Hill International, Inc.
Hill International, Inc. (Form: 10-Q, Received: 08/08/2014 12:27:51)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended June 30, 2014

 

or

 

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

 

For the transition period
from                            to                           

 

Commission File Number: 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

 

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

 

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

 

There were 50,332,922 shares of the Registrant’s Common Stock outstanding at August 6, 2014.

 

 

 



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBDISIARIES

 

Index to Form 10-Q

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

 

 

 

 

Consolidated Balance Sheets at June 30, 2014 (unaudited) and December 31, 2013

3

 

 

 

 

Consolidated Statements of Operations for the three- and six-month periods ended June 30, 2014 and 2013 (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Earnings (Loss) for the three- and six-month periods ended June 30, 2014 and 2013 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2014 and 2013 (unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2

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

26

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

Item 4

Controls and Procedures

40

 

 

 

Part II

OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

41

 

 

 

Item 1A

Risk Factors

41

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 3

Defaults Upon Senior Securities

41

 

 

 

Item 4

Mine Safety Disclosures

41

 

 

 

Item 5

Other Information

41

 

 

 

Item 6

Exhibits

41

 

 

 

Signatures

 

 

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.          Financial Statements.

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

26,847

 

$

30,381

 

Cash - restricted

 

9,025

 

15,766

 

Accounts receivable, less allowance for doubtful accounts of $8,867 and $9,530

 

248,556

 

232,011

 

Accounts receivable - affiliate

 

1,058

 

492

 

Prepaid expenses and other current assets

 

13,618

 

13,078

 

Income taxes receivable

 

4,356

 

4,460

 

Deferred income tax assets

 

1,737

 

1,705

 

Total current assets

 

305,197

 

297,893

 

Property and equipment, net

 

11,160

 

10,613

 

Cash - restricted, net of current portion

 

7,755

 

2,740

 

Retainage receivable

 

1,346

 

1,212

 

Acquired intangibles, net

 

22,290

 

24,964

 

Goodwill

 

87,885

 

85,853

 

Investments

 

5,948

 

5,984

 

Deferred income tax assets

 

13,955

 

13,882

 

Other assets

 

7,389

 

5,961

 

Total assets

 

$

462,925

 

$

449,102

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Due to bank

 

$

 

$

2

 

Current maturities of notes payable

 

53,307

 

18,974

 

Accounts payable and accrued expenses

 

100,668

 

92,270

 

Income taxes payable

 

4,717

 

9,442

 

Deferred revenue

 

16,885

 

18,203

 

Deferred income taxes

 

376

 

369

 

Other current liabilities

 

14,444

 

12,255

 

Total current liabilities

 

190,397

 

151,515

 

Notes payable, net of current maturities

 

87,578

 

114,285

 

Retainage payable

 

1,031

 

1,017

 

Deferred income taxes

 

16,724

 

16,732

 

Deferred revenue

 

14,598

 

16,261

 

Other liabilities

 

4,365

 

6,261

 

Total liabilities

 

314,693

 

306,071

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.0001 par value; 1,000 shares authorized, none issued

 

 

 

Common stock, $.0001 par value; 100,000 shares authorized, 47,288 shares and 46,598 shares issued at June 30, 2014 and December 31, 2013, respectively

 

5

 

5

 

Additional paid-in capital

 

140,007

 

136,899

 

Retained earnings

 

48,609

 

47,038

 

Accumulated other comprehensive loss

 

(22,248

)

(25,032

)

 

 

166,373

 

158,910

 

Less treasury stock of 6,546 and 6,434 shares at June 30, 2014 and December 31, 2013, respectively, at cost

 

(28,304

)

(27,766

)

Hill International, Inc. share of equity

 

138,069

 

131,144

 

Noncontrolling interests

 

10,163

 

11,887

 

Total equity

 

148,232

 

143,031

 

Total liabilities and stockholders’ equity

 

$

462,925

 

$

449,102

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Consulting fee revenue

 

$

144,515

 

$

128,427

 

$

281,764

 

$

250,983

 

Reimbursable expenses

 

15,124

 

20,037

 

27,888

 

33,554

 

Total revenue

 

159,639

 

148,464

 

309,652

 

284,537

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

83,246

 

75,357

 

161,836

 

148,055

 

Reimbursable expenses

 

15,124

 

20,037

 

27,888

 

33,554

 

Total direct expenses

 

98,370

 

95,394

 

189,724

 

181,609

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

61,269

 

53,070

 

119,928

 

102,928

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

52,614

 

43,230

 

105,273

 

85,689

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

8,655

 

9,840

 

14,655

 

17,239

 

 

 

 

 

 

 

 

 

 

 

Interest expense and related financing fees, net

 

5,646

 

6,281

 

10,722

 

11,768

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

3,009

 

3,559

 

3,933

 

5,471

 

Income tax expense

 

993

 

2,288

 

1,624

 

4,162

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

2,016

 

1,271

 

2,309

 

1,309

 

 

 

 

 

 

 

 

 

 

 

Less: net earnings - noncontrolling interests

 

498

 

552

 

738

 

970

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Hill International, Inc.

 

$

1,518

 

$

719

 

$

1,571

 

$

339

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share - Hill International, Inc.

 

$

0.04

 

$

0.02

 

$

0.04

 

$

0.01

 

Basic weighted average common shares outstanding

 

40,568

 

38,826

 

40,184

 

38,745

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share - Hill International, Inc.

 

$

0.04

 

$

0.02

 

$

0.04

 

$

0.01

 

Diluted weighted average common shares outstanding

 

42,591

 

38,943

 

41,570

 

38,950

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Consolidated net earnings

 

$

2,016

 

$

1,271

 

$

2,309

 

$

1,309

 

Foreign currency translation adjustment, net of tax

 

1,090

 

(2,270

)

2,549

 

(5,165

)

Other, net

 

383

 

86

 

422

 

108

 

Comprehensive earnings (loss)

 

3,489

 

(913

)

5,280

 

(3,748

)

Comprehensive earnings (loss) earnings attributable to noncontrolling interests

 

407

 

(106

)

925

 

(312

)

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

 

$

3,082

 

$

(807

)

$

4,355

 

$

(3,436

)

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

2,309

 

$

1,309

 

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,864

 

5,196

 

Reduction of notes payable to Engineering S.A.

 

 

(366

)

Provision for bad debts

 

442

 

1,442

 

Interest accretion on term loan

 

4,247

 

3,847

 

Deferred tax expense

 

307

 

590

 

Share based compensation

 

1,927

 

1,583

 

Changes in operating assets and liabilities, net:

 

 

 

 

 

Restricted cash

 

1,726

 

307

 

Accounts receivable

 

(19,403

)

(29,230

)

Accounts receivable - affiliate

 

(566

)

118

 

Prepaid expenses and other current assets

 

(655

)

(3,979

)

Income taxes receivable

 

49

 

(468

)

Retainage receivable

 

(134

)

(184

)

Other assets

 

(2,232

)

345

 

Accounts payable and accrued expenses

 

9,331

 

5,468

 

Income taxes payable

 

(4,610

)

(2,226

)

Deferred revenue

 

(2,614

)

7,797

 

Other current liabilities

 

(790

)

2,026

 

Retainage payable

 

14

 

14

 

Other liabilities

 

(1,842

)

262

 

Net cash used in operating activities

 

(7,630

)

(6,149

)

Cash flows from investing activities:

 

 

 

 

 

Payments for purchase of property and equipment

 

(2,372

)

(1,293

)

Cash received from acquisition

 

 

727

 

Contribution to affiliate

 

 

(5

)

Payment of liability for additional interest in Hill Spain

 

 

(9,325

)

Net cash used in investing activities

 

(2,372

)

(9,896

)

Cash flows from financing activities:

 

 

 

 

 

Due to bank

 

(2

)

(16

)

Payments on notes payable

 

(1,160

)

(106

)

Net borrowings on revolving loans

 

4,626

 

19,829

 

Proceeds from stock issued under employee stock purchase plan

 

54

 

53

 

Proceeds from exercise of stock options

 

879

 

20

 

Net cash provided by financing activities

 

4,397

 

19,780

 

Effect of exchange rate changes on cash

 

2,071

 

1,374

 

Net (decrease) increase in cash and cash equivalents

 

(3,534

)

5,109

 

Cash and cash equivalents — beginning of period

 

30,381

 

16,716

 

Cash and cash equivalents — end of period

 

$

26,847

 

$

21,825

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 - The Company

 

Hill International, Inc. (“Hill” or the “Company”) is a professional services firm that provides program management, project management, construction management, construction claims and other consulting services primarily to the buildings, transportation, environmental, energy and industrial markets worldwide.  Hill’s clients include the U.S. federal government, U.S. state and local governments, foreign governments and the private sector.  The Company is organized into two key operating divisions: the Project Management Group and the Construction Claims Group.

 

Note 2 — Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.  In the opinion of management, these statements include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the consolidated financial statements.

 

The consolidated financial statements include the accounts of Hill and its wholly- and majority-owned subsidiaries.  All intercompany balances and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The interim operating results are not necessarily indicative of the results for a full year.

 

Note 3 — Accounts Receivable

 

The components of accounts receivable are as follows (in thousands):

 

 

 

June 30, 2014

 

December 31, 2013

 

Billed

 

$

204,065

 

$

206,469

 

Retainage, current portion

 

13,699

 

10,215

 

Unbilled

 

39,659

 

24,857

 

 

 

257,423

 

241,541

 

Allowance for doubtful accounts

 

(8,867

)

(9,530

)

 

 

$

248,556

 

$

232,011

 

 

In early 2014, the Company received additional payments against accounts receivable related to work performed by Hill prior to March 2011 pursuant to contracts with the Libyan government of approximately $6,800,000 consisting of approximately 200,000 pounds sterling ($300,000), approximately LYD 2,100,000 ($1,700,000) and $4,800,000 in U.S. dollars. Total receipts to date amounted to approximately $9,900,000 and, at June 30, 2014, the remaining accounts receivable outstanding related to Hill’s work in Libya amounted to approximately $50,100,000.

 

Since the end of the Libyan civil unrest in October 2011, the Company has sought to recover the receivable from its client, the Libyan Organization for the Development of Administrative Centres (“ODAC”) through ongoing negotiations rather than pursue its legal rights for payment under the contracts. The Company continues to believe that this course of action provides the best likelihood for recovery as it could result in completion of and payment on the existing contracts as well as the potential for the award of new contracts.  There is at present no formal agreement, understanding or timetable for

 

7



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further payments of Hill’s accounts receivable from ODAC or a return to work on Hill’s existing contracts.  Management believes that the recent payments made in 2013 and 2014, along with standby letters of credit of approximately $14,000,000 posted in our favor by ODAC, were made in good faith and are a positive indication that ODAC intends to satisfy its obligations to Hill.  Currently, the Company and ODAC are in the process of extending the standby letters of credit for an additional six-month term.  However, the Company cannot predict with certainty when, or if, the remaining accounts receivable will be paid by the Libyan authorities or when work will resume there.  In the event that the Company does not realize any further payments, there could be a significant adverse impact on its consolidated results of operations and consolidated financial position.

 

Note 4 — Intangible Assets

 

The following table summarizes the Company’s acquired intangible assets (in thousands):

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

 

 

 

 

 

 

 

Client relationships

 

$

38,287

 

$

20,734

 

$

37,501

 

$

18,238

 

Acquired contract rights

 

11,650

 

9,175

 

11,874

 

8,541

 

Trade names

 

3,306

 

1,044

 

3,266

 

898

 

Total

 

$

53,243

 

$

30,953

 

$

52,641

 

$

27,677

 

Intangible assets, net

 

$

22,290

 

 

 

$

24,964

 

 

 

 

Amortization expense related to intangible assets was as follows (in thousands):

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2014

 

2013

 

2014

 

2013

 

$

1,546

 

$

1,656

 

$

3,132

 

$

3,234

 

 

The following table presents the estimated amortization expense based on our present intangible assets for the next five years (in thousands):

 

 

 

Estimated

 

 

 

Amortization

 

Year ending December 31,

 

Expense

 

 

 

 

 

2014 (remaining 6 months)

 

$

3,052

 

2015 

 

5,625

 

2016 

 

4,171

 

2017 

 

3,142

 

2018 

 

2,089

 

 

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Note 5 — Goodwill

 

The following table summarizes the changes in the Company’s carrying value of goodwill during 2014 (in thousands):

 

 

 

Project

 

Construction

 

 

 

 

 

Management

 

Claims

 

Total

 

Balance, December 31, 2013

 

$

58,448

 

$

27,405

 

$

85,853

 

Additions

 

 

 

 

Translation adjustments

 

1,219

 

813

 

2,032

 

Balance, June 30, 2014

 

$

59,667

 

$

28,218

 

$

87,885

 

 

Note 6 — Accounts Payable and Accrued Expenses

 

Below are the components of accounts payable and accrued expenses (in thousands):

 

 

 

June 30, 2014

 

December 31, 2013

 

Accounts payable

 

$

28,992

 

$

25,349

 

Accrued payroll

 

42,007

 

35,732

 

Accrued subcontractor fees

 

5,838

 

6,212

 

Accrued agency fees

 

16,111

 

17,623

 

Accrued legal and professional fees

 

762

 

1,239

 

Other accrued expenses

 

6,958

 

6,115

 

 

 

$

100,668

 

$

92,270

 

 

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Note 7 — Notes Payable and Long-Term Debt

 

On June 12, 2014, the Company and its subsidiary Hill International N.V. entered into a Commitment Letter with Société Générale (the “Agent”) and SG Americas Securities, LLC, (the “Arranger”) pursuant to which the Arranger and the Agent committed, subject to the conditions and other terms and provisions of the Commitment Letter, to provide secured debt facilities to the Company in an aggregate principal amount of $165,000,000 which would be used to payoff and terminate the existing Term Loan and existing Revolving Credit Agreement. These secured debt facilities are expected to close during August 2014.  See Note 16 for further information.

 

Outstanding debt obligations are as follows (in thousands):

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Term loan payable (For more information, see below)

 

$

88,721

 

$

84,474

 

 

 

 

 

 

 

Revolving Credit loan payable under the Credit Agreement. The weighted average interest rate of all borrowings was 7.22% and 5.32% at June 30, 2014 and December 31, 2013, respectively. (For more information, see below.)

 

42,600

 

39,000

 

 

 

 

 

 

 

Borrowings under revolving credit facilities with a consortium of banks in Spain
(For more information, see below.)

 

7,542

 

7,670

 

 

 

 

 

 

 

Borrowings under unsecured credit facility with Caja Badajoz
(For more information, see below.)

 

1,091

 

2,047

 

 

 

 

 

 

 

Borrowings under revolving credit facility with the National Bank of Abu Dhabi
(For more information, see below.)

 

916

 

 

 

 

 

 

 

 

Other notes payable

 

15

 

68

 

 

 

140,885

 

133,259

 

Less current maturities

 

53,307

 

18,974

 

Notes payable and long-term debt, net of current maturities

 

$

87,578

 

$

114,285

 

 

Term Loan Agreement

 

The Company entered into a Term Loan Agreement on October 18, 2012, which was amended on May 23, 2013 (the “First Amendment”) and again on July 25, 2014 (the “Second Amendment”). The First Amendment contains identical provisions as those in the Fourth Amendment to Credit Agreement (see below) and the Second Amendment contains identical provisions as the Fifth Amendment and Limited Waiver to Credit Agreement (see below).  Borrowings under the Term Loan Agreement are collateralized by a second lien on substantially all of the Company’s assets, including, without limitation, accounts receivable, equipment, securities, financial assets and the proceeds of the foregoing, as well as by a pledge of 65% of the outstanding capital stock of its wholly-owned foreign subsidiary, Hill International N.V., and of certain of its other foreign subsidiaries.  The maturity date of the Term Loan is October 18, 2016.

 

The Company will pay interest on amounts outstanding from time to time under the Term Loan at a rate per annum equal to 7.50%, however, such rate may be increased to 9.50% per annum if fixed price contracts (as defined under the Term Loan Agreement) or certain accounts receivable of the Company and its subsidiaries exceed percentages specified in the Term Loan Agreement.

 

Also, contemporaneous with its entry into the Term Loan Agreement, the Company entered into a Fee Letter.  The Fee Letter requires the Company to pay to the Lenders an exit fee (the “Exit Fee”), which fee shall be earned in full on the Closing Date and due and payable on the date the Term Loan is paid in full (the “Exit Date”).  “Exit Fee” means the amount, if any, when paid to the Term Loan Lenders on the Exit Date, that will result in the internal annual rate of return to the Term Loan Lenders on the Exit Date being equal to, but no greater than, 20%; provided that in no event shall the Exit Fee Amount be less than $0 or greater than $11,790,000.  The IRR is to be calculated as the rate of return earned by the Term Loan Lenders on their initial investment in the Term Loan (to be calculated as the principal amount of the Term Loan less the Closing Fee of $25,000,000) through the Exit Date taking into account the payment by the Company to the

 

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Term Loan Lenders of all principal, interest and other payments to the Term Loan Lenders pursuant to the Term Loan Agreement.

 

At June 30, 2014, the Company was in compliance with all of the Term Loan covenants.

 

Revolving Credit Agreement

 

The Company entered into a Credit Agreement, dated June 30, 2009 (the “Credit Agreement”), with Bank of America, N.A., Capital One, N.A., The PrivateBank and Trust Company, PNC Bank N.A. (the “Lenders”), and Bank of America, N.A., as Administrative Agent (the “Agent”).  On May 23, 2013, the Company entered into a Fourth Amendment to Credit Agreement pursuant to which, among other things, the Lenders agreed to :  (a) permit the Company to enter into an agreement with Qatar National Bank for the issuance of letters of credit (“LCs”) not to exceed $17,000,000, (b) increase the limit on LCs available to the Company’s foreign subsidiaries who are not loan parties from $4,000,000 to $11,800,000 and (c) permit the Company to provide up to $20,000,000 as cash collateral for letters of credit and performance bonds.  On July 25, 2014, the Company entered into a Fifth Amendment and Limited Waiver to Credit Agreement pursuant to which the Lenders agreed, among other things, to permit the Company to sell its common stock through a follow-on offering (see Note 16) resulting in receipt by the Company of net proceeds aggregating not less than $30,000,000.

 

The following tables set forth the requirements for the consolidated leverage ratio, consolidated fixed charge ratio and the senior leverage ratio as of June 30, 2014:

 

Consolidated Leverage Ratio

 

Consolidated Fixed Charge Ratio

 

Senior Leverage Ratio

 

Not to exceed 5.75 to 1.00

 

Not less than 1.15 to 1.00

 

Not to exceed 2.25 to 1.00

 

 

The following table presents the Company’s actual ratios at June 30, 2014:

 

 

 

 

 

 

Consolidated Leverage Ratio

 

Consolidated Fixed Charge Ratio

 

Senior Leverage Ratio

 

4.41 to 1.00

 

1.46 to 1.00

 

1.84 to 1.00

 

 

At June 30, 2014, the Company had $19,530,000 in outstanding letters of credit.  Due to conditions of the Credit Facility, as amended, total remaining availability was $2,870,000.

 

The maturity date of the Credit Agreement is March 31, 2015. Accordingly, the Company has classified all borrowings under the Credit Agreement as current in the consolidated balance sheet at June 30, 2014.

 

Other Debt Arrangements

 

The Company’s subsidiary, Hill International (Spain) S.A. (“Hill Spain”), maintains a revolving credit facility with 12 banks (the “Financing Entities”) in Spain providing for total borrowings, with interest at 6.50%, of up to €5,640,000 (approximately $7,695,000 at June 30, 2014). At June 30, 2014, total borrowings outstanding were €5,528,000 (approximately $7,542,000). The amount being financed (“Credit Contracts”) by each Financing Entity is between €156,000 (approximately $213,000) and €689,000 (approximately $940,000). The facility expires on December 17, 2016. The maximum available amount will be reduced to 75.0% at December 31, 2014 and to 50.0% at December 31, 2015. To guarantee Hill Spain’s obligations resulting from the Credit Contracts, Hill Spain provided a guarantee in favor of each one of the Financing Entities, which, additionally, and solely in the case of unremedied failure to make payment, and at the request of each of the Financing Entities, shall grant a first ranking pledge over a given percentage of corporate shares of Hill International Brasil Participacoes Ltda. for the principal, interest, fees, expenses or any other amount owed by virtue of the Credit Contracts, coinciding with the percentage of credit of each Financing Entity with respect to the total outstanding borrowings under this facility.

 

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Hill Spain maintains an unsecured credit facility with the Caja Badajoz bank in Spain for €800,000 (approximately $1,091,000) at June 30, 2014.  The interest rate at June 30, 2014 was 7.50%. At June 30, 2014, total borrowings outstanding were €800,000 (approximately $1,091,000).  The facility expires on December 23, 2014.

 

The Company maintains a credit facility with the National Bank of Abu Dhabi which provides for total borrowings of up to AED 11,500,000 (approximately $3,131,000 at June 30, 2014) collateralized by certain overseas receivables. The interest rate is the one-month Emirates InterBank Offer Rate plus 3.50% (or 4.70% at June 30, 2014) but no less than 5.50%. At June 30, 2014, total borrowings outstanding were AED 3,364,000 (approximately $916,000). This facility also allows for to AED 127,033,000 (approximately $34,589,000 at June 30, 2014) in Letters of Guarantee of which AED 122,577,000 (approximately $33,375,000) were utilized at June 30, 2014. This facility is being renewed on a month-to-month basis.

 

The Company maintains a credit facility with Egnatia Bank that allows for letters of guarantee up to €4,500,000 (approximately $6,139,000 at June 30, 2014), of which €2,180,000 (approximately $2,974,000) had been utilized at June 30, 2014.  The facility expires on April 30, 2018.

 

Engineering S.A. maintains three unsecured revolving credit facilities with two banks in Brazil aggregating 2,900,000 Brazilian Reais (BR) (approximately $1,316,000 at June 30, 2014), with a weighted average interest rate of 3.32% per month at June 30, 2014.  There were no borrowings outstanding on any of these facilities which are renewed automatically every three months.

 

The Company maintains a revolving credit facility with Barclays Bank PLC up to £550,000 (approximately $937,000 at June 30, 2014), with interest rates of 2.00% at June 30, 2014, collateralized by cross guarantees of several of the United Kingdom companies.  Aggregate of all debt owing to the bank will be, at all times, covered 3 times by the aggregate value of the UK accounts receivable less than 90 days old and excluding any receivables which are due from any associate, subsidiary or overseas client. There were no borrowings outstanding under this facility at June 30, 2014. This facility is on demand with no fixed expiration date. It is subject to an annual review on September 12, 2014.

 

At June 30, 2014, the Company had $4,621,000, of available borrowing capacity under its foreign credit agreements.

 

The Company also maintains relationships with other foreign banks for the issuance of letters of credit, letters of guarantee and performance bonds in a variety of foreign currencies.  At June 30, 2014, the maximum U.S. dollar equivalent of the commitments was $62,017,000 of which $17,307,000 is outstanding.

 

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Note 8 — Supplemental Cash Flow Information

 

The following table provides additional cash flow information (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

Interest and related financing fees paid

 

$

7,097

 

$

5,717

 

Income taxes paid

 

$

6,616

 

$

5,386

 

Reduction of noncontrolling interest in connection with acquisition of an additional interest in Engineering S.A.

 

$

(2,649

)

$

 

Increase in additional paid in capital from issuance of shares of common stock related to purchase of CPI

 

$

618

 

$

 

Increase in additional paid in capital from issuance of shares common stock from cashless exercise of stock options

 

$

538

 

$

 

Reduction of noncontrolling interest in connection with acquisition of remaining noncontrolling interest in Hill Spain

 

$

 

$

(1,094

)

Increase in intangible assets and goodwill in connection with acquisition of BCA and remaining noncontrolling interest in Hill Spain

 

$

 

$

3,026

 

Common stock issued for acquisition of BCA

 

$

 

$

1,072

 

 

Note 9 — Earnings per Share

 

Basic earnings per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share incorporates the incremental shares issuable upon the assumed exercise of stock options, if dilutive.  Dilutive stock options increased the average common stock outstanding by approximately 2,023,000 shares for the three-month period ended June 30, 2014 and by approximately 1,386,000 shares for the six-month period ended June 30, 2014. Options to purchase 1,355,000 shares and 2,034,000 shares were excluded from the calculation of diluted earnings (loss) per common share for the three- and six-month periods ended June 30, 2014 because they were antidilutive.  Stock options were excluded from the calculation of diluted loss per common share because their effect was antidilutive for both of the three-and six-month periods ended June 30, 2013.  The total number of such shares excluded from diluted loss per common share was 5,547,000 shares for the three-month period ended June 30, 2013 and 5,303,000 shares for the six-month period ended June 30, 2013.

 

Note 10 — Share-Based Compensation

 

At June 30, 2014, the Company had 7,518,620 options outstanding with a weighted average exercise price of $4.59.  During the six-month period ended June 30, 2014, the Company granted     500,000 options which vest over a four-year period, have an exercise price of $4.35 and a contractual life of 5 years; 1,285,000 options which vest over a five-year period, have a weighted average exercise price of $4.56 and a contractual life of seven years; and 63,870 options which vested immediately, have an exercise price of $6.61 and a contractual live of five years. The aggregate fair value of the options was $4,210,000 calculated using the Black-Scholes valuation model.  The weighted average assumptions used to calculate fair value were: expected life — 4.59 years; volatility — 62.85% and risk-free interest rate — 1.67%. During the first six months of 2014, options for 480,406 shares with a weighted average exercise price of $2.95 were exercised and options for 424,000 shares with a weighted average exercise price of $7.67 lapsed.

 

During the six-month period ended June 30, 2014, the Company issued 26,475 shares of its common stock to its Non-Employee Directors. The Company recognized compensation expense amounting to $175,000.

 

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During the six-month period ended June 30, 2014, employees purchased 12,136 common shares, for an aggregate purchase price of $54,000, pursuant to the Company’s 2008 Employee Stock Purchase Plan.

 

The Company recognized share-based compensation expense in selling, general and administrative expenses in the consolidated statement of operations totaling $1,129,000    and $973,000 for the three-month periods ended June 30, 2014 and 2013, respectively, and $1,927,000 and $1,583,000 for the six-month periods ended June 30, 2014 and 2013, respectively.

 

Note 11 — Stockholders’ Equity

 

The following table summarizes the changes in stockholders’ equity during the six months ended June 30, 2014 (in thousands):

 

 

 

 

 

Hill International,

 

Noncontrolling

 

 

 

Total

 

Inc. Stockholders

 

Interests

 

Stockholders’ equity, December 31, 2013

 

$

143,031

 

$

131,144

 

$

11,887

 

Net earnings

 

2,309

 

1,571

 

738

 

Other comprehensive earnings

 

2,971

 

2,784

 

187

 

Comprehensive earnings

 

5,280

 

4,355

 

925

 

Additional paid in capital

 

4,015

 

4,015

 

 

Acquisition of additional interest in Engineering S. A.

 

(3,556

)

(907

)

(2,649

)

Treasury stock acquired

 

(538

)

(538

)

 

Stockholders’ equity, June 30, 2014

 

$

148,232

 

$

138,069

 

$

10,163

 

 

In February 2014, the Company issued 171,308 shares of its common stock aggregating $618,000 to the former shareholders of Collaborative Partners, Inc. as payment for equity in excess of that required under the acquisition agreement.

 

In March 2014, the Company’s Chairman and Chief Executive Officer exercised 200,000 options with an exercise price of $2.70 through the Company on a cashless basis.  The Company withheld 112,788 shares as payment for the options and placed those shares in treasury stock.  The Chairman and Chief Executive Office received 87,212 shares from this transaction.

 

During the six months ended June 30, 2014, the Company received cash proceeds of $877,000 from the exercise of stock options.

 

On August 6, 2014, the Company sold 9,546,629 shares of its common stock in an underwritten equity offering.  See Note 16 for further information.

 

Note 12 — Income Taxes

 

The effective tax rates for the three-month periods ended June 30, 2014 and 2013 were 33.0% and 64.3%, respectively, and 41.3% and 76.1% for the six-month periods ended June 30, 2014 and 2013, respectively.  The Company’s effective tax rate represents the Company’s effective tax rate for the year based on projected income and mix of income among the various foreign tax jurisdictions, adjusted for discrete transactions occurring during the period.  The difference in the Company’s 2014 effective tax rate compared to the 2013 effective tax rate was primarily related to the $2,514,000 reversal of the reserve for uncertain tax positions in 2014 discussed below. The Company also recognized an income tax expense resulting from adjustments to agree the prior year’s book amounts to the actual amounts per the tax returns totaling $44,000 and $0 for the three-month periods ending June 30, 2014 and 2013, respectively, and $44,000 and $145,000 for the six-month periods ended June 30, 2014 and 2013, respectively. If the discrete transactions noted

 

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previously were excluded, the Company’s effective tax rate would have been higher in both years primarily as a result of not recording an income benefit related to the U.S. net operating loss.

 

The components of earnings (loss) before income taxes and the related income tax expense by United States and foreign jurisdictions were as follows (in thousands):

 

 

 

Three Months Ended June 30, 2014

 

Three Months Ended June 30, 2013

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income taxes

 

$

(10,791

)

$

13,800

 

$

3,009

 

$

(8,073

)

$

11,632

 

$

3,559

 

Income tax expense, net

 

$

 

$

993

 

$

993

 

$

 

$

2,288

 

$

2,288

 

 

 

 

Six Months Ended June 30, 2014

 

Six Months Ended June 30, 2013

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income taxes

 

$

(21,672

)

$

25,605

 

$

3,933

 

$

(17,829

)

$

23,300

 

$

5,471

 

Income tax expense, net

 

$

 

$

1,624

 

$

1,624

 

$

 

$

4,162

 

$

4,162

 

 

The reserve for uncertain tax positions amounted to $840,000 and $2,933,000 at June 30, 2014 and December 31, 2013, respectively, and is included in “Other liabilities” in the consolidated balance sheet at those dates. During the three-month period ended June 30, 2014, the reserve for uncertain tax positions was reduced by $2,514,000 based on management’s assessment that these items were effectively settled with the appropriate foreign tax authorities. During the six-month period ended June 30, 2014, the Company also reclassified $420,000 from  “Income taxes payable” to the reserve for uncertain tax positions primarily due to tax positions taken in foreign jurisdictions. During the three- and six-month periods ended June 30, 2013, there were no changes in the reserve for uncertain tax positions.

 

The Company’s policy is to record income tax related interest and penalties in income tax expense. At June 30, 2014, potential interest and penalties related to uncertain tax positions amounting to $592,000 was included in the balance above.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC740,  Income Taxes. They consider both positive and negative evidence. In making this determination, management assesses all of the evidence available at the time including recent earnings, internally-prepared income projections, and historical financial performance.

 

Note 13 — Business Segment Information

 

The Company’s business segments reflect how executive management makes resource decisions and assesses its performance. The Company bases these decisions on the type of services provided (Project Management and Construction Claims) and secondarily by their geography (U.S./Canada, Latin America, Europe, the Middle East, Africa and Asia/Pacific).

 

The Project Management business segment provides extensive construction and project management services to construction owners worldwide. Such services include program management, project management, construction

 

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management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, and labor compliance services.

 

The Construction Claims business segment provides such services as claims consulting, management consulting, litigation support, expert witness testimony, cost/damages assessment, delay/disruption analysis, adjudication, lender advisory, risk management, forensic accounting, fraud investigation and Project Neutral services to clients worldwide.

 

The Company evaluates the performance of its segments primarily on operating profit before corporate overhead allocations and income taxes.

 

The following tables reflect the required disclosures for the Company’s reportable segments (in thousands):

 

Consulting Fee Revenue (“CFR”)

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

108,521

 

75.1

%

$

98,979

 

77.1

%

Construction Claims

 

35,994

 

24.9

 

29,448

 

22.9

 

Total

 

$

144,515

 

100.0

%

$

128,427

 

100.0

%

 

Total Revenue:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

122,044

 

76.4

%

$

117,588

 

79.2

%

Construction Claims

 

37,595

 

23.6

 

30,876

 

20.8

 

Total

 

$

159,639

 

100.0

%

$

148,464

 

100.0

%

 

Operating Profit:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Project Management

 

$

13,218

 

$

13,334

 

Construction Claims

 

3,054

 

3,384

 

Corporate

 

(7,617

)

(6,878

)

Total

 

$

8,655

 

$

9,840

 

 

Depreciation and Amortization Expense:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Project Management

 

$

1,720

 

$

1,910

 

Construction Claims

 

663

 

693

 

Subtotal segments

 

2,383

 

2,603

 

Corporate

 

54

 

54

 

Total

 

$

2,437

 

$

2,657

 

 

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Table of Contents

 

Consulting Fee Revenue by Geographic Region:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

31,708

 

21.9

%

$

31,914

 

24.8

%

Latin America

 

11,064

 

7.7

 

11,613

 

9.0

 

Europe

 

18,948

 

13.1

 

19,948

 

15.5

 

Middle East

 

68,867

 

47.7

 

53,662

 

41.8

 

Africa

 

6,020

 

4.2

 

5,408

 

4.2

 

Asia/Pacific

 

7,908

 

5.4

 

5,882

 

4.7

 

Total

 

$

144,515

 

100.0

%

$

128,427

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

30,846

 

21.3

%

$

30,919

 

24.1

%

Non-U.S.

 

113,669

 

78.7

 

97,508

 

75.9

 

Total

 

$

144,515

 

100.0

%

$

128,427

 

100.0

%

 

For the three-month period ended June 30, 2014, consulting fee revenue for the United Arab Emirates amounted to $17,229,000 representing 11.9% of the total and Oman’s consulting fee revenue amounted to $18,420,000 representing 12.7% of the total.  No other country other than the United States accounted for 10% or more of consolidated consulting fee revenue.

 

For the three-month period ended June 30, 2013, consulting fee revenue for the United Arab Emirates amounted to $16,557,000 representing 12.9% of the total and Oman’s consulting fee revenue amounted to $12,896,000 representing 10.0% of the total. No other country except for the United States accounted for 10% or more of consolidated consulting fee revenue.

 

Total Revenue by Geographic Region:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

42,693

 

26.7

%

$

47,557

 

32.0

%

Latin America

 

11,126

 

7.0

 

11,726

 

7.9

 

Europe

 

20,058

 

12.6

 

21,128

 

14.2

 

Middle East

 

70,629

 

44.2

 

55,380

 

37.3

 

Africa

 

6,940

 

4.3

 

6,630

 

4.5

 

Asia/Pacific

 

8,193

 

5.2

 

6,043

 

4.1

 

Total

 

$

159,639

 

100.0

%

$

148,464

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

41,761

 

26.2

%

$

46,505

 

31.3

%

Non-U.S.

 

117,878

 

73.8

 

101,959

 

68.7

 

Total

 

$

159,639

 

100.0

%

$

148,464

 

100.0

%

 

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For the three-month period ended June 30, 2014, total revenue for the United Arab Emirates amounted to $17,539,000 representing 11.0% of the total and Oman’s total revenue amounted to $18,804,000 representing 11.8% of the total.  No other country except for the United States accounted for 10% or more of consolidated consulting fee revenue.

 

For the three-month period ended June 30, 2013, total revenue for the United Arab Emirates amounted to $17,104,000 representing 11.5% of the total.  No other country other than the United States accounted for 10% or more of consolidated consulting fee revenue.

 

Consulting Fee Revenue By Client Type:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

3,242

 

2.2

%

$

4,074

 

3.2

%

U.S. state, regional and local governments

 

18,698

 

12.9

 

19,065

 

14.8

 

Foreign governments

 

57,527

 

39.8

 

43,453

 

33.8

 

Private sector

 

65,048

 

45.1

 

61,835

 

48.2

 

Total

 

$

144,515

 

100.0

%

$

128,427

 

100.0

%

 

Total Revenue By Client Type:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

4,018

 

2.5

%

$

4,842

 

3.3

%

U.S. state, regional and local governments

 

24,729

 

15.5

 

27,074

 

18.2

 

Foreign governments

 

59,919

 

37.5

 

45,694

 

30.8

 

Private sector

 

70,973

 

44.5

 

70,854

 

47.7

 

Total

 

$

159,639

 

100.0

%

$

148,464

 

100.0

%

 

Property, Plant and Equipment, Net by Geographic Location:

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

U.S./Canada

 

$

3,501

 

$

3,837

 

Latin America

 

1,643

 

1,351

 

Europe

 

1,924

 

2,575

 

Middle East

 

3,411

 

2,167

 

Africa

 

241

 

182

 

Asia/Pacific

 

440

 

501

 

Total

 

$

11,160

 

$

10,613

 

 

 

 

 

 

 

U.S.

 

$

3,501

 

$

3,837

 

Non-U.S.

 

7,659

 

6,776

 

Total

 

$

11,160

 

$

10,613

 

 

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Table of Contents

 

Consulting Fee Revenue (“CFR”)

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

210,309

 

74.6

%

$

193,977

 

77.3

%

Construction Claims

 

71,455

 

25.4

 

57,006

 

22.7

 

Total

 

$

281,764

 

100.0

%

$

250,983

 

100.0

%

 

Total Revenue

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

235,213

 

76.0

%

$

225,167

 

79.1

%

Construction Claims

 

74,439

 

24.0

 

59,370

 

20.9

 

Total

 

$

309,652

 

100.0

%

$

284,537

 

100.0

%

 

Operating Profit:

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Project Management

 

$

24,161

 

$

25,690

 

Construction Claims

 

5,672

 

5,823

 

Corporate

 

(15,178

)

(14,274

)

Total

 

$

14,655

 

$

17,239

 

 

Depreciation and Amortization Expense:

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Project Management

 

$

3,419

 

$

3,736

 

Construction Claims

 

1,337

 

1,341

 

Subtotal segments

 

4,756

 

5,077

 

Corporate

 

108

 

119

 

Total

 

$

4,864

 

$

5,196

 

 

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Consulting Fee Revenue by Geographic Region:

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

60,999

 

21.6

%

$

61,275

 

24.4

%

Latin America

 

21,812

 

7.7

 

25,171

 

10.0

 

Europe

 

39,387

 

14.0

 

39,562

 

15.8

 

Middle East

 

132,002

 

46.8

 

104,477

 

41.6

 

Africa

 

12,284

 

4.4

 

9,430

 

3.8

 

Asia/Pacific

 

15,280

 

5.5

 

11,068

 

4.4

 

Total

 

$

281,764

 

100.0

%

$

250,983

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

59,224

 

21.0

%

$

59,458

 

23.7

%

Non-U.S.

 

222,540

 

79.0

 

191,525

 

76.3

 

Total

 

$

281,764

 

100.0

%

$

250,983

 

100.0

%

 

For the six-month period ended June 30, 2014, consulting fee revenue for the United Arab Emirates amounted to $33,719,000 representing 12.0% of the total and Oman’s consulting fee revenue amounted to $34,077,000 representing 12.1% of the total.  No other country except the United States accounted for 10% or more of consolidated consulting fee revenue.

 

For the six-month period ended June 30, 2013, consulting fee revenue for the United Arab Emirates amounted to $34,468,000 representing 13.7% of the total. No other country except for the United States accounted for 10% or more of the consolidated consulting fee revenue.

 

Total Revenue by Geographic Region:

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

78,323

 

25.3

%

$

87,226

 

30.7

%

Latin America

 

22,042

 

7.1

 

25,363

 

8.9

 

Europe

 

41,894

 

13.5

 

41,800

 

14.7

 

Middle East

 

137,473

 

44.4

 

107,688

 

37.8

 

Africa

 

14,096

 

4.6

 

11,096

 

3.9

 

Asia/Pacific

 

15,824

 

5.1

 

11,364

 

4.0

 

Total

 

$

309,652

 

100.0

%

$

284,537

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

76,502

 

24.7

%

$

85,325

 

30.0

%

Non-U.S.

 

233,150

 

75.3

 

199,212

 

70.0

 

Total

 

$

309,652

 

100.0

%

$

284,537

 

100.0

%

 

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For the six-month period ended June 30, 2014, total revenue for the United Arab Emirates amounted to $34,240,000 representing 11.1% of the total and Oman’s total revenue amounted to $36,813,000 representing 11.9% of the total.  No other country except for the United States accounted for 10% or more of consolidated consulting fee revenue.

 

For the six-month period ended June 30, 2013, total revenue for the United Arab Emirates amounted to $35,358,000 representing 12.4% of the total.  No other country except for the United States accounted for 10% or more of consolidated consulting fee revenue.

 

Consulting Fee Revenue By Client Type:

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

6,607

 

2.3

%

$

7,891

 

3.1

%

U.S. state, regional and local governments

 

35,040

 

12.4

 

34,820

 

13.9

 

Foreign governments

 

110,964

 

39.4

 

82,092

 

32.7

 

Private sector

 

129,153

 

45.9

 

126,180

 

50.3

 

Total

 

$

281,764

 

100.0

%

$

250,983

 

100.0

%

 

Total Revenue By Client Type:

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

7,870

 

2.5

%

$

9,182

 

3.2

%

U.S. state, regional and local governments

 

45,829

 

14.8

 

51,921

 

18.2

 

Foreign governments

 

117,665

 

38.0

 

85,926

 

30.2

 

Private sector

 

138,288

 

44.7

 

137,508

 

48.4

 

Total

 

$

309,652

 

100.0

%

$

284,537

 

100.0

%

 

Note 14 — Client Concentrations

 

The Company had one client, located in Oman, that accounted for 11% of total revenue and 12% of consulting fee revenue during the three-month period ended June 30, 2014.  No other client accounted for 10% or more of total revenue or consulting fee revenue for the three-month period ended June 30, 2013.

 

The Company had one client, located in Oman, that accounted for 10% of total revenue and 11% of consulting fee revenue for the six-month period ended June 30, 2014.  No other client accounted for 10% or more of total revenue or consulting fee revenue for the six-month period ended June 30, 2013.

 

One client, located in Libya, accounted for 21% and 25% of accounts receivable at June 30, 2014 and December 31, 2013.

 

The Company has numerous contracts with U.S. federal government agencies that collectively accounted for 3% of total revenue during each of the three-month periods ended June 30, 2014 and 2013 and 3% of total revenue during each of the six-month periods ended June 30, 2014 and 2013.

 

Note 15 — Commitments and Contingencies

 

General Litigation

 

M.A. Angeliades, Inc. (“Plaintiff”) has filed a complaint with the Supreme Court of New York against the Company and the New York City Department of Design and Construction (“DDC”) regarding payment of approximately $8,771,000 for work performed as a subcontractor to the Company plus interest and other cost. The Company has accrued approximately

 

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$2,340,000, including interest of $448,000, based on invoices received from Plaintiff who has refused to provide invoices for additional work that Plaintiff claims to have performed. Until such time as the Company obtains invoices for the additional work and is able to provide those invoices to DDC for reimbursement or there is a full resolution of the litigation, it has no intention of paying Plaintiff. The Company believes that its position is defensible, however, there can be no assurance that it will receive a favorable verdict should this case proceed to trial.

 

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.

 

Acquisition—Related Contingencies

 

Hill Spain acquired an indirect 60% interest in Engineering S.A. (“ESA”), a firm located in Brazil.  ESA’s shareholders entered into an agreement whereby the minority shareholders have a right to compel (“ESA Put Option”) Hill Spain to purchase any or all of their shares during the period from February 28, 2014 to July 31, 2021.  Hill Spain also has the right to compel (“ESA Call Option”) the minority shareholders to sell any or all of their shares during the same time period.  The purchase price for such shares shall be seven times the earnings before interest and taxes for ESA’s most recently ended fiscal year, net of any financial debt plus excess cash multiplied by a percentage which the shares to be purchased bear to the total number of shares outstanding at the time of purchase, but in the event the ESA Call Option is exercised by Hill Spain, the purchase price shall be increased by five percent.  The ESA Put Option and the ESA Call Option must be made within three months after the audited financial statements of ESA have been completed.  In April 2014, two of the minority shareholders exercised their ESA Put Option whereby Hill Spain will pay approximately 7,838,000 Brazilian Reais (approximately $3,556,000 at June 30, 2014).  After the transaction is completed, Hill Spain will own approximately 72% of ESA.  Payment of the liability is expected in late August 2014.  In accordance with the guidance in ASC 810-10-45-23, under Changes in the Parent’s Ownership Interest in a Subsidiary When There Is No Change in Control , the Company has accounted for this transaction as an equity transaction.  Accordingly, Hill Spain accrued the liability of 7,838,000 Brazilian Reais which is in other current liabilities, reduced noncontrolling interests by 5,839,000 Brazilian Reais (approximately $2,649,000), and reduced additional paid in capital by approximately 1,999,000 Brazilian Reais (approximately $907,000) which represents the excess of the fair value over the amount of the adjustment to noncontrolling interests.

 

The Company is committed to issue shares of its common stock to the former shareholders of BCA in satisfaction of the Third Tranche Payment, the amount of which will be determined in late August 2014.

 

The Company is committed to issue shares of its common stock to the former shareholders of CPI for certain contingent consideration.  The number of shares will be determined at various times during 2014.  In connection therewith, on March 7, 2014, the Company issued 171,308 shares of its common stock with a value of $618,000 representing CPI’s common equity in excess of $600,000.

 

Note 16 — Subsequent Events

 

Amendments to Credit Facilities

 

On July 25, 2014, the Company entered into a Second Amendment and Limited Waiver to Credit Agreement for its existing Term Loan and a Fifth Amendment and Limited Waiver to Credit Agreement for its existing Revolving Credit Agreement.  Under these amendments, the Lenders agreed, among other things, to permit the Company to sell its common stock through a follow-on offering resulting in receipt by the Company of net proceeds aggregating not less than $30,000,000.

 

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Follow-On Equity Offering

 

On August 6, 2014, the Company sold 9,546,629 shares of its common stock at $4.25 per share, less an underwriting discount, in an underwritten equity offering which raised gross proceeds of approximately $40,573,000.  Included in this transaction are 1,046,629 shares of common stock out of a total 1,275,000 common shares available from the underwriters’ overallotment option.  After the underwriting discount and expenses of the offering, the Company received net proceeds aggregating approximately $38,090,000.  As required under the Commitment Letter regarding the Secured Credit Facilities (see below), the Company intends to keep $10,000,000 of the net proceeds of the offering as cash or cash equivalents until the closing of the Secured Credit Facilities and use the balance of the net proceeds to repay certain of its obligations and repay a portion of outstanding borrowings under its Existing Credit Agreement and Existing Term Loan.  Upon the closing of the Secured Credit Facilities, the Company intends to use the above-referenced $10,000,000 of the net proceeds of the offering for general working capital purposes.

 

Debt Refinancing

 

On June 12, 2014, the Company and its subsidiary Hill International N.V.(the “Subsidiary”) and together with the Company, the “Borrowers,” entered into a Commitment Letter with Société Générale (the “Agent”) and SG Americas Securities, LLC (the “Arranger”) and together with the Agent and any other entity that becomes a lender under the Secured Credit Facilities (as described below), the “Lenders,” pursuant to which the Arranger and the Agent committed, subject to the conditions and other terms and provisions of the Commitment Letter, to provide secured debt facilities to the Company in an aggregate principal amount of $165,000,000.

 

The debt facilities would consist of (i) a term loan facility of $120,000,000 (the “Term Loan Facility”), and (ii) revolving credit facilities totaling $45,000,000 consisting of: (A) a $30,000,000 U.S. dollar-denominated facility to be made available to the Company ( the “U.S. Revolver”) and (B) a $15,000,000 Euro-denominated facility to be made available to Subsidiary (the “International Revolver”) and together with the U.S. Revolver, the “Revolving Credit Facilities” and, together with the Term Loan Facility, the “Secured Credit Facilities.” The Revolving Credit Facilities would include a $35,000,000 sub-limit for letters of credit with $25,000,000 allocated to the U.S. Revolver and $10,000,000 allocated to the International Revolver.  The commitment is subject to the satisfaction of all specified conditions on or before September 10, 2014 and is currently expected to close during August 2014.

 

The Company would be required to use the proceeds from the Term Loan Facility:

 

·                                           for consummating the payoff and termination of its existing credit arrangements (the “Refinancing”) which consist of the Credit Agreement, dated as of October 18, 2012, among the Company, certain lenders and Obsidian Agency Services, Inc., as amended, (the “Existing Term Loan”) and the Credit Agreement, dated as of June 30, 2009, among the Company, Bank of America, N.A. and certain other lenders, as amended (the “Existing Credit Agreement”);

·                                           to pay fees and expenses incurred in connection with the Secured Credit Facilities; and

·                                           thereafter for general corporate purposes.

 

The Company would be required to use the proceeds from the Revolving Credit Facilities:

 

·                                           for the Refinancing;

·                                           to finance the working capital needs and general corporate purposes of the Borrowers and their subsidiaries;

·                                           to pay fees and expenses incurred in connection with the Secured Credit Facilities; and

·                                           for any other purposes not prohibited by the Secured Credit Facilities.

 

The Term Loan Facility would have a term of six years, require repayment of 1.0% of the original principal amount annually for the first five years and be fully funded upon closing. Any amounts repaid on the Term Loan Facility would not be available to be re-borrowed. The Revolving Credit Facilities would have a term of five years and require payment of interest only during the term. Under the Revolving Credit Facilities, outstanding loans would be able to be repaid in whole or in part at any time, without premium or penalty (except customary breakage costs), subject to certain customary limitations, and would be available to be reborrowed from time to time.

 

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The interest rate on the Term Loan Facility would be, at the Borrower’s option (subject to customary provisions or limitations), either:

 

·                                           the London Inter-Bank Offered Rate, or “LIBOR,” for the relevant interest period plus a range of 6.50% to 6.75% per annum, provided that such LIBOR shall not be lower than 1.00% per annum; or

·                                           a Base Rate (as described below) plus a range of 5.50% to 5.75% per annum.

 

The interest rate on borrowings under the U.S. Revolver would be, at the Borrower’s option (subject to customary provisions or limitations), either:

 

·                                           the LIBOR for the relevant interest period plus 3.75% per annum; or

·                                           a Base Rate (as described below) plus 2.75% per annum.

 

The interest rate on borrowings under the International Revolver would be, at the Borrower’s option (subject to customary provisions or limitations), either:

 

·                                           the European Inter-Bank Offered Rate, or “EURIBOR,” for the relevant interest period plus 4.00% per annum; or

·                                           a Base Rate (as described below) plus 3.00% per annum.

 

The “Base Rate” is the highest of (A) the prime rate, (B) the federal funds effective rate plus 0.5%, or (C) the LIBOR for an interest period of one month plus 1.0% per annum. Upon a default, the applicable rate of interest under the Secured Credit Facilities may increase by 2.0%.  The LIBOR on the Term Loan Facilities (including when determining the Base Rate) shall in no event be less than 1.0%.

 

The Borrowers would pay a commitment fee calculated from and after the closing date at 0.50% annually on the average daily unused portion of the U.S. Revolver and 0.75% annually on the average daily unused portion of the International Revolver.

 

The ability to borrow under each of the U.S. Revolver and the International Revolver would be subject to a “borrowing base,” calculated using a formula based upon approximately 85% of receivables that meet or satisfy certain criteria (“Eligible Receivables”) that are subject to a perfected security interest, plus, in the case of the International Revolver only, 10% of Eligible Receivables that are not subject to a perfected security interest, subject to certain exceptions and restrictions.

 

The Term Loan Facility and the U.S. Revolver would be guaranteed by the U.S. subsidiaries of the Company (subject to certain limitations), and the International Revolver would be guaranteed by the Company and the Company’s U.S. and non-U.S. subsidiaries (subject to certain limitations).

 

The Term Loan Facility would generally be secured by a first-priority security interest in substantially all assets of the Company and the Company’s U.S. subsidiaries (subject to certain limitations) other than accounts receivable and bank accounts, as to which the Term Loan Facility will be secured by a second-priority security interest.  Generally, the obligations of the Borrowers under the U.S. Revolver would be secured by a first-priority security interest in the accounts receivable and bank accounts of the Company and the Company’s U.S. subsidiaries (subject to certain limitations), and a second-priority security interest in substantially all other assets of the Company and the Company’s U.S. subsidiaries (subject to certain limitations).  The obligations of the Subsidiary under the International Revolver generally would be secured by a first-priority security interest in the accounts receivable and bank accounts of the Subsidiary and the Company’s non-U.S. subsidiaries (subject to certain limitations), and a second-priority security interest in substantially all other assets of the Company and the Company’s U.S. and non-U.S. subsidiaries (subject to certain limitations).

 

The Company would have the right to prepay the Term Loan Facility in full or in part at any time without premium or penalty (except customary breakage costs); provided, however, that upon the occurrence of prepayments relating to certain repricing transactions (as well as certain other repricing transactions) within the first year following closing, a 1% prepayment premium would be payable. The Company would be required to make mandatory prepayments of the Term Loan Facility without premium or penalty (except customary breakage costs) (i) with net proceeds of any issuance or incurrence of indebtedness by the Company after the closing, (ii) with net proceeds from certain asset sales outside the ordinary course of business, and (iii) with 50% of the excess cash flow for each fiscal year of the Borrowers commencing

 

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with the first full fiscal year ending after closing which may be stepped down upon the achievement and maintenance of certain metrics; provided, however, that upon the occurrence any repricing transaction in respect of certain mandatory prepayments within the first year following closing, a 1% prepayment premium would be payable.  The Company or the Subsidiary, as applicable, would be required to make mandatory prepayments of their respective Revolving Credit Facilities to the extent that the aggregate outstanding amount thereunder would exceed the then-applicable borrowing base, which payments would be made without penalty or premium (except customary breakage costs).

 

There are a number of conditions to the Lenders’ obligation to provide the Secured Credit Facilities, including the Refinancing and the documentation of the Secured Credit Facilities.

 

The Secured Credit Facilities would also contain customary default provisions, representations and warranties, and restrictive covenants.  The Secured Credit Facilities will also require the Company to comply with a consolidated total leverage ratio.

 

Notwithstanding the foregoing, within sixty days of the closing date of the Secured Credit Facilities, the Arranger may exercise certain customary rights to change the proposed terms, including the ability to increase the interest rates.  Thus, while the above is a summary of the expected terms of the Secured Credit Facilities, final terms of the Secured Credit Facilities may differ from those set forth above, and, in certain circumstances, these differences may be significant.

 

The Company currently anticipates that closing of the new Secured Credit Facilities and the Refinancing will occur in August 2014; however the Company cannot provide assurance that either the closing of the new Secured Credit Facilities or the Refinancing will be completed. If the Refinancing does occur, the Company will incur for the three- and nine-month periods ending September 30, 2014 a one-time interest charge amounting to approximately $11,279,000 for the difference between the face value and the accreted value of its Existing Term Loan plus $1,502,000 due to the write-off of deferred financing costs associated with the Existing Credit Agreement and the Existing Term Loan.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

We make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use forward-looking works such as “may,” “except,” “anticipate,” “contemplate,” “believe,” “estimate,” “intend,” and “continue” or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other “forward-looking” information. However, there may be events in the future that we are not able to predict accurately or over which we have no control. Examples or risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in such forward-looking statements include those described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 14, 2014 (the “2013 Annual Report”). You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. All forward-looking statements included herein attributable to use are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligations to update these forward-looking statements.

 

References to “the Company,” “we,” “us,” and “our” refer to Hill International, Inc. and its subsidiaries.

 

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 $16,088,000, or 12.5%, to $144,515,000 during the second quarter of 2014 from $128,427,000 during the second quarter of 2013.  CFR for the Project Management segment increased $9,542,000, principally due to increased work in the Middle East, primarily Oman, Qatar and Iraq.  CFR for the Construction Claims segment increased by $6,546,000, due primarily to increases in the Middle East, Asia/Pacific and South Africa.

 

CFR increased $30,781,000, or 12.3%, to $281,764,000 during the first half ended June 30, 2014 from $250,983,000 during the first half ended June 30, 2013.  CFR for the Project Management segment increased $16,332,000, principally due to increased work in the Middle East, primarily Oman, Qatar and Iraq.  CFR for the Construction Claims segment increased by $14,449,000, due primarily to increases in the United Kingdom, Asia/Pacific, South Africa and the Middle East.

 

Net earnings attributable to Hill were $1,518,000 during the second quarter of 2014 compared to net earnings of $719,000 during the second quarter of 2013.  Diluted earnings per common share was $0.04 during the second quarter of 2014 based upon 42,591,000 diluted common shares outstanding compared to a diluted earnings per common share of $0.02 during the second quarter ended 2013 based upon 38,943,000 diluted common shares outstanding.

 

Net earnings attributable to Hill were $1,571,000 during the first half ended June 30, 2014 compared to net earnings of $339,000 during the first half ended June 30, 2013.  Diluted earnings per common share was $0.04 during the first half ended June 30, 2014 based upon 41,570,000 diluted common shares outstanding compared to a diluted earnings per common share of $0.01 during the first half ended June 30, 2013 based upon 38,950,000 diluted common shares outstanding.

 

We have open but inactive contracts in Libya.  During late 2013 and early 2014, we received payments of approximately $9,900,000 from our client, the Libyan Organization for the Development of Administrative Centres (“ODAC”), for work performed prior to March 2011.  The remaining accounts receivable balance with ODAC is now approximately $50,100,000. Since the end of the Libyan civil unrest in October 2011, the Company has sought to recover its receivable

 

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from ODAC through ongoing negotiations rather than pursue its legal rights for payment under the contracts.  The Company continues to believe that this course of action provides the best likelihood for recovery as it could result in completion of and payment on the existing contracts as well as the potential for the award of new contracts.  There is at present no formal agreement, understanding or timetable for further payments of Hill’s accounts receivable from ODAC or a return to work on Hill’s existing contracts.  However management believes that these payments, along with standby letters of credit of approximately $14,000,000 posted in our favor by ODAC, were made in good faith and are a positive indication that ODAC intends to satisfy its obligations to Hill.  Currently, the Company and ODAC are in the process of extending the standby letters of credit for an additional six-month term.  However, the Company cannot predict with certainty when, or if, the remaining accounts receivable will be paid by the Libyan authorities or when work will resume there.

 

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 high level of our backlog which amounted to $972,000,000 at June 30, 2014. Our 12-month backlog on that date was a record $404,000,000.

 

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, capital expenditures and debt service. 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 three-month periods ended June 30, 2014 and 2013 (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013