economic risks in different countries and currency exchange rate fluctuations could adversely affect our financial results.

 

Our international operations contributed 72.6%, 71.9% and 73.9% of our consulting fee revenue for the years ended December 31, 2012, 2011 and 2010, respectively. There are risks inherent in doing business internationally, including:

 

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·                   Lack of developed legal systems to enforce contractual rights;

·                   Foreign governments may assert sovereign or other immunity if we seek to assert our contractual rights thus depriving us of any ability to seek redress against them;

·                   Greater difficulties in managing and staffing foreign operations;

·                   Differences in employment laws and practices which could expose us to liabilities for payroll taxes, pensions and other expenses;

·                   Inadequate or failed internal controls, processes, people, and systems associated with foreign operations;

·                   Increased logistical complexity;

·                   Increased selling, general and administrative expenses associated with managing a larger and more global business;

·                   Greater risk of uncollectible accounts and longer collection cycles;

·                   Currency exchange rate fluctuations;

·                   Restrictions on the transfer of cash from certain foreign countries;

·                   Imposition of governmental controls;

·                   Political and economic instability;

·                   Changes in U.S. and other national government policies affecting the markets for our services and our ability to do business with certain foreign governments or their political leaders;

·                   Conflict between U.S. and non-U.S. law;

·                   Changes in regulatory practices, tariffs and taxes;

·                   Less well established bankruptcy and insolvency procedures;

·                   Potential non-compliance with a wide variety of non-U.S. laws and regulations; and

·                   General economic, political and civil conditions in these foreign markets.

 

Any of these factors could have a material adverse effect on our business, results of operations, financial condition or cash flows.

 

We operate in many different jurisdictions and we could be adversely affected by any violations of the U.S. Foreign Corrupt Practices Act or similar worldwide and local anti-corruption laws.

 

The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide and local anti-corruption laws, including the U.K. Bribery Act of 2010, generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. The policies also are applicable to agents through which we do business in certain non-U.S. jurisdictions. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, we cannot assure you that our internal control policies and procedures always will protect us from improper or criminal acts committed by our employees or agents. Our continued expansion outside the U.S., including in developing countries, could increase the risk of such violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business, subject us to fines, penalties and restrictions and otherwise result in a material adverse effect on our results of operations or financial condition. All of our recently acquired businesses are subject to our internal policies.  However, because our internal policies are more restrictive than some local laws or customs where we operate, we may be at an increased risk for violations while we train our new employees to comply with our internal policies and procedures.

 

Our business sometimes requires our employees to travel to and work in high security risk countries, which may result in employee injury, repatriation costs or other unforeseen costs.

 

Many of our employees often travel to and work in high security risk countries around the world that are undergoing or that may undergo political, social and economic upheavals resulting in war, civil unrest, criminal activity or acts of terrorism. For example, we have had and expect to have significant projects in the Middle East and North Africa, including in Afghanistan, Iraq, Libya, Egypt, Saudi Arabia, Qatar and Oman. As a result, we may be subject to costs related to employee injury, repatriation or other unforeseen circumstances. Further, circumstances in these countries could

 

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make it difficult or impossible to attract and retain qualified employees. Our inability to attract and retain qualified employees to work in these counties could have a material adverse effect on our operations.

 

Our business is sensitive to oil and gas prices, and fluctuations in oil and gas prices may negatively affect our business.

 

Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. In 2012, approximately 35.4% of our consulting fee revenue was derived from our operations in oil and gas producing countries in the Middle East and North Africa.  A significant drop in oil or gas prices could lead to a slowdown in construction in these regions, which could have a material adverse effect on our business, results of operations, financial condition or cash flows.

 

We depend on long-term government contracts, many of which are funded on an annual basis. If appropriations are not made in subsequent years of a multiple-year contract, we will not realize all of our potential revenue and profit from that project.

 

A significant portion of our consulting fee revenue is derived from contracts with federal, state, regional, local and foreign governments. During the years ended December 31, 2012, 2011 and 2010, approximately 40.9%, 40.6% and 52.4%, respectively, of our consulting fee revenue were derived from such contracts.

 

Most government contracts are subject to the continuing availability of legislative appropriation. Legislatures typically appropriate funds for a given program on a year-by-year basis, even though contract performance may take more than one year. As a result, at the beginning of a program, the related contract is only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent fiscal year. These appropriations and the timing of payment of appropriated amounts may be influenced by, among other things, the state of the economy, budgetary and other political issues affecting the particular government and its appropriations process, competing priorities for appropriation, the timing and amount of tax receipts and the overall level of government expenditures. If appropriations are not made in subsequent years on government contracts, then we will not realize all of our potential revenue and profit from those contracts.

 

We depend on government contracts for a significant portion of our consulting fee revenue. Our inability to win profitable government contracts could harm our operations and adversely affect our net earnings.

 

In 2012, U.S. federal government contracts and U.S. state, regional and local government contracts contributed approximately 3.1% and 14.8%, respectively, of our total consulting fee revenue, and foreign government contracts contributed approximately 23.0% of our total consulting fee revenue. Our inability to win profitable government contracts could harm our operations and adversely affect our net earnings. Government contracts are typically awarded through a heavily regulated procurement process. Some government contracts are awarded to multiple competitors, causing increases in overall competition and pricing pressure. In turn, the competition and pricing pressure may require us to make sustained post-award efforts to reduce costs under these contracts. If we are not successful in reducing the amount of costs, our profitability on these contracts may be negatively impacted. Also, some of our federal government contracts require U.S. government security clearances. If we or certain of our personnel were to lose these security clearances, our ability to continue performance of these contracts or to win new contracts requiring such clearances may be negatively impacted.

 

Our business is subject to numerous laws, regulations and restrictions, and failure to comply with these laws, regulations and restrictions could subject us to fines, penalties, suspension or debarment.

 

Our contracts and operations are subject to various laws and regulations. Prime contracts with various agencies of the U.S. federal government, and subcontracts with other prime contractors, are subject to numerous procurement regulations, including the Federal Acquisition Regulations and the False Claims Act.  We could be subject to fines, penalties or debarment, or suspended from receiving additional contracts with all U.S. government agencies if any one agency finds that we are not in compliance with the appropriate regulations.  Although a small percentage of our business is from U.S. federal government contracts, suspension or debarment from business with the U.S. federal government could impact other public-sector clients and have a material adverse effect on our financial results.

 

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Our international business subjects us to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to economic sanctions and other trade controls, technology transfer restrictions, repatriation of earnings, exchange controls, the FCPA and the anti-boycott provisions of the U.S. Export Administration Act. Changes in regulations or political environments may affect our ability to conduct business in foreign markets including investment, procurement and repatriation of earnings. Failure by us or our sales representatives or consultants to comply with these laws and regulations could result in certain liabilities and could possibly result in suspension or debarment from government contracts, which could have other repercussions and thus could have a material adverse effect on our financial results.

 

We depend on contracts that may be terminated by our clients on short notice, which may adversely impact our ability to recognize all of our potential revenue and profit from the project.

 

Substantially all of our contracts are subject to termination by the client either at its convenience or upon our default. If one of our clients terminates a contract at its convenience, then we typically are able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent us from recognizing all of our potential revenue and profit from that contract. If one of our clients terminates the contract due to our default, we could be liable for excess costs incurred by the client in re-procuring services from another source, as well as other costs.

 

Our contracts with governmental agencies are subject to audit, which could result in adjustments to reimbursable contract costs or, if we are charged with wrongdoing, possible temporary or permanent suspension from participating in government programs.

 

Our books and records are subject to audit by the various governmental agencies we serve and by their representatives. These audits can result in adjustments to reimbursable contract costs and allocated overhead. In addition, if as a result of an audit, we or one of our subsidiaries is charged with wrongdoing or the government agency determines that we or one of our subsidiaries is otherwise no longer eligible for federal contracts, then we or, as applicable, that subsidiary, could be temporarily suspended or, in the event of convictions or civil judgments, could be prohibited from bidding on and receiving future government contracts for a period of time. Furthermore, as a U.S. government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities, the results of which could have a material adverse effect on our operations.

 

We submit change orders to our clients for work we perform beyond the scope of some of our contracts. If our clients do not approve these change orders, our net earnings could be adversely impacted.

 

We typically submit change orders under some of our contracts for payment for work performed beyond the initial contractual requirements. The clients may not approve or may contest these change orders and we cannot assure you that these claims will be approved in whole, in part or at all. If these claims are not approved, our net earnings could be adversely impacted.

 

Because our backlog of uncompleted projects under contract or awarded is subject to unexpected adjustments and cancellations, including the amount, if any, of future appropriations by the applicable contracting governmental agency, it may not be indicative of our future revenue and profits.

 

At December 31, 2012, our backlog of uncompleted projects under contract or awarded was approximately $923 million. The inability to obtain financing or governmental approvals, changes in economic or market conditions or other unforeseen events, such as terrorist acts or natural disasters, could lead to us not realizing any revenue under some or all of these contracts. We cannot assure you that the backlog attributed to any of our uncompleted projects under contract will be realized as revenue or, if realized, will result in profits.

 

Many projects may remain in our backlog for an extended period of time because of the size or long-term nature of the contract. In addition, from time to time projects are scaled back or cancelled. These types of backlog reductions adversely affect the revenue and profit that we ultimately receive. Included in our backlog is the maximum amount of all indefinite

 

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delivery/indefinite quantity (“ID/IQ”), or task order, contracts, or a lesser amount if we do not reasonably expect to be issued task orders for the maximum amount of such contracts. A significant amount of our backlog is derived from ID/IQ contracts and we cannot provide any assurance that we will in fact be awarded the maximum amount of such contracts.

 

We depend on the continued services of our executive officers. We cannot assure you that we will be able to retain the services of these individuals.

 

We are dependent upon the efforts and service of our executive officers, particularly Irvin E. Richter, Chairman and Chief Executive Officer; David L. Richter, President and Chief Operating Officer; Thomas J. Spearing III, President, Project Management Group (Americas); Raouf S. Ghali, President, Project Management Group (International) and Frederic Z. Samelian, President, Construction Claims Group; because of their knowledge, experience, skills and relationships with major clients and other members of our management team. Irvin E. Richter has served as our only Chief Executive Officer since he founded the Company in 1976. The loss of the services of our key executive officers, and particularly one or more of these individuals, for any reason, could have an adverse effect on our operations.

 

Our ability to grow and compete in our industry will be harmed if we do not retain the continued service of our key management, sales and technical personnel and identify, hire and retain additional qualified personnel.

 

There is intense competition for qualified management, sales and technical personnel in the industry sectors in which we compete. We may not be able to continue to attract and retain qualified personnel who are necessary for the development of our business or to replace qualified personnel. Any growth we experience is expected to place increased demands on our resources and will likely require the addition of personnel and the development of additional expertise by existing personnel. Also, some of our personnel hold security clearance levels required to obtain government projects and, if we were to lose some or all of these personnel, they may be difficult to replace. Loss of the services of, or failure to recruit, key personnel could limit our ability to complete existing projects successfully and to compete for new projects.

 

Our dependence on subcontractors, partners and specialists could adversely affect our business.

 

We rely on third-party subcontractors as well as third-party strategic partners and specialists to complete our projects. To the extent that we cannot engage such subcontractors, partners or specialists or cannot engage them on a competitive basis, our ability to complete a project in a timely fashion or at a profit may be impaired. If we are unable to engage appropriate strategic partners or specialists in some instances, we could lose the ability to win some contracts. In addition, if a subcontractor or specialist is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition or over-commitment of its resources, we may be required to purchase the services from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services were needed.

 

If our partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation or reduced profits.

 

We sometimes enter into joint venture agreements and other contractual arrangements with outside partners to jointly bid on and execute a particular project. The success of these joint projects depends on the satisfactory performance of the contractual obligations of our partners. If any of our partners fails to satisfactorily perform its contractual obligations, we may be required to make additional investments and provide additional services to complete the project. If we are unable to adequately address our partner’s performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation or reduced profits.

 

Our services expose us to significant risks of liability and our insurance policies may not provide adequate coverage.

 

Our services involve significant risks of professional and other liabilities that may substantially exceed the fees that we derive from our services. In addition, we sometimes contractually assume liability under indemnification agreements. We cannot predict the magnitude of potential liabilities from the operation of our business.

 

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We currently maintain comprehensive general liability, umbrella and professional liability insurance policies. Professional liability policies are “claims made” policies. Thus, only claims made during the term of the policy are covered. Additionally, our insurance policies may not protect us against potential liability due to various exclusions and retentions. Partially or completely uninsured claims, if successful and of significant magnitude, could have a material adverse effect on our business.

 

The project management and construction claims businesses are highly competitive and if we fail to compete effectively, we may miss new business opportunities or lose existing clients and our revenues and profitability may decline.

 

The project management and construction claims industries are highly competitive. We compete for contracts, primarily on the basis of technical capability, with numerous entities, including design or engineering firms, general contractors, other “pure” construction management companies, other claims consulting firms, the “Big Four” and other accounting firms, management consulting firms and other entities. Compared to us, many of these competitors are larger, well-established companies that have broader geographic scope and greater financial and other resources. If we cannot compete effectively with our competitors, or if the costs of competing, including the costs of retaining and hiring professionals, become too expensive, our revenue growth and financial results may differ materially from our expectations.

 

We have acquired and may continue to acquire businesses as strategic opportunities arise and may be unable to realize the anticipated benefits of those acquisitions, or if we are unable to take advantage of strategic acquisition situations, our ability to expand our business may be slowed or curtailed.

 

Over the past 15 years, we have acquired 20 businesses and our strategy is to continue to expand and diversify our operations with additional acquisitions as strategic opportunities arise. If the competition for acquisitions increases, or if the cost of acquiring businesses or assets becomes too expensive, the number of suitable acquisition opportunities may decline, the cost of making an acquisition may increase or we may be forced to agree to less advantageous acquisition terms for the companies that we are able to acquire. Alternatively, at the time an acquisition opportunity presents itself, internal and external pressures (including, but not limited to, borrowing capacity under our credit facilities or the availability of alternative financing), may cause us to be unable to pursue or complete an acquisition. Our ability to grow our business, particularly through acquisitions, may depend on our ability to raise capital by selling equity or debt securities or obtaining additional debt financing. There can be no assurance that we will be able to obtain financing when we need it or on terms acceptable to us. Some of the financial, business and operational risks associated with acquisitions include:

 

·                   Unexpected losses of key personnel or clients of the acquired business;

·                   Difficulties arising from the increasing scope, geographic diversity and complexity of our operations;

·                   Difficulties in integrating diverse corporate cultures and management styles;

·                   Increased costs to improve or coordinate managerial, operational, financial and administrative systems;

·                   Dilutive issuances of equity securities;

·                   Increased amortization expense of acquired intangible assets;

·                   Changes in future market conditions could materially affect the determination of fair value and/or the impairment of goodwill acquired in connection with business combinations may result in future impairment charges;

·                   Undisclosed or unknown liabilities associated with the acquired business;

·                   Diversion of management’s attention from other business concerns; and

·                   Adverse effects on existing business relationships with clients.

 

In addition, managing the growth of our operations will require us to continually increase and improve our operational, financial and human resources management and our internal systems and controls. If we are unable to manage growth effectively or to successfully integrate acquisitions or if we are unable to grow our business, that could have a material adverse effect on our business.

 

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We may fail to realize expected values from our strategy of pursuing new business development opportunities.

 

We intend to pursue new business opportunities focused primarily on providing development services in real estate infrastructure markets as part of our growth strategy.  We can provide no assurance that new business development opportunities will be successful or that we will be able to sustain our growth through these new development opportunities. To the extent that these new business development opportunities are not feasible or are not profitable, we may fail to realize expected future growth.

 

We may be required to write-off all or a portion of the remaining value of our goodwill or other intangibles of companies we have acquired.

 

Under U.S. generally accepted accounting principles, we review our intangible assets, including goodwill, for impairment at least annually or when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or other intangible assets may not be recoverable, include a sustained decline in our stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry. We may be required to record a significant non-cash impairment charge in our financial statements during the period in which any impairment of our goodwill or other intangible assets is determined, negatively impacting our results of operations and stockholders’ equity.

 

Our effective tax rate may increase or decrease.

 

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Although we believe that our tax estimates and tax positions are reasonable, they could be materially affected by many factors including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations, and related interpretations, our global mix of earnings, the realizability of deferred tax assets and changes in uncertain tax positions. An increase or decrease in our effective tax rate could have a material adverse impact on our financial condition and results of operations.

 

If our internal controls prove to be ineffective, it could impact our business and operating results.

 

The Company’s internal control over financial reporting may not prevent or detect misstatements because of the inherent limitations of internal controls or otherwise, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations.

 

Our use of accounting estimates involves judgment and could impact our financial results.

 

The application of generally accepted accounting principles requires us to make estimates and assumptions about certain items and future events that directly affect our reported financial condition. Our most critical accounting estimates are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under “Critical Accounting Policies.” In addition, as discussed in Note 16, “Commitments and Contingencies,” we make certain estimates including decisions related to legal proceedings and reserves. These estimates and assumptions involve the use of judgment. As a result, actual financial results may differ.

 

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Risks Related to Ownership of Our Common Stock

 

The market price for our common stock could be volatile and could decline, resulting in a substantial or complete loss of your investment.

 

The stock markets, including the New York Stock Exchange on which our common stock is listed, have experienced significant price and volume fluctuations. As a result, the market price of our common stock could be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including:

 

·       Our operating performance and the performance of other similar companies;

·                   Actual or anticipated differences in our operating results;

·                   Changes in our revenue or earnings estimates or recommendations by securities analysts;

·                   Publication of research reports about us or our industry by securities analysts;

·                   Additions and departures of key personnel;

·                   Speculation in the press or investment community;

·                   Actions by institutional stockholders;

·                   Changes in accounting principles;

·                   Terrorist acts and other events affecting political, economic or civil conditions in one or more foreign countries in which we operate; and

·                   General economic and market conditions, including factors unrelated to our performance.

 

Future sales of our common and preferred stock may depress the price of our common stock.

 

As of March 6, 2013, there were 38,663,782 shares of our common stock outstanding. An additional 4,644,376 shares of our common stock may be issued upon the exercise of options held by employees, management and directors. We also have the authority to issue up to 1,000,000 shares of preferred stock upon terms that are determined by our Board of Directors and additional options to purchase 3,304,624 shares of our common stock without stockholder approval. In addition, in 2011, we registered for the potential issuance of 20,000,000 shares and 8,000,000 shares with the SEC. These shares may be used for working capital and general corporate purposes, or used in future acquisitions, respectively, subject to the restrictions of our Credit Agreement. Sales of a substantial number of these shares in the public market, or factors relating to the terms we may determine for our preferred stock, options or warrants, could decrease the market price of our common stock. In addition, the perception that such sales might occur may cause the market price of our common stock to decline. Future issuances or sales of our common stock could have an adverse effect on the market price of our common stock.

 

Because we have no current plans to pay cash dividends on our common stock, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

 

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our revolving credit agreement. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

 

We are able to issue shares of preferred stock with greater rights than our common stock.

 

Our Board of Directors is authorized to issue one or more series of preferred stock from time to time without any action on the part of our stockholders. Our Board of Directors also has the power, without stockholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights and preferences over our common stock with respect to dividends and other terms. If we issue preferred stock in the future that has a preference

 

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over our common stock with respect to the payment of dividends or other terms, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected.

 

Provisions in our organizational documents and Delaware law could discourage potential acquisition proposals, could delay or prevent a change in control of the Company that our stockholders may consider favorable and could adversely affect the market value of our common stock.

 

Provisions in our organizational documents and Delaware law could discourage potential acquisition proposals, could delay or prevent a change in control of the Company that our stockholders may consider favorable and could adversely affect the market value of our common stock.  Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

 

·                   Our Board of Directors is expressly authorized to make, alter or repeal our bylaws;

·                   Our Board of Directors is divided into three classes of service with staggered three-year terms. This means that only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms;

·                   Our Board of Directors is authorized to issue preferred stock without stockholder approval;

·                   Only our Board of Directors, our Chairman of the Board, our Chief Executive Officer or the holders of a majority in amount of our capital stock issued and outstanding and entitled to vote may call a special meeting of stockholders; this means that minority stockholders cannot force stockholder consideration of a proposal, including a proposal to replace our Board of Directors, by calling a special meeting of stockholders prior to such time authorized by our Board of Directors, our Chairman of the Board, our Chief Executive Officer or the holders of a majority in amount of our capital stock issued and outstanding and entitled to vote;

·                   Our bylaws require advance notice for stockholder proposals and director nominations;

·                   Our bylaws limit the removal of directors and the filling of director vacancies; and

·                   We will indemnify officers and directors against losses that may incur in connection with investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures.

 

These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in control of the Company.

 

In addition, Section 203 of the Delaware General Corporation Law imposes certain restrictions on mergers and other business combinations between the Company and any holder of 15% or more of our outstanding common stock. This provision is applicable to Hill and may have an anti-takeover effect that may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in the stockholder’s best interest. In general, Section 203 could delay for three years and impose conditions upon “business combinations” between an “interested shareholder” and Hill, unless prior approval by our Board of Directors is given. The term “business combination” is defined broadly to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. An “interested shareholder,” in general, would be a person who, together with affiliates and associates, owns, or within three years, did own, 15% or more of a corporation’s voting stock.

 

A small group of stockholders own a large quantity of our common stock thereby potentially exerting significant influence over the Company.

 

As of December 31, 2012, Irvin E. Richter, David L. Richter and other members of the Richter family beneficially owned approximately 38% of our common stock.  This concentration of ownership could significantly influence matters requiring stockholder approval and could delay, deter or prevent a change in control of the Company or other business combinations that might otherwise be beneficial to our other stockholders. Accordingly, this concentration of ownership may impact the market price of our common stock. In addition, the interest of our significant stockholders may not always coincide with the interest of the Company’s other stockholders. In deciding how to vote on such matters, they may be influenced by interests that conflict with our other stockholders.

 

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Item 1B.                           Unresolved Staff Comments.

 

None.

 

Item 2.                                    Properties.

 

Our executive and operating offices are located at 303 Lippincott Centre, Marlton, New Jersey 08053. We lease all of our office space and do not own any real property. The telephone number at our executive office is (856) 810-6200.  In addition to our executive offices, we have approximately 100 operating leases for office facilities throughout the world.  Due to acquisition and growth we may have more than one operating lease in the cities in which we are located. Additional space may be required as our business expands geographically, but we believe we will be able to obtain suitable space as needed.

 

Following are our principal worldwide office locations and the geographic regions in which we reflect their operations:

 

U.S./Canada

 

 

 

Middle East

Atlanta, GA

 

Toronto, Canada

 

Abu Dhabi, UAE

Austin, TX

 

Vancouver, Canada

 

Aqaba, Jordan

Bensalem, PA

 

Washington, DC

 

Doha, Qatar

Broadview Heights, OH

 

 

 

Dubai, UAE

Columbus, OH

 

Europe

 

Jeddah, Saudi Arabia

Dallas, TX

 

Ankara, Turkey

 

Kabul, Afghanistan

Danbury, CT

 

Athens, Greece

 

Makkah, Saudi Arabia

Fresno, CA

 

Baku, Azerbaijan

 

Manama, Bahrain

Granite Bay, CA

 

Barcelona, Spain

 

Muscat, Oman

Houston, TX

 

Belgrade, Serbia

 

Riyadh, Saudi Arabia

Irvine, CA

 

Birmingham, UK

 

Sharq, Kuwait

Jacksonville, FL

 

Bristol, UK

 

 

Las Vegas, NV

 

Bucharest, Romania

 

North Africa

Lemont Furnace, PA

 

Daresbury, UK

 

Cairo, Egypt

Los Angeles, CA

 

Dusseldorf, Germany

 

Casablanca, Morocco

Marlton, NJ

 

Edinburgh, Scotland

 

Tripoli, Libya

Miami, FL

 

Glasgow, Scotland

 

 

Montgomeryville, PA

 

Istanbul, Turkey

 

Asia/Pacific

New Orleans, LA

 

Leeds, UK

 

Beijing, China

New York, NY

 

London, UK

 

Brisbane, Australia

Ontario, CA

 

Madrid, Spain

 

Danang City, Vietnam

Orlando, FL

 

Munich, Germany

 

Hong Kong, China

Palm Beach Gardens, FL

 

Pristina, Kosovo

 

Kochi, India

Perrysburg, OH

 

Riga, Latvia

 

Kuala Lumpur, Malaysia

Philadelphia, PA

 

Teesside, UK

 

Perth, Australia

Phoenix, AZ

 

Warsaw, Poland

 

Shanghai, China

Pittsburgh, PA

 

Winchester, UK

 

Singapore

Portland, OR

 

 

 

Sydney, Australia

San Diego, CA

 

Latin America

 

 

San Francisco, CA

 

Mexico City, Mexico

 

 

Seattle, WA

 

Rio de Janeiro, Brazil

 

 

Spokane, WA

 

Santiago, Chile

 

 

Tampa, FL

 

Sao Paulo, Brazil

 

 

 

 

Trinidad and Tobago

 

 

 

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Item 3.                                    Legal Proceedings .

 

General Litigation

 

From time to time, the Company is a defendant or plaintiff in various legal actions which arise in the normal course of business. As such the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease the Company’s earnings in the period the changes are made. It is the opinion of management, after consultation with legal counsel, that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

Item 4.                                    Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5.       Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the trading symbol “HIL.” The following table includes the range of high and low trading prices for our common stock as reported on the NYSE for the periods presented.

 

 

 

Price Range

 

 

 

High

 

Low

 

2012

 

 

 

 

 

Fourth Quarter

 

$

4.48

 

$

2.80

 

Third Quarter

 

4.44

 

2.96

 

Second Quarter

 

4.00

 

2.74

 

First Quarter

 

6.69

 

3.93

 

 

 

 

 

 

 

2011

 

 

 

 

 

Fourth Quarter

 

$

5.99

 

$

4.30

 

Third Quarter

 

6.41

 

3.92

 

Second Quarter

 

7.38

 

3.75

 

First Quarter

 

6.96

 

4.70

 

 

Stockholders

 

As of March 6, 2013, there were 105 holders of record of our common stock.  However, a single record stockholder account may represent multiple beneficial owners, including owners of shares in street name accounts. As a result, we believe there are approximately 3,000 beneficial owners of our common stock.

 

Dividends

 

We have not paid any dividends on our common stock. The payment of dividends in the future will be contingent upon our earnings, if any, capital requirements and general financial condition of our business. Our Credit Agreement currently precludes the payment of dividends.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The table setting forth this information is included in Part III — Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Recent Sales of Unregistered Securities

 

None.

 

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Performance Graph

 

The performance graph and table below compare the cumulative total return of our common stock for the period December 31, 2007 to December 31, 2012 with the comparable cumulative total returns of the Russell 2000 Index (of which the Company is a component stock) and a peer group which consists of the following ten companies:  AECOM Technology Corp. (ACM), Michael Baker Corp. (BKR), Exponent, Inc. (EXPO), Fluor Corporation (FLR), ICF International, Inc. (ICFI), Jacobs Engineering Group, Inc. (JEC), Navigant Consulting, Inc. (NCI), Tutor Perini Corp. (TPC), Tetra Tech, Inc. (TTEK), and URS Corp. (URS).

 

 

 

 

2007

 

2008

 

2009

 

2010

 

2011

 

2012

 

Hill International, Inc.

 

$

100.00

 

$

49.68

 

$

44.04

 

$

45.66

 

$

36.27

 

$

25.82

 

Russell 2000 Index

 

100.00

 

66.20

 

84.20

 

106.81

 

102.33

 

119.05

 

Peer Group

 

100.00

 

66.91

 

63.50

 

75.56

 

61.33

 

69.78

 

 

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Item 6. Selected Financial Data.

 

The following is selected financial data from the Company’s audited consolidated financial statements for each of the last five years. This data should be read in conjunction with the Company’s consolidated financial statements (and related notes) appearing elsewhere in this report and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The data presented below is in thousands, except for (loss) earnings per share data.

 

 

 

Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Consulting fee revenue

 

$

417,598

 

$

399,254

 

$

382,099

 

$

364,010

 

$

333,882

 

Reimbursable expenses

 

63,183

 

102,202

 

69,659

 

57,772

 

46,600

 

Total revenue

 

480,781

 

501,456

 

451,758

 

421,782

 

380,482

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

239,572

 

227,991

 

213,349

 

209,052

 

183,485

 

Reimbursable expenses

 

63,183

 

102,202

 

69,659

 

57,772

 

46,600

 

Total direct expenses

 

302,755

 

330,193

 

283,008

 

266,824

 

230,085

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

178,026

 

171,263

 

168,750

 

154,958

 

150,397

 

Selling, general and administrative expenses

 

172,779

 

175,312

 

151,634

 

136,683

 

131,857

 

Equity in earnings of affiliates

 

 

(190

)

(1,503

)

(8,222

)

(3,658

)

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

5,247

 

(3,859

)

18,619

 

26,497

 

22,198

 

Interest and related financing fees, net

 

18,150

 

7,262

 

3,144

 

1,737

 

(134

)

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before income taxes

 

(12,903

)

(11,121

)

15,475

 

24,760

 

22,332

 

Income tax expense (benefit)

 

13,442

 

(6,186

)

481

 

4,577

 

3,654

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

(26,345

)

(4,935

)

14,994

 

20,183

 

18,678

 

Less: net earnings - noncontrolling interests

 

1,872

 

1,082

 

778

 

713

 

1,027

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings attributable to Hill International, Inc.

 

$

(28,217

)

$

(6,017

)

$

14,216

 

$

19,470

 

$

17,651

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per common share - Hill International, Inc.

 

$

(0.73

)

$

(0.16

)

$

0.36

 

$

0.49

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

38,500

 

38,414

 

39,258

 

39,659

 

40,809

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per common share - Hill International, Inc.

 

$

(0.73

)

$

(0.16

)

$

0.36

 

$

0.49

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

38,500

 

38,414

 

39,824

 

40,124

 

41,148

 

 

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Table of Contents

 

 

 

As of December 31,

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

Selected Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,716

 

$

17,924

 

$

39,406

 

$

30,923

 

$

20,430

 

Accounts receivable, net

 

211,176

 

197,906

 

180,856

 

130,900

 

118,124

 

Current assets

 

257,270

 

231,833

 

237,466

 

183,602

 

161,492

 

Total assets

 

421,673

 

407,512

 

370,851

 

291,539

 

254,041

 

Current liabilities

 

150,135

 

108,800

 

104,465

 

82,657

 

80,563

 

Total debt

 

109,456

 

94,759

 

74,959

 

28,244

 

18,887

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Hill International, Inc. share of equity

 

$

127,546

 

$

154,136

 

$

161,091

 

$

155,635

 

$

135,506

 

Noncontrolling interests

 

13,557

 

18,258

 

7,005

 

4,005

 

3,510

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

$

141,103

 

$

172,394

 

$

168,096

 

$

159,640

 

$

139,016

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

Our revenue consists of two components: consulting fee revenue (“CFR”) and reimbursable expenses. Reimbursable expenses are reflected in equal amounts in both total revenue and total direct expenses. Because these pass-through revenue/costs are subject to significant fluctuation from year to year, we measure the performance of many of our key operating metrics as a percentage of CFR, as we believe that this is a better and more consistent measure of operating performance than total revenue.

 

CFR increased $18,344,000, or 4.6%, to $417,598,000 in 2012. CFR for the Project Management segment increased $21,445,000 principally due to increased work in the Middle East, primarily Saudi Arabia, partially offset by a decrease in Libya. CFR for the Construction Claims segment decreased $3,101,000 due primarily to a decrease in work in Australia.

 

Cost of services increased $11,581,000, or 5.1%, to $239,572,000 in 2012 as a result of an increase in employees and other direct expenses related to the additional work in the Middle East.

 

Gross profit increased $6,763,000, or 3.9%, to $178,026,000 in 2012 due to the increases in CFR. Gross profit as a percent of CFR remained relatively constant at 42.6% in 2012.

 

Selling, general and administrative expenses decreased $2,533,000, or 1.4%, principally due to our cost-cutting initiatives as well as a decrease in amortization expense, offset by the establishment of a $4,000,000 reserve for potential employment taxes for certain foreign subsidiaries.

 

Operating profit was $5,247,000 in 2012 compared to an operating loss of ($3,859,000) in 2011.

 

Income tax expense was $13,442,000 for 2012 compared to an income tax benefit of $6,186,000 for 2011. The change is primarily the result of an increase of $17,707,000 in the reserve against the Company’s U.S. deferred tax asset.

 

Net loss attributable to Hill was ($28,217,000) in 2012 compared to a net loss of ($6,017,000) in 2011. Diluted loss per common share was ($0.73) in 2012 based upon 38,500,000 diluted common shares outstanding compared to ($0.16) in 2011 based upon 38,414,000 diluted common shares outstanding.

 

We currently have open contracts in Libya. Due to the political unrest which commenced there in February 2011, we suspended our operations in, and demobilized substantially all of our personnel from Libya. Although we reopened our office there in November 2011, we are unable to predict when, or if, the work will resume. At December 31, 2012, the accounts receivable related to the work performed under contracts in the region was approximately $60,000,000. We are unable to determine the effect the political and economic uncertainty will have on the collectibility of the accounts receivable. We believe that the amounts due will be collected, however, if we are unable to do so, there could be a significant adverse impact on our results of operations and liquidity.

 

Despite continuing global economic uncertainty and current limits to financial credit, we remain optimistic about maintaining our current growth strategy to pursue new business development opportunities, continue to take advantage of organic growth opportunities, continue to pursue acquisitions and strengthen our professional resources. Among other things, our optimism stems from the growth of our backlog at December 31, 2012. Our total backlog is a record $923,000,000, an increase of $50,000,000 from September 30, 2012 and $128,000,000 from December 31, 2011. Our 12-month backlog is also a record $382,000,000, an increase of $41,000,000 from September 30, 2012 and $60,000,000 from December 31, 2011. These increases are primarily related to new work in Oman, Qatar and Saudi Arabia.

 

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Table of Contents

 

Non-GAAP Financial Measures

 

Regulation G, conditions for use of Non-Generally Accepted Accounting Principles (“Non-GAAP”) financial measures, and other SEC regulations define and prescribe the conditions for use of certain Non-GAAP financial information. Generally, a Non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. We believe earnings before interest, taxes, depreciation and amortization (“EBITDA”), in addition to operating profit, net earnings and other GAAP measures, is a useful indicator of our financial and operating performance and our ability to generate cash flows from operations that are available for taxes and capital expenditures. This measure, however, should be considered in addition to, and not as a substitute or superior to, operating profit, cash flows, or other measures of financial performance prepared in accordance with GAAP. The following table is a reconciliation of EBITDA to the most directly comparable GAAP measure in accordance with SEC Regulation S-K for the years ended December 31, 2012, 2011 and 2010 (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Net (loss) earnings attributable to Hill

 

$

(28,217

)

$

(6,017

)

$

14,216

 

Interest

 

18,150

 

7,262

 

3,144

 

Income taxes

 

13,442

 

(6,186

)

481

 

Depreciation and amortization

 

12,430

 

15,640

 

10,001

 

 

 

 

 

 

 

 

 

EBITDA

 

$

15,805

 

$

10,699

 

$

27,842

 

 

Critical Accounting Policies

 

Our consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, which require us 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 we believe our assumptions are reasonable and appropriate, actual results may be materially different than estimated.

 

Revenue Recognition

 

We generate revenue primarily from providing professional services to our clients. Revenue is generally recognized upon the performance of services. In providing these services, we may incur reimbursable expenses, which consist of amounts paid to subcontractors and other third parties as well as travel and other job related expenses that are contractually reimbursable from clients. We will include reimbursable expenses in computing and reporting our total contract revenue as long as we remain responsible to the client for the fulfillment of the contract and for the overall acceptability of all services provided.

 

We earn our revenue from cost-plus, fixed-price and time-and-materials contracts. If estimated total costs on any contract indicate a loss, we charge the entire estimated loss to operations in the period the loss becomes known. The cumulative effect of revisions to revenue, estimated costs to complete contracts, including penalties, incentive awards, change orders, claims, anticipated losses, and other effects are recorded in the accounting period in which the events indicating a loss are known and the loss can be reasonably estimated. Such revisions could occur at any time and the effects may be material. The majority of our contracts are for work where we bill the client monthly at hourly billing rates. The hourly billing rates are determined by contract terms. For governmental clients, the hourly rates are generally calculated as either (i) a negotiated multiplier of our direct labor costs or (ii) as direct labor costs plus overhead costs plus a negotiated profit percentage. For commercial clients, the hourly rates are generally taken from a standard fee schedule by staff classification or they can be at a negotiated discount from this schedule. In some cases, primarily for foreign work, a fixed monthly staff rate is negotiated rather than an hourly rate. This monthly rate is determined based upon a buildup of direct labor costs plus overhead and profit. We account for these contracts on a time-and-expenses method, recognizing revenue as costs are incurred.

 

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We account for fixed-price contracts on the “percentage-of-completion” method, wherein revenue is recognized as costs are incurred. Under the percentage-of-completion method for revenue recognition, we estimate the progress towards completion to determine the amount of revenue and profit to be recognized. We generally utilize a cost-to-cost approach in applying the percentage-of-completion method, where revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred.

 

Under the percentage-of-completion method, recognition of profit is dependent upon the accuracy of estimates. We have a history of making reasonably dependable estimates of contract revenue, the extent of progress towards completion and contract completion costs on our long-term construction management contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.

 

Allowance for Doubtful Accounts

 

We make ongoing estimates relating to the collectibility of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our clients to make required payments. Estimates used in determining accounts receivable allowances are based on specific client account reviews and historical experience of credit losses. We also apply judgment including assessments about changes in economic conditions, concentration of receivables among clients and industries, recent write-off trends, rates of bankruptcy, and credit quality of specific clients. Unanticipated changes in the financial condition of clients, the resolution of various disputes, or significant changes in the economy could impact the reserves required. At December 31, 2012 and 2011, the allowance for doubtful accounts was $10,268,000 and $9,181,000, respectively.

 

Goodwill and Other Intangible Assets

 

Goodwill is tested annually for impairment in our third fiscal quarter or more frequently if events or circumstances indicate that there may be an impairment. We have determined that we have two reporting units, the Project Management unit and the Construction Claims unit. We made that determination based on the similarity of the services provided, the methodologies in delivering our services and the similarity of the client base in each of these units. To determine the fair value of our reporting units, we use the market approach and the income approach, weighting the results of each approach.

 

Under the market approach, we determine fair value using the public company method and the quoted price method. For our determination with respect to the current year, we utilized a control premium of 30% to arrive at the preliminary fair value for each reporting unit, and we applied a weighting of 20% to the preliminary fair value determined by using the public company method.  The quoted price method is based upon the market value of the transactions of minority interests in the publicly-traded shares of the Company. For our determination with respect to the current year, we utilized a control premium of 30% to arrive at the preliminary fair value for each reporting unit , and we applied a weighting of 50% to the preliminary fair value determined using the quoted price method.

 

Our calculation under the income approach utilizes our internal forecasts. In the income approach (that is, the discounted cash flow method), the projected cash flows reflect the cash flows subsequent to the sale of the reporting unit pursuant to the guidance in ASC 350 and ASC 820.  Consistent with applicable literature, we include in projected cash flows any expected improvements in cash flows or other changes that, in our view, a market participant would consider and be willing to pay for (but we exclude any buyer- or entity-specific synergies).   The projections are developed by us and are based upon cash flows that maximize reporting unit value by taking into account improvements that controlling-interest holders can make, but minority interest holders cannot make.  These improvements include:  increasing revenues, reducing operating costs, or reducing non-operating costs such as taxes. The owners of the enterprise may also increase enterprise value by reducing risk; for example, by diversifying the business, improving access to capital, increasing the certainty of cash flows, or optimizing the capital structure.

 

For our determination using the income approach with respect to July 1, 2012, we considered the factors listed above when developing the cash flows to support the income approach, but did not consider these factors when determining the value of a minority interest holder.  We made this distinction recognizing that the owner of a minority interest in a company is unlikely to be able to influence the operating and financial policies of that company. Recognizing that due to

 

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elements of control incorporated into our reporting units’ forecasts, we applied no control premium to our conclusion of value indicated by the discounted cash flows. In determining fair value, we applied a weighting of 30% to the preliminary fair value determined using the income approach.

 

With regard to weighting the conclusions rendered by the approaches utilized, we believe that the quoted price method provides the most reliable indication of value (that is, a Level 1 input); therefore, we placed the greatest emphasis upon this method assigning a 50% weighting. We also determined that the value using the discounted cash flow method (to which we assigned a 30% weighting) provided a more reliable indication of value than the public company method (to which we assigned a 20% weighting) with the relative levels of reliability contributing to the weighting accorded to each approach.

 

Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for each reporting unit, the period over which cash flows will occur, and determination of the weighted average cost of capital, among other things. Based on the valuation as of July 1, 2012, the fair values of the Project Management unit and the Construction Claims unit substantially exceeded their carrying values. Changes in these estimates and assumptions could materially affect our determination of fair value and/or goodwill impairment for each reporting unit. Changes in future market conditions, our business strategy, or other factors could impact upon the future values of Hill’s reporting units, which could result in future impairment charges .

 

We amortize other intangible assets over their estimated useful lives and review the long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate.

 

Income Taxes

 

We make judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings. These judgments and interpretations affect the provision for income taxes, deferred tax assets and liabilities and the valuation allowance. We evaluate the deferred tax assets to determine on the basis of objective factors whether the net assets will be realized through future years’ taxable income. In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required.

 

At December 31, 2012, we evaluated the deferred tax asset related to our U.S. net operating losses.  Due to three consecutive years of U.S.-based net operating losses, we determined that it was more likely than not that we would not be able to utilize the majority of our deferred tax assets with the exception of certain foreign deferred tax assets. As a consequence, we established a valuation allowance against our entire U.S.-based deferred tax asset.

 

We will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.

 

Stock Options

 

We recognize compensation expense for all stock-based awards. These awards have included stock options and restricted stock grants. While fair value may be readily determinable for awards of stock, market quotes are not available for long-term, nontransferable stock options because these instruments are not traded. We currently use the Black-Scholes option

 

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Table of Contents

 

pricing model to estimate the fair value of options. Option valuation models require the input of highly subjective assumptions, including but not limited to stock price volatility, expected life and stock option exercise behavior.

 

Contingencies

 

Estimates are inherent in the assessment of our exposure to insurance claims that fall below policy deductibles and to litigation and other legal claims and contingencies, as well as in determining our liabilities for incurred but not reported insurance claims. Significant judgments by us and reliance on third-party experts are utilized in determining probable and/or reasonably estimable amounts to be recorded or disclosed in our financial statements. The results of any changes in accounting estimates are reflected in the financial statements of the period in which the changes are determined. We do not believe that material changes to these estimates are reasonably likely to occur.

 

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Table of Contents

 

Results of Operations

 

Year Ended December 31, 2012 Compared to

Year Ended December 31, 2011

 

Consulting Fee Revenue (“CFR”)

 

 

 

2012

 

2011

 

Change

 

 

 

(dollars in thousands)

 

Project Management

 

$

312,232

 

74.8

%

$

290,787

 

72.8

%

$

21,445

 

7.4

%

Construction Claims

 

105,366

 

25.2

 

108,467

 

27.2

 

(3,101

)

(2.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

417,598

 

100.0

%

$

399,254

 

100.0

%

$

18,344

 

4.6

%

 

The increase in Hill’s CFR for 2012 over 2011 was comprised of an organic increase of 2.7% primarily due to increased work in the Middle East and an increase of 1.9% from the acquisition of Engineering S.A. in Brazil.

 

During 2012, Hill’s Project Management CFR included an organic increase of 4.7% primarily from the Middle East plus an increase of 2.7% due to the acquisition of Engineering S.A. The increase in Project Management CFR consisted of a $19,677,000 increase in foreign projects and an increase of $1,768,000 in domestic projects.  The increase in foreign Project Management CFR included an increase of $16,815,000 in Saudi Arabia, $4,638,000 in Egypt and $4,339,000 in Afghanistan. These increases were partially offset by decreases of $8,208,000 in Libya where work was suspended in February 2011 due to political unrest and $4,327,000 in Spain. The increase in domestic Project Management CFR was due primarily to increases in our Mid-Atlantic and Western regions.

 

The decrease in Hill’s Construction Claims CFR was all organic and primarily resulted from decreases in Australia, Europe and the Middle East where several large assignments were completed, partially offset by increases in the United Kingdom and the United States.

 

Reimbursable Expenses

 

 

 

2012

 

2011

 

Change

 

 

 

(dollars in thousands)

 

Project Management

 

$

60,049

 

95.0

%

$

98,928

 

96.8

%

$

(38,879

)

(39.3

)%

Construction Claims

 

3,134

 

5.0

 

3,274

 

3.2

 

(140

)

(4.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

63,183

 

100.0

%

$

102,202

 

100.0

%

$

(39,019

)

(38.2

)%

 

Reimbursable expenses consist of amounts paid to subcontractors and other third parties, and travel and other job-related expenses that are contractually reimbursable from clients. These items are reflected as separate line items in both our revenue and cost of services captions in our consolidated statements of operations. The decrease in Project Management reimbursable expenses was due primarily to decreased use of subcontractors of $41,260,000 primarily in our Northeast region.

 

Cost of Services

 

 

 

2012

 

2011

 

Change

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

 

 

CFR

 

 

 

 

 

CFR

 

 

 

 

 

Project Management

 

$

192,592

 

80.4

%

61.7

%

$

178,336

 

78.2

%

61.3

%

$

14,256

 

8.0

%

Construction Claims

 

46,980

 

19.6

 

44.6

 

49,655

 

21.8

 

45.8

 

(2,675

)

(5.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

239,572

 

100.0

%

57.4

%

$

227,991

 

100.0

%

57.1

%

$

11,581

 

5.1

%

 

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Table of Contents

 

Cost of services consists of labor expenses for time charged directly to contracts and non-reimbursable job-related travel and out-of-pocket expenses. The increase in Project Management cost of services is primarily due to increases in Saudi Arabia, Afghanistan, Egypt and our U.S. Mid-Atlantic and Western regions in support of the increased revenue in those areas and due to the acquisition of Engineering S.A., partially offset by decreases in Libya and Spain.

 

The decrease in the cost of services for Construction Claims was due primarily to decreases in direct cost in Australia, the Middle East and Europe, partially offset by increases in the United Kingdom and the United States.

 

Gross Profit

 

 

 

2012

 

2011

 

Change

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

 

 

CFR

 

 

 

 

 

CFR

 

 

 

 

 

Project Management

 

$

119,640

 

67.2

%

38.3

%

$

112,451

 

65.7

%

38.7

%

$

7,189

 

6.4

%

Construction Claims

 

58,386

 

32.8

 

55.4

 

58,812

 

34.3

 

54.2

 

(426

)

(0.7

)

Total

 

$

178,026

 

100.0

%

42.6

%

$

171,263

 

100.0

%

42.9

%

$

6,763

 

3.9

%

 

The increase in Project Management gross profit included an increase of $5,971,000 from international operations including increases of $8,885,000 from the Middle East, primarily Saudi Arabia and Afghanistan, $3,197,000 from Brazil and $2,926,000 from Egypt, partially offset by decreases of $4,636,000 from Libya and $3,061,000 from Spain.

 

The decrease in Construction Claims gross profit was driven by a decrease of $2,412,000 from Australia where some large assignments were completed, partially offset by an increase in $1,801,000 from the United Kingdom.

 

Selling, General and Administrative (“SG&A”) Expenses

 

 

 

2012

 

2011

 

Change

 

 

 

(dollars in thousands)

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

 

 

CFR

 

 

 

CFR

 

 

 

 

 

SG&A Expenses

 

$

172,779

 

41.4

%

$

175,312

 

43.9

%

$

(2,533

)

(1.4

)%

 

The decrease in SG&A included decreases of $7,523,000, partially offset by an increase of $4,990,000 from Engineering S.A. which was acquired in February 2011.

 

The significant components of the change in SG&A are as follows:

 

·                   An increase of $4,000,000 for a reserve for potential employment tax liabilities for certain foreign subsidiaries;

·                   A decrease in unapplied and indirect labor expense of $140,000 including a decrease of $1,275,000 due to cost-cutting initiatives, partially offset by an increase of $1,135,000 at Engineering S.A.;

·                   A decrease of $2,556,000 in amortization expense due to the full amortization of the shorter-lived intangible assets of companies we acquired over the last several years;

·                   A decrease of $1,384,000 in administrative travel due to cost-cutting initiatives, $454,000 of which was attributable to Engineering S.A.;

·                   A credit of $1,000,000 to indirect expenses for the reversal of an unachieved earnout liability which was recorded as part of the acquisition of TRS Consultants in December 2009;

·                   A decrease of $792,000 in rent expense due to the early termination of a northern New Jersey office lease in early 2011, a temporary overlapping of rental cost in the United Kingdom during an office relocation during the first quarter of 2011 and to lower office space expenses in 2012 due to renegotiation of various leases during 2012; and

·                   A decrease in legal fees of $767,000.

 

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Table of Contents

 

Operating Profit (Loss):

 

 

 

2012

 

2011

 

Change

 

 

 

(dollars in thousands)

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

 

 

CFR

 

 

 

CFR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Project Management before equity in earnings of affiliates

 

$

23,273

 

7.5

%

$

17,673

 

6.0

%

$

5,600

 

31.7

%

Equity in earnings of affiliates

 

 

 

190

 

0.1

 

(190

)

(100.0

)

Total Project Management

 

23,273

 

7.5

 

17,863

 

6.1

 

5,410

 

30.3

 

Construction Claims

 

8,071

 

7.7

 

9,488

 

8.7

 

(1,417

)

(14.9

)

Corporate

 

(26,097

)

 

 

(31,210

)

 

 

5,113

 

(16.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,247

 

1.3

%

$

(3,859

)

(1.0

)%

$

9,106

 

N.M.

%

 

The increase in Project Management operating profit primarily included an increase of $7,381,000 in the Middle East, primarily Saudi Arabia and Afghanistan, $5,204,000 in the United States and $1,875,000 in Egypt. The increases were partially offset by a decrease in operating profit of $4,869,000 in Libya and $2,956,000 in Romania.

 

The decrease in Construction Claims operating profit was primarily due to a decrease of $3,626,000 in Australia and $1,417,000 in the Middle East, partially offset by an increase of $2,735,000 in the United Kingdom.

 

Corporate expenses decreased $5,113,000 primarily due to decreases of $1,675,000 in indirect labor and travel expenses as a result of cost-cutting initiatives, a reserve of $1,600,000 in 2011 related to a Saudi Arabian joint venture and a decrease of $1,004,000 in legal fees.

 

Interest and related financing fees, net

 

Interest and related financing fees, net increased $10,888,000 to $18,150,000 in 2012 as compared with $7,262,000 in 2011, primarily due to higher levels of debt outstanding and higher interest rates, including forbearance agreement fees, default fees, amended Credit Agreement fees, refinancing fees and related legal and advisory fees amounting to $10,775,000 for 2012 compared to $1,076,000 in 2011.

 

Income Taxes

 

In 2012, the income tax expense was $13,442,000 compared to an income tax benefit of ($6,186,000) in 2011. The effective income tax expense rates for 2012 and 2011 were (104.2%) and 55.6%, respectively. The decrease in the Company’s effective tax rate during the year was primarily a result of recording a valuation allowance on the net U.S. deferred tax asset of $17,700,000.

 

The valuation allowance primarily relates to the U.S. federal and state net operating losses of $38,400,000 and $41,600,000, respectively. The losses were generated in fiscal years 2010 through 2012. The primary reason for recording the valuation allowance was due to the inability of the Company’s majority owned subsidiary, HillStone International, LLC to finalize the contracts that were projected to commence in 2012. In 2011 the Company recognized an income tax benefit of $6,932,000 related to net operating losses from U.S. operations.

 

In addition, several items materially affected the Company’s effective tax rate during 2012. The Company realized a benefit from the reversal of prior year’s uncertain tax position amounting to $350,000 due to the expiration of the statute of limitations upon filing of certain income tax returns in a foreign jurisdiction. An income tax benefit of $666,000 resulted from adjustments to agree the 2011 book amount to the actual amounts reported on the tax returns, primarily in foreign jurisdictions. In addition, the Company recognized an income tax expense related to withholding tax in the amount of $573,000 primarily related to foreign operations and an income tax expense of $804,000 related to potential prior year tax assessments of certain foreign subsidiaries.

 

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Table of Contents

 

In 2011, four items materially affected the Company’s effective tax rate. The Company realized substantial benefits from the reversal of a prior year’s uncertain tax position amounting to $1,515,000 due to the expiration of the statute of limitations upon the filing of certain income tax returns and the favorable resolution of a Kazakhstan withholding tax issue. An income tax benefit of $347,000 resulted from adjustments to agree the 2010 book amount to the actual amounts reported on the tax returns, primarily related to foreign operations. In addition, a tax benefit was recognized in the amount of $18,000 representing the tax effect on unrealized foreign exchange losses generated in the United Kingdom which are included as a deduction on the local tax returns. These benefits were offset by an increase in the reserves for uncertain tax positions of $609,000, related primarily to uncertain tax positions of foreign operations.  Excluding these items our effective tax rate would have been 44.5% in 2011.

 

Net Loss Attributable to Hill

 

The net loss attributable to Hill International, Inc. for 2012 was ($28,217,000) or ($0.73) per diluted common share based on 38,500,000 diluted common shares outstanding, as compared to a net loss for 2011 of ($6,017,000) or ($0.16) per diluted common share based upon 38,414,000 diluted common shares outstanding.

 

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Table of Contents

 

Year Ended December 31, 2011 Compared to

 

Year Ended December 31, 2010

 

Consulting Fee Revenue (“CFR”)

 

 

 

2011

 

2010

 

Change

 

 

 

(dollars in thousands)

 

Project Management

 

$

290,787

 

72.8

%

$

286,466

 

75.0

%

$

4,321

 

1.5

%

Construction Claims

 

108,467

 

27.2

 

95,633

 

25.0

 

12,834

 

13.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

399,254

 

100.0

%

$

382,099

 

100.0

%

$

17,155

 

4.5

%

 

The increase in Hill’s CFR for 2011 over 2010 was comprised of an increase of 15.4% from acquisitions, partially offset by an organic decrease of 10.9%. The organic decrease in CFR was primarily due to decreases in Libya and Iraq.

 

During 2011, Hill’s Project Management CFR included an increase of 18.8% due to the full-year effect of the 2010 acquisitions of dck and TCM and the 2011 acquisition of Engineering S.A., partially offset by an organic decrease of 17.3% primarily in Libya and Iraq. The increase in Project Management CFR consisted of a $10,922,000 increase in domestic projects and a decrease of $6,601,000 in foreign projects. The increase in domestic projects resulted primarily of the full-year effect of the 2010 acquisitions of dck and TCM as well as increases in the Western region. The decrease in foreign Project Management CFR was primarily due to decreases of $50,976,000 in Libya where work stopped in February 2011 due to the political unrest and $11,621,000 in Iraq, where Hill’s work on the Iraq Reconstruction Program was completed at the end of 2010. These decreases were partially offset by an increase of $42,689,000 from Engineering S.A. which was acquired on February 28, 2011 and an increase of $11,916,000 elsewhere in the Middle East, primarily Saudi Arabia.

 

During 2011, Hill’s Construction Claims CFR included an increase of 5.3% due to the acquisition of MLL and an organic increase of 8.1% primarily in the Middle East and United States.

 

Reimbursable Expenses

 

 

 

2011

 

2010

 

Change

 

 

 

(dollars in thousands)

 

Project Management

 

$

98,928

 

96.8

%

$

66,330

 

95.2

%

$

32,598

 

49.1

%

Construction Claims

 

3,274

 

3.2

 

3,329

 

4.8

 

(55

)

(1.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

102,202

 

100.0

%

$

69,659

 

100.0

%

$

32,543

 

46.7

%

 

Reimbursable expenses consist of amounts paid to subcontractors and other third parties and travel and other job-related expenses that are contractually reimbursable from clients. These items are reflected as separate line items in both our revenue and cost of services captions in our consolidated statements of operations. The increase in Project Management reimbursable expenses was due primarily to increased use of subcontractors of $29,959,000 in our New York office.

 

Cost of Services

 

 

 

2011

 

2010

 

Change

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

 

 

CFR

 

 

 

 

 

CFR

 

 

 

 

 

Project Management

 

$

178,336

 

78.2

%

61.3

%

$

171,124

 

80.2

%

59.7

%

$

7,212

 

4.2

%

Construction Claims

 

49,655

 

21.8

 

45.8

 

42,225

 

19.8

 

44.2

 

7,430

 

17.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

227,991

 

100.0

%

57.1

%

$

213,349

 

100.0

%

55.8

%

$

14,642

 

6.9

%

 

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Table of Contents

 

Cost of services consists of labor expenses for time charged directly to contracts and non-reimbursable job-related travel and out-of-pocket expenses. The increase in Project Management cost of services was primarily due to increases in the Middle East and the acquisitions of TCM and Engineering S.A., partially offset by decreases in Iraq and Libya.

 

The increase in the cost of services for Construction Claims was due primarily to increases in direct labor in the Middle East and Australia in support of the increases in CFR.

 

Gross Profit

 

 

 

2011

 

2010

 

Change

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

 

 

CFR

 

 

 

 

 

CFR

 

 

 

 

 

Project Management

 

$

112,451

 

65.7

%

38.7

%

$

115,342

 

68.4

%

40.3

%

$

(2,891

)

(2.5

)%

Construction Claims

 

58,812

 

34.3

 

54.2

 

53,408

 

31.6

 

55.8

 

5,404

 

10.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

171,263

 

100.0

%

42.9

%

$

168,750

 

100.0

%

44.2

%

$

2,513

 

1.5

%

 

The decrease in Project Management gross profit included a decrease of $7,400,000 from foreign operations and an increase of $4,509,000 in domestic operations. The decrease in foreign operations included decreases of $27,844,000 in Libya and Iraq, partially offset by increases of $14,400,000 from Engineering S.A. and $4,355,000 in the Middle East. The increase in domestic operations includes increases of $5,400,000 from TCM and dck which were acquired in 2010. The decrease in Project Management gross profit percentage was due to the effect of a lower gross profit percentage at Engineering S.A. and the reduced work in Libya where percentages were higher than average for the Company.

 

The increase in Construction Claims gross profit of $5,404,000 was driven by increases of $3,496,000 from a full year of MLL and $1,848,000 from the Middle East, due to new work in Saudi Arabia.

 

Selling, General and Administrative (“SG&A”) Expenses

 

 

 

2011

 

2010

 

Change

 

 

 

(dollars in thousands)

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

 

 

CFR

 

 

 

CFR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A Expenses

 

$

175,312

 

43.9

%

$

151,634

 

39.7

%

$

23,678

 

15.6

%

 

The increase in SG&A included increases of $19,611,000 from the MLL, dck, TCM and Engineering S.A. acquisitions.

 

The significant components of the change in SG&A were as follows:

 

·                  An increase in unapplied and indirect labor expense of $12,437,000 including $9,701,000 from MLL, dck, TCM and Engineering S.A., $1,023,000 from the United Kingdom where utilization was low during the first quarter of 2011 and $868,000 in corporate primarily in support of real estate development-related projects;

·