Hill International, Inc.
Hill International, Inc. (Form: 10-Q, Received: 11/03/2014 17:03:06)

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 September 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 50,373,257 shares of the Registrant’s Common Stock outstanding at October 31, 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 September 30, 2014 (unaudited) and December 31, 2013

3

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Earnings for the three and nine months ended September 30, 2014 and 2013 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 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

38

 

 

 

Item 4

Controls and Procedures

39

 

 

 

Part II

OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

40

 

 

 

Item 1A

Risk Factors

40

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3

Defaults Upon Senior Securities

40

 

 

 

Item 4

Mine Safety Disclosures

40

 

 

 

Item 5

Other Information

40

 

 

 

Item 6

Exhibits

40

 

 

 

Signatures

 

41

 



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)

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

28,525

 

$

30,381

 

Cash - restricted

 

6,677

 

15,766

 

Accounts receivable, less allowance for doubtful accounts of $7,664 and $9,530

 

251,084

 

232,011

 

Accounts receivable - affiliate

 

2,140

 

492

 

Prepaid expenses and other current assets

 

11,336

 

13,078

 

Income taxes receivable

 

4,264

 

4,460

 

Deferred income tax assets

 

1,736

 

1,705

 

Total current assets

 

305,762

 

297,893

 

Property and equipment, net

 

11,061

 

10,613

 

Cash - restricted, net of current portion

 

9,454

 

2,740

 

Retainage receivable

 

2,344

 

1,212

 

Acquired intangibles, net

 

19,504

 

24,964

 

Goodwill

 

83,072

 

85,853

 

Investments

 

5,566

 

5,984

 

Deferred income tax assets

 

13,736

 

13,882

 

Other assets

 

15,472

 

5,961

 

Total assets

 

$

465,971

 

$

449,102

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Due to bank

 

$

 

$

2

 

Current maturities of notes payable

 

2,580

 

18,974

 

Accounts payable and accrued expenses

 

93,626

 

92,270

 

Income taxes payable

 

7,758

 

9,442

 

Deferred revenue

 

15,506

 

18,203

 

Deferred income taxes

 

312

 

369

 

Other current liabilities

 

12,964

 

12,255

 

Total current liabilities

 

132,746

 

151,515

 

Notes payable, net of current maturities

 

125,291

 

114,285

 

Retainage payable

 

2,190

 

1,017

 

Deferred income taxes

 

15,071

 

16,732

 

Deferred revenue

 

13,846

 

16,261

 

Other liabilities

 

2,700

 

6,261

 

Total liabilities

 

291,844

 

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, 56,905 shares and 46,598 shares issued at September 30, 2014 and December 31, 2013, respectively

 

6

 

5

 

Additional paid-in capital

 

179,127

 

136,899

 

Retained earnings

 

39,643

 

47,038

 

Accumulated other comprehensive loss

 

(25,737

)

(25,032

)

 

 

193,039

 

158,910

 

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

 

(28,304

)

(27,766

)

Hill International, Inc. share of equity

 

164,735

 

131,144

 

Noncontrolling interests

 

9,392

 

11,887

 

Total equity

 

174,127

 

143,031

 

Total liabilities and stockholders’ equity

 

$

465,971

 

$

449,102

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Consulting fee revenue

 

$

145,324

 

$

130,181

 

$

427,088

 

$

381,164

 

Reimbursable expenses

 

16,167

 

17,013

 

44,055

 

50,567

 

Total revenue

 

161,491

 

147,194

 

471,143

 

431,731

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

82,675

 

75,734

 

244,511

 

223,789

 

Reimbursable expenses

 

16,167

 

17,013

 

44,055

 

50,567

 

Total direct expenses

 

98,842

 

92,747

 

288,566

 

274,356

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

62,649

 

54,447

 

182,577

 

157,375

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

51,352

 

46,195

 

156,625

 

131,884

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

11,297

 

8,252

 

25,952

 

25,491

 

 

 

 

 

 

 

 

 

 

 

Interest expense and related financing fees, net

 

16,112

 

5,489

 

26,834

 

17,257

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before income taxes

 

(4,815

)

2,763

 

(882

)

8,234

 

Income tax expense (benefit)

 

3,800

 

(179

)

5,424

 

3,983

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

(8,615

)

2,942

 

(6,306

)

4,251

 

Less: net earnings - noncontrolling interests

 

351

 

386

 

1,089

 

1,356

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(8,966

)

$

2,556

 

$

(7,395

)

$

2,895

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.19

)

$

0.06

 

$

(0.17

)

$

0.07

 

Basic weighted average common shares outstanding

 

46,606

 

39,351

 

42,348

 

38,949

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.19

)

$

0.06

 

$

(0.17

)

$

0.07

 

Diluted weighted average common shares outstanding

 

46,606

 

39,494

 

42,348

 

39,135

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Consolidated net (loss) earnings

 

$

(8,615

)

$

2,942

 

$

(6,306

)

$

4,251

 

Foreign currency translation adjustment, net of tax

 

(4,200

)

(1,063

)

(1,651

)

(6,228

)

Other, net

 

(238

)

7

 

184

 

115

 

Comprehensive (loss) earnings

 

(13,053

)

1,886

 

(7,773

)

(1,862

)

Comprehensive (loss) earnings attributable to noncontrolling interests

 

(598

)

(139

)

327

 

(451

)

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

 

$

(12,455

)

$

2,025

 

$

(8,100

)

$

(1,411

)

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) earnings

 

$

(6,306

)

$

4,251

 

Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

7,276

 

7,921

 

Provision for bad debts

 

1,501

 

2,743

 

Interest accretion on term loan

 

15,526

 

5,875

 

Deferred tax (benefit) expense

 

(2,316

)

1,035

 

Share based compensation

 

2,712

 

2,257

 

Changes in operating assets and liabilities, net of acquisition in 2013:

 

 

 

 

 

Restricted cash

 

3,716

 

986

 

Accounts receivable

 

(9,148

)

(21,594

)

Accounts receivable - affiliate

 

(1,648

)

16

 

Prepaid expenses and other current assets

 

2,381

 

(4,184

)

Income taxes receivable

 

589

 

(608

)

Retainage receivable

 

(1,132

)

(184

)

Other assets

 

1,065

 

345

 

Accounts payable and accrued expenses

 

(5,207

)

1,179

 

Income taxes payable

 

(2,603

)

(2,475

)

Deferred revenue

 

(7,610

)

12,177

 

Other current liabilities

 

(2,711

)

3,154

 

Retainage payable

 

1,166

 

9

 

Other liabilities

 

(3,599

)

(4,018

)

Net cash (used in) provided by operating activities

 

(6,348

)

8,885

 

Cash flows from investing activities:

 

 

 

 

 

Payments for purchase of property and equipment

 

(2,393

)

(2,144

)

Cash received from acquisition

 

 

727

 

Contribution to affiliate

 

 

(8

)

Payment of liability for additional interest in Hill Spain

 

 

(9,325

)

Net cash used in investing activities

 

(2,393

)

(10,750

)

Cash flows from financing activities:

 

 

 

 

 

Due to bank

 

(2

)

(21

)

Proceeds from secondary public offering of common stock

 

38,078

 

 

Proceeds from new term loan

 

120,000

 

 

Payoff and termination of term loan

 

(100,000

)

 

Payoff and termination of revolving credit facility

 

(25,500

)

 

Payment of financing fees

 

(9,484

)

 

 

Payments on Engineering S.A. note payable

 

 

(5,095

)

Payments on notes payable

 

 

(148

)

Net (payments) borrowings on revolving loans

 

(14,793

)

22,279

 

Dividends paid to noncontrolling interest

 

(173

)

 

Proceeds from stock issued under employee stock purchase plan

 

158

 

53

 

Proceeds from exercise of stock options

 

1,032

 

20

 

Net cash provided by financing activities

 

9,316

 

17,088

 

Effect of exchange rate changes on cash

 

(2,431

)

(5,300

)

Net (decrease) increase in cash and cash equivalents

 

(1,856

)

9,923

 

Cash and cash equivalents — beginning of period

 

30,381

 

16,716

 

Cash and cash equivalents — end of period

 

$

28,525

 

$

26,639

 

 

See accompanying notes to consolidated financial statements.

 

6



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):

 

 

 

September 30, 2014

 

December 31, 2013

 

Billed

 

$

206,556

 

$

206,469

 

Retainage, current portion

 

13,806

 

10,215

 

Unbilled

 

38,386

 

24,857

 

 

 

258,748

 

241,541

 

Allowance for doubtful accounts

 

(7,664

)

(9,530

)

 

 

$

251,084

 

$

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 since 2011 amounted to approximately $9,900,000 and, at September 30, 2014, the remaining accounts receivable outstanding related to Hill’s work in Libya amounted to approximately $50,100,000.

 

Currently, the Company is seeking to recover the receivable from its client, the Libyan Organization for the Development of Administrative Centres (“ODAC”), through ongoing negotiations rather than pursuing 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

 

7



Table of Contents

 

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.  Management believes that the recent payments made in 2013 and 2014 were made in good faith and are a positive indication that ODAC intends to satisfy its obligations to Hill.  However, the Company cannot predict with certainty when the remaining accounts receivable will be paid by the Libyan authorities or when work will resume there.  Accordingly, the Company believes that recovery of its receivable from ODAC through continued negotiation, rather than legal action, remains appropriate.  In the event that continued negotiations with ODAC are determined to be unsuccessful, the Company will value its legal claims and adjust the carrying amount of this receivable, which could have 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):

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

 

 

 

 

 

 

 

Client relationships

 

$

36,133

 

$

20,632

 

$

37,501

 

$

18,238

 

Acquired contract rights

 

11,392

 

9,404

 

11,874

 

8,541

 

Trade names

 

3,056

 

1,041

 

3,266

 

898

 

Total

 

$

50,581

 

$

31,077

 

$

52,641

 

$

27,677

 

Intangible assets, net

 

$

19,504

 

 

 

$

24,964

 

 

 

 

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

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2014

 

2013

 

2014

 

2013

 

$

1,518

 

$

1,723

 

$

4,650

 

$

4,957

 

 

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 3 months)

 

$

1,460

 

2015

 

5,190

 

2016

 

3,938

 

2017

 

2,970

 

2018

 

1,973

 

 

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Table of Contents

 

Note 5 — Goodwill

 

The Company performs its annual goodwill impairment testing, by reporting unit, in the third quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. 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 the businesses, the useful life over which cash flows will occur, and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company performed its annual impairment test effective July 1, 2014. Based on a preliminary valuation, the fair value of the Project Management unit and the Construction Claims unit exceeded their carrying values by $227,700,000 and $70,800,000, respectively.

 

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

 

 

 

Project

 

Construction

 

 

 

 

 

Management

 

Claims

 

Total

 

Balance, December 31, 2013

 

$

58,448

 

$

27,405

 

$

85,853

 

Additions

 

 

 

 

Translation adjustments

 

(2,317

)

(464

)

(2,781

)

Balance, September 30, 2014

 

$

56,131

 

$

26,941

 

$

83,072

 

 

Note 6 — Accounts Payable and Accrued Expenses

 

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

 

 

 

September 30, 2014

 

December 31, 2013

 

Accounts payable

 

$

23,816

 

$

25,349

 

Accrued payroll

 

41,892

 

35,732

 

Accrued subcontractor fees

 

4,526

 

6,212

 

Accrued agency fees

 

16,055

 

17,623

 

Accrued legal and professional fees

 

608

 

1,239

 

Other accrued expenses

 

6,728

 

6,115

 

 

 

$

93,626

 

$

92,270

 

 

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Table of Contents

 

Note 7 — Notes Payable and Long-Term Debt

 

Outstanding debt obligations are as follows (in thousands):

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

2014 Term Loan Facility

 

$

120,000

 

$

 

 

 

 

 

 

 

2012 Term Loan Payable

 

 

84,474

 

 

 

 

 

 

 

2009 Revolving Credit loan payable under the Credit Agreement(the weighted average interest rate of all borrowings was 5.32% at December 31, 2013)

 

 

39,000

 

 

 

 

 

 

 

Borrowings under revolving credit facilities with a consortium of banks in Spain

 

6,976

 

7,670

 

 

 

 

 

 

 

Borrowings under unsecured credit facility with Caja Badajoz

 

888

 

2,047

 

 

 

 

 

 

 

Borrowings under revolving credit facility with the National Bank of Abu Dhabi

 

7

 

 

 

 

 

 

 

 

Other notes payable

 

 

68

 

 

 

 

 

 

 

 

 

127,871

 

133,259

 

Less current maturities

 

2,580

 

18,974

 

 

 

 

 

 

 

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

 

$

125,291

 

$

114,285

 

 

Refinancing

 

On June 12, 2014, the Company and its subsidiary Hill International N.V. (the “Subsidiary”) 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 Company’s previous senior credit facility with a bank group led by Bank of America, N.A. and a previous second lien term loan with funds managed by Tennenbaum Capital Partners, LLC.

 

Effective as of September 26, 2014 (the “Closing Date”), the Company, entered into (i) a credit agreement with the Agent as administrative agent and collateral agent, TD Bank, N.A., as syndication agent and HSBC Bank USA, N.A., as documentation agent, (collectively, the “U.S. Lenders”) consisting of (A) a term loan facility of $120,000,000 (the “Term Loan Facility”) and (B) a $30,000,000 U.S. dollar-denominated facility available to the Company (the “U.S. Revolver,” together with the Term Loan Facility, the “U.S. Credit Facilities”) and (ii) a credit agreement with the Agent as administrative agent and collateral agent, (the “International Lender”) providing a $15,000,000 Euro-denominated facility available to the Subsidiary (the “International Revolver” and together with the U.S. Revolver, the “Revolving Credit Facilities” and, together with the U.S. Credit Facilities, the “Secured Credit Facilities”).  The U.S. Revolver and the International Revolver include sub-limits for letters of credit amounting to $25,000,000 and $10,000,000, respectively.

 

The Secured Credit Facilities contain customary default provisions, representations and warranties, and affirmative and negative covenants, and require the Company to comply with certain financial and reporting covenants.  The financial covenants consist of a Maximum Consolidated Net Leverage Ratio and an Excess Account Concentration requirement commencing on December 31, 2014. The Consolidated Net Leverage Ratio is the ratio of (a) consolidated total debt (minus cash of up to $10,000,000 held in the aggregate) to consolidated earnings before interest, taxes, depreciation, amortization and share-based compensation for the trailing twelve months. At December 31, 2014, the ratio may not exceed 3.50 to 1.00.  The Excess Account Concentration covenant permits the U. S. Lenders and the International Lender to increase the interest rates by 2.0% if, as of the last day of any fiscal quarter, either (a) the accounts receivable from all clients located in any country not listed as a Permitted Country as defined in the Secured Credit Facilities (other than the United Arab Emirates) that are more than 120 days old (relative to the invoice date) constitute more than 10% of the total outstanding accounts receivable or (b) accounts receivable from all clients located in the United Arab Emirates that are more than 120 days old (relative to the invoice date) constitute more than 14% of the total outstanding accounts

 

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receivable; provided that, in each case, the accounts receivable due from clients located in Libya that exist as of the Closing Date shall be excluded for all purposes of this covenant. The interest rate will be reset as soon as the accounts receivable over 120 days decline below the 10% or 14% levels.

 

The U.S. Credit Facilities are guaranteed by certain U.S. subsidiaries of the Company, and the International Revolver is guaranteed by the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.

 

In connection with the Refinancing, the Company wrote off deferred financing fees amounting to $1,482,000 by a charge to interest expense and related financing fees, net for the three- and nine-month periods ended September 30, 2014.

 

Term Loan Facility

 

The Company used the proceeds from the Term Loan Facility:

 

·                   for consummating the payoff and termination of the Company’s 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 “2012 Term Loan Agreement”), 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 “2009 Revolving Credit Agreement”); and

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

 

The interest rate on the Term Loan Facility will be, at the Company’s option, either:

 

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

·                   the Base Rate (as described below) plus 5.75% per annum.

 

The “Base Rate” is a per annum rate equal to the highest of (A) the prime rate, (B) the federal funds effective rate plus 0.50%, 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% per annum.

 

The Company has the right to prepay the Term Loan Facility in full or in part at any time without premium or penalty; provided, however that upon the occurrence of prepayments relating to certain repricing transactions within the first year following closing, a 1.0% prepayment premium will be payable. The Company is required to make mandatory prepayments of the Term Loan Facility, without premium or penalty, (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 (as defined in the agreement) for each fiscal year of the Borrowers commencing with the first full fiscal year ending after closing (which percentage would be stepped down upon the achievement and maintenance of certain metrics).

 

The Term Loan Facility is generally secured by a first-priority security interest in substantially all assets of the Company and certain of the Company’s U.S. subsidiaries other than accounts receivable, cash proceeds thereof and certain bank accounts, as to which the Term Loan Facility is secured by a second-priority security interest.

 

The Term Loan Facility has a term of six years, requires repayment of 0.25% of the original principal amount on a quarterly basis commencing on December 31, 2014 and ending on September 30, 2020, and was fully funded at closing. Any amounts repaid on the Term Loan Facility will not be available to be re-borrowed.

 

The Company incurred fees and expenses related to the Term Loan Facility aggregating $6,643,000 which has been deferred and is included in other assets in the consolidated balance sheet at September 30, 2014. The deferred fees will be amortized to interest and related financing fees, net over a six-year period commencing on October 1, 2014.

 

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Revolving Credit Facilities

 

The Company is 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 interest rate on borrowings under the U.S. Revolver will be, at the Company’s option from time to time, either:

 

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

·                   the Base Rate plus 2.75% per annum.

 

The interest rate on borrowings under the International Revolver will be the European Inter-Bank Offered Rate, or “EURIBOR,” for the relevant interest period (or at a substitute rate to be determined to the extent EURIBOR is not available) plus 4.00% per annum.

 

The Company will pay a commitment fee calculated at 0.50% annually on the average daily unused portion of the U.S. Revolver, and the Subsidiary will pay a commitment fee calculated at 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 is subject to a “borrowing base,” calculated using a formula based upon approximately 85% of receivables that meet or satisfy certain criteria (“Eligible Receivables”) and that are subject to a perfected security interest held by either the U.S. Lenders or the International Lender, plus, in the case of the International Revolver only, 10% of Eligible Receivables that are not subject to a perfected security interest held by the International Lender, subject to certain exceptions and restrictions.

 

The Company or the Subsidiary, as applicable, will be required to make mandatory prepayments under their respective Revolving Credit Facilities to the extent that the aggregate outstanding amount thereunder exceeds the then-applicable borrowing base, which payments will be made without penalty or premium.

 

Generally, the obligations of the Company under the U.S. Revolver are secured by a first-priority security interest in the above-referenced accounts receivable, cash proceeds and bank accounts of the Company and certain of the Company’s U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and such subsidiaries. The obligations of the Subsidiary under the International Revolver would generally be secured by a first-priority security interest in substantially all accounts receivable, cash proceeds thereof and certain bank accounts of the Subsidiary and certain of the Company’s non-U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.

 

The Revolving Credit Facilities have a term of five years and require payment of interest only during the term. Under the Revolving Credit Facilities, outstanding loans may be repaid in whole or in part at any time, without premium or penalty, subject to certain customary limitations, and will be available to be re-borrowed from time to time.

 

The Company incurred fees and expenses related to the Revolving Credit Facilities aggregating $2,841,000 which has been deferred and is included in other assets in the consolidated balance sheet at September 30, 2014. The deferred fees will be amortized to interest expense and related financing fees, net over a five-year period commencing October 1, 2014.

 

At September 30, 2014, the Company had $20,159,000 of outstanding letters of credit and $9,841,000 of available borrowing capacity under the U.S. Revolver.

 

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2012 Term Loan Agreement

 

The Company entered into a Term Loan Agreement on October 18, 2012, which was amended from time to time. Borrowings under the Term Loan Agreement were 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 was October 18, 2016.

 

The Company paid interest on amounts outstanding from time to time under the 2012 Term Loan at a rate per annum equal to 7.50%.

 

Also, contemporaneous with its entry into the 2012 Term Loan Agreement, the Company entered into a Fee Letter.  The Fee Letter required the Company to pay to the Lenders an exit fee (the “Exit Fee”), which fee was earned in full on the Closing Date and was due and payable on September 26, 2014, the date the 2012 Term Loan was paid in full (the “Exit Date”).  The Exit Fee meant the amount, if any, when paid to the Term Loan Lenders on the Exit Date, that would 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 would the Exit Fee amount be less than $0 or greater than $11,790,000.  The IRR was to be calculated as the rate of return earned by the Term Loan Lenders on their initial investment in the 2012 Term Loan (calculated as the principal amount of the Term Loan less the Closing Fee of $25,000,000, or $75,000,000) through the Exit Date taking into account the payment by the Company to the Term Loan Lenders of all principal, interest and other payments to the Term Loan Lenders pursuant to the Term Loan Agreement.  There was no Exit Fee payable upon the payoff and termination of the Term Loan.

 

On August 6, 2014, the Company made a mandatory principal prepayment of $9,522,402 from funds received in the equity offering (See Note 11).  On September 26, 2014, the Company paid $90,477,598 (including accelerated principal of $9,338,000 which was charged to interest expense and related financing fees for the three- and nine-month periods ended September 30, 2014), plus interest of $1,658,756, to payoff and terminate the Term Loan.

 

2009 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”), which was amended from time to time.

 

The maturity date of the 2009 Credit Agreement was March 31, 2015. On September 26, 2014, the Company paid $25,500,000 (including $9,522,402 from funds received in the equity offering (See Note 11)), plus interest of $419,897, to payoff and terminate the Credit Agreement.

 

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 €5,520,000 (approximately $7,005,000 at September 30, 2014). At September 30, 2014, total borrowings outstanding were €5,498,000 (approximately $6,976,000). The amount being financed (“Credit Contracts”) by each Financing Entity is between €156,000 (approximately $198,000) and €689,000 (approximately $874,000). 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 €700,000 (approximately $888,000) at September 30, 2014. The interest rate at September 30, 2014 was 7.50%. At September 30, 2014, this facility was fully utilized with total borrowings outstanding of €700,000 (approximately $888,000).  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 September 30, 2014) collateralized by certain overseas receivables. The interest rate is the one-month Emirates InterBank Offer Rate plus 3.00% (or 4.41% at September 30, 2014) but no less than 5.50%. At September 30, 2014, total borrowings outstanding were AED 27,000 (approximately $7,000). This facility also allows for to AED 127,033,000 (approximately $34,589,000 at September 30, 2014) in Letters of Guarantee of which AED 128,000,000 (approximately $34,863,000) were utilized at September 30, 2014. This facility is being renewed on a month-to-month basis.

 

The Company maintains a credit facility with Marfin Bank (formerly Egnatia Bank), that allows for letters of guarantee up to €4,500,000 (approximately $5,711,000 at September 30, 2014), of which €2,197,000 (approximately $2,788,000) had been utilized at September 30, 2014.  The facility expires on April 30, 2018. Under the terms of the International Credit Facility, this credit facility may remain in place as long as Hill International, Inc. replaces Hill International N.V. as sole guarantor on or before December 25, 2014, or the credit facility must be reduced to €3,750,000.

 

Engineering S.A. maintains three unsecured revolving credit facilities with two banks in Brazil aggregating 2,900,000 Brazilian Reais (approximately $1,185,000 at September 30, 2014), with a weighted average interest rate of 3.60% per month at September 30, 2014.  There were no borrowings outstanding on any of these facilities which are renewed automatically every three months.

 

At September 30, 2014, the Company had $19,338,000 of available borrowing capacity under its International Revolver and its other foreign credit agreements.  There were no outstanding letters of credit under the International Revolver at September 30, 2014.

 

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 September 30, 2014, the maximum U.S. dollar equivalent of the commitments was $102,583,000 of which $56,280,000 is outstanding.

 

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Note 8 — Supplemental Cash Flow Information

 

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

 

 

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

Interest and related financing fees paid

 

$

19,662

 

$

10,346

 

Income taxes paid

 

$

5,375

 

$

6,901

 

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

 

$

 

$

2,000

 

 

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.  Options to purchase 7,436,980 shares and 7,459,832 were excluded from the calculation of diluted (loss) earnings per common share for the three and nine months ended September 30, 2014 because they were antidilutive.  Dilutive stock options increased the average common stock outstanding by approximately 143,528 shares for the three months ended September 30, 2013 and by approximately 185,809 shares for the nine months September 30, 2013. Certain stock options were excluded from the calculation of diluted loss per common share because their effect was antidilutive for both of the three and nine months ended September 30, 2013.  The total number of such shares excluded from diluted loss per common share was 5,492,975 shares for the three months ended September 30, 2013 and 5,366,904 shares for the nine months ended September 30, 2013.

 

Note 10 — Share-Based Compensation

 

At September 30, 2014, the Company had 7,389,176 options outstanding with a weighted average exercise price of $4.57.  During the nine months ended September 30, 2014, the Company granted 500,000 options which vest over a four-year period, 1,285,000 options which vest over a five-year period, and 63,870 options which vested immediately. The options have a weighted average exercise price of $4.57 and a weighted average contractual live of 6.39 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 — 62.9% and risk-free interest rate —1.67%. During the first nine months of 2014, options for 524,350 shares with a weighted average exercise price of $3.00 were exercised, options for 483,500 shares with a weighted average exercise price of $7.70 lapsed and options for 26,000 shares with a weighted average exercise price of $3.87 were forfeited.

 

During the nine months ended September 30, 2014, the Company issued 26,475 shares of its common stock to its Non-Employee Directors as part of their annual compensation.

 

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During the nine months ended September 30, 2014, employees purchased 39,456 common shares, for an aggregate purchase price of $158,000, 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 $785,000 and $674,000 for the three months ended September 30, 2014 and 2013, respectively, and $2,712,000 and $2,257,000 for the nine months ended September 30, 2014 and 2013, respectively.

 

Note 11 — Stockholders’ Equity

 

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

 

 

 

 

 

Hill International,

 

Noncontrolling

 

 

 

Total

 

Inc. Stockholders

 

Interests

 

Stockholders’ equity, December 31, 2013

 

$

143,031

 

$

131,144

 

$

11,887

 

Net (loss) earnings

 

(6,306

)

(7,395

)

1,089

 

Other comprehensive (loss) earnings

 

(1,467

)

(705

)

(762

)

Comprehensive (loss) earnings

 

(7,773

)

(8,100

)

327

 

Additional paid in capital

 

5,058

 

5,058

 

 

Sale of common stock

 

38,078

 

38,078

 

 

Acquisition of additional interest in Engineering S. A.

 

(3,556

)

(907

)

(2,649

)

Treasury stock acquired

 

(538

)

(538

)

 

Dividends paid to noncontrolling interests

 

(173

)

 

(173

)

Stockholders’ equity, September 30, 2014

 

$

174,127

 

$

164,735

 

$

9,392

 

 

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 Officer received 87,212 shares from this transaction.

 

During the nine months ended September 30, 2014, the Company received cash proceeds of $1,032,000 from the exercise of stock options.

 

On August 6, 2014, in connection with the Refinancing (See Note 7), the Company sold 9,546,629 shares of its common stock in an underwritten equity offering and received net proceeds aggregating approximately $38,078,000, of which two mandatory prepayments of $9,522,402 were used to pay down the 2012 Term Loan Agreement and the 2009 Revolving Credit Agreement (See Note 7).

 

Note 12 — Income Taxes

 

The effective tax rates for the three-month periods ended September 30, 2014 and 2013 were (78.9%) and (6.5%), respectively, and for the nine-month periods ended September 30, 2014 and 2013 were (614.9%) and 48.4%, respectively.  The Company’s effective tax rate for the year is based on the mix of projected 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 a significant increase in the U.S. pre-tax loss in 2014 primarily due to the recognition by the Company of an additional $10,820,000 of interest expense in the U.S

 

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related to the refinancing and early termination of the Company’s senior credit facility and term loan during the third quarter of 2014. The Company also recognized an income tax benefit related to the reversal of the reserve for uncertain tax positions in a foreign jurisdiction totaling $0 and $2,473,000 for the three-month periods ended September 30, 2014 and 2013, respectively, and $2,514,000 and $2,473,000 for the nine-month periods ended September 30, 2014 and 2013, respectively. In addition, the Company recognized an income tax expense (benefit) resulting from adjustments to agree the prior year’s book amounts to the actual amounts per the tax returns totaling $206,000 and ($105,000) for the three-month periods ending September 30, 2014 and 2013, respectively, and $250,000 and $40,000 for the nine months ended September 30, 2014 and 2013, respectively. In both years, the Company’s effective tax rate is significantly higher than it otherwise would be primarily as a result of not being able to record an income tax benefit related to the U.S. net operating loss.

 

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

 

 

 

Three Months Ended September 30, 2014

 

Three Months Ended September 30, 2013

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before income taxes

 

$

(16,640

)

$

11,825

 

$

(4,815

)

$

(6,123

)

$

8,886

 

$

2,763

 

Income tax expense, net

 

$

 

$

3,800

 

$

3,800

 

$

 

$

(179

)

$

(179

)

 

 

 

Nine Months Ended September 30, 2014

 

Nine Months Ended September 30, 2013

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before income taxes

 

$

(32,137

)

$

31,255

 

$

(882

)

$

(18,713

)

$

26,947

 

$

8,234

 

Income tax expense, net

 

$

 

$

5,424

 

$

5,424

 

$

 

$

3,983

 

$

3,983

 

 

The reserve for uncertain tax positions amounted to $840,000 and $2,933,000 at September 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 September 30, 2014, there were no changes to the reserve for uncertain tax positions. During the nine-month period ended September 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. 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 nine-month periods ended September 30, 2013, the reserve for uncertain tax positions was reduced by $2,473,000 based on management’s assessment that these items were effectively settle with the appropriate foreign tax authorities.

 

The Company’s policy is to record income tax related interest and penalties in income tax expense. At September 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.

 

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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 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.

 

Selected information by business segment and geographical area is summarized below (in thousands):

 

Consulting Fee Revenue (“CFR”)

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

106,969

 

73.6

%

$

99,583

 

76.5

%

Construction Claims

 

38,355

 

26.4

 

30,598

 

23.5

 

Total

 

$

145,324

 

100.0

%

$

130,181

 

100.0

%

 

Total Revenue:

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

121,746

 

75.4

%

$

115,533

 

78.5

%

Construction Claims

 

39,745

 

24.6

 

31,661

 

21.5

 

Total

 

$

161,491

 

100.0

%

$

147,194

 

100.0

%

 

Operating Profit:

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Project Management

 

$

12,960

 

$

11,290

 

Construction Claims

 

5,269

 

3,806

 

Corporate

 

(6,932

)

(6,844

)

Total

 

$

11,297

 

$

8,252

 

 

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Table of Contents

 

Depreciation and Amortization Expense:

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Project Management

 

$

1,718

 

$

1,930

 

Construction Claims

 

640

 

741

 

Subtotal segments

 

2,358

 

2,671

 

Corporate

 

54

 

54

 

Total

 

$

2,412

 

$

2,725

 

 

Consulting Fee Revenue by Geographic Region:

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

32,228

 

22.2

%

$

31,197

 

24.0

%

Latin America

 

10,503

 

7.2

 

11,329

 

8.7

 

Europe

 

18,950

 

13.0

 

18,211

 

14.0

 

Middle East

 

68,043

 

46.8

 

56,588

 

43.5

 

Africa

 

5,580

 

3.8

 

6,735

 

5.2

 

Asia/Pacific

 

10,020

 

7.0

 

6,121

 

4.6

 

Total

 

$

145,324

 

100.0

%

$

130,181

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

31,309

 

21.5

%

$

30,334

 

23.3

%

Non-U.S.

 

114,015

 

78.5

 

99,847

 

76.7

 

Total

 

$

145,324

 

100.0

%

$

130,181

 

100.0

%

 

For the third quarter ended September 30, 2014, consulting fee revenue for the United Arab Emirates amounted to $18,666,000 representing 12.8% of the total and Oman’s consulting fee revenue amounted to $16,098,000 representing 11.1% of the total.  No other country other than the United States accounted for 10% or more of consolidated consulting fee revenue.

 

For the third quarter ended September 30, 2013, consulting fee revenue for the United Arab Emirates amounted to $16,017,000 representing 12.3% of the total and Oman’s consulting fee revenue amounted to $14,667,000 representing 11.3% of the total. No other country other than the United States accounted for 10% or more of consolidated consulting fee revenue.

 

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Table of Contents

 

Total Revenue by Geographic Region:

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

43,804

 

27.1

%

$

44,204

 

30.0

%

Latin America

 

10,535

 

6.5

 

11,429

 

7.8

 

Europe

 

20,266

 

12.5

 

19,556

 

13.3

 

Middle East

 

70,218

 

43.5

 

57,804

 

39.3

 

Africa

 

6,480

 

4.0

 

7,637

 

5.2

 

Asia/Pacific

 

10,188

 

6.4

 

6,564

 

4.4

 

Total

 

$

161,491

 

100.0

%

$

147,194

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

42,876

 

26.6

%

$

43,327

 

29.4

%

Non-U.S.

 

118,615

 

73.4

 

103,867

 

70.6

 

Total

 

$

161,491

 

100.0

%

$

147,194

 

100.0

%

 

For the third quarter ended September 30, 2014, total revenue for the United Arab Emirates amounted to $19,112,000 representing 11.8% of the total and Oman’s total revenue amounted to $16,960,000 representing 10.5% of the total.  No other country other than the United States accounted for 10% or more of consolidated total revenue.

 

For the third quarter ended September 30, 2013, total revenue for the United Arab Emirates amounted to $16,182,000 representing 11.0% of the total and Oman’s total revenue amounted to $14,697,000 representing 10.0% of the total.  No other country other than the United States accounted for 10% or more of consolidated total fee revenue.

 

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Table of Contents

 

Consulting Fee Revenue By Client Type:

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

4,562

 

3.1

%

$

3,722

 

2.9

%

U.S. state, regional and local governments

 

19,989

 

13.8

 

18,539

 

14.2

 

Foreign governments

 

54,361

 

37.4

 

47,516

 

36.5

 

Private sector

 

66,412

 

45.7

 

60,404

 

46.4

 

Total

 

$

145,324

 

100.0

%

$

130,181

 

100.0

%

 

Total Revenue By Client Type:

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

5,894

 

3.6

%

$

4,253

 

2.9

%

U.S. state, regional and local governments

 

28,627

 

17.7

 

24,901

 

16.9

 

Foreign governments

 

57,825

 

35.8

 

49,501

 

33.6

 

Private sector

 

69,145

 

42.9

 

68,539

 

46.6

 

Total

 

$

161,491

 

100.0

%

$

147,194

 

100.0

%

 

Property, Plant and Equipment, Net by Geographic Location:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

U.S./Canada

 

$

3,333

 

$

3,837

 

Latin America

 

1,487

 

1,351

 

Europe

 

1,758

 

2,575

 

Middle East

 

3,350

 

2,167

 

Africa

 

556

 

182

 

Asia/Pacific

 

577

 

501

 

Total

 

$

11,061

 

$

10,613

 

 

 

 

 

 

 

U.S.

 

$

3,333

 

$

3,837

 

Non-U.S.

 

7,728

 

6,776

 

Total

 

$

11,061

 

$

10,613

 

 

Consulting Fee Revenue (“CFR”)

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

317,278

 

74.3

%

$

293,560

 

77.0

%

Construction Claims

 

109,810

 

25.7

 

87,604

 

23.0

 

Total

 

$

427,088

 

100.0

%

$

381,164

 

100.0

%

 

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Table of Contents

 

Total Revenue

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

356,959

 

75.8

%

$

340,700

 

78.9

%

Construction Claims

 

114,184

 

24.2

 

91,031

 

21.1

 

Total

 

$

471,143

 

100.0

%

$

431,731

 

100.0

%

 

Operating Profit:

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Project Management

 

$

37,121

 

$

36,980

 

Construction Claims

 

10,941

 

9,629

 

Corporate

 

(22,110

)

(21,118

)

Total

 

$

25,952

 

$

25,491

 

 

Depreciation and Amortization Expense:

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Project Management

 

$

5,137

 

$

5,666

 

Construction Claims

 

1,977

 

2,082

 

Subtotal segments

 

7,114

 

7,748

 

Corporate

 

162

 

173

 

Total

 

$

7,276

 

$

7,921

 

 

Consulting Fee Revenue by Geographic Region:

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

93,227

 

21.8

%

$

92,472

 

24.3

%

Latin America

 

32,315

 

7.6

 

36,385

 

9.5

 

Europe

 

58,337

 

13.7

 

57,888

 

15.2

 

Middle East

 

200,045

 

46.8

 

161,065

 

42.3

 

Africa

 

17,864

 

4.2

 

16,165

 

4.2

 

Asia/Pacific

 

25,300

 

5.9

 

17,189

 

4.5

 

Total

 

$

427,088

 

100.0

%

$

381,164

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

90,533

 

21.2

%

$

89,792

 

23.6

%

Non-U.S.

 

336,555

 

78.8

 

291,372

 

76.4

 

Total

 

$

427,088

 

100.0

%

$

381,164

 

100.0

%

 

During the nine months ended September 30, 2014, consulting fee revenue for the United Arab Emirates amounted to $52,385,000 representing 12.3% of the total and Oman’s consulting fee revenue amounted to $50,175,000 representing 11.7% of the total.  No other country other than the United States accounted for 10% or more of consolidated consulting fee revenue.

 

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Table of Contents

 

During the nine months ended September 30, 2013, consulting fee revenue for the United Arab Emirates amounted to $50,485,000 representing 13.2% of the total. No other country other than the United States accounted for 10% or more of the consolidated consulting fee revenue.

 

Total Revenue by Geographic Region:

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

122,127

 

25.9

%

$

131,430

 

30.4

%

Latin America

 

32,577

 

6.9

 

36,677

 

8.5

 

Europe

 

62,160

 

13.2

 

61,471

 

14.2

 

Middle East

 

207,691

 

44.1

 

165,492

 

38.3

 

Africa

 

20,576

 

4.4

 

18,733

 

4.3

 

Asia/Pacific

 

26,012

 

5.5

 

17,928

 

4.3

 

Total

 

$

471,143

 

100.0

%

$

431,731

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

119,378

 

25.3

%

$

128,652

 

29.8

%

Non-U.S.

 

351,765

 

74.7

 

303,079

 

70.2

 

Total

 

$

471,143

 

100.0

%

$

431,731

 

100.0

%

 

For the first nine months ended September 30, 2014, total revenue for the United Arab Emirates amounted to $53,352,000 representing 11.3% of the total and Oman’s total revenue amounted to $53,773,000 representing 11.4% of the total.  No other country other than the United States accounted for 10% or more of consolidated total revenue.

 

For the first nine months ended September 30, 2013, total revenue for the United Arab Emirates amounted to $51,540,000 representing 11.9% of the total.  No other country other than the United States accounted for 10% or more of consolidated total revenue.

 

Consulting Fee Revenue By Client Type:

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

11,169

 

2.6

%

$

11,613

 

3.0

%

U.S. state, regional and local governments

 

55,029

 

12.9

 

53,360

 

14.0

 

Foreign governments

 

165,325

 

38.7

 

129,608

 

34.0

 

Private sector

 

195,565

 

45.8

 

186,583

 

49.0

 

Total

 

$

427,088

 

100.0

%

$

381,164

 

100.0

%

 

Total Revenue By Client Type:

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

13,763

 

2.9

%

$

13,436

 

3.1

%

U.S. state, regional and local governments

 

74,456

 

15.8

 

76,822

 

17.8

 

Foreign governments

 

175,490

 

37.2

 

135,426

 

31.4

 

Private sector

 

207,434

 

44.1

 

206,047

 

47.7

 

Total

 

$

471,143

 

100.0

%

$

431,731

 

100.0

%

 

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Table of Contents

 

Note 14 — Client Concentrations

 

The Company had no clients that accounted for 10% or more of total revenue during the third quarter ended September 30, 2014 and one client, located in Oman, that accounted for 10% of total revenue during the same quarter in 2013. The Company had one client, located in Oman, that accounted for 10% and 11% of consulting fee revenue during the third quarter ended September 30, 2014 and 2013.

 

The Company had one client, located in Oman, that accounted for 10% of total revenue during the nine months ended September 30, 2014.  No client accounted for 10% or more of total revenue for the nine months ended September 30, 2013. The Company had one client, located in Oman, that accounted for 11% of consulting fee revenue during the nine months ended September 30, 2014.  No client accounted for 10% or more of consulting fee revenue during the nine months ended September 30, 2013.

 

One client, located in Libya, accounted for 20% and 25% of accounts receivable at September 30, 2014 and December 31, 2013.

 

The Company has numerous contracts with U.S. federal government agencies that collectively accounted for 4% and 3% of total revenue during the third quarter ended September 30, 2014 and 2013 and 3% of total revenue during both the nine months ended September 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 costs. The Company has accrued approximately $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

 

The Company’s wholly-owned subsidiary, Hill International (Spain), S.A. (“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

 

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Table of Contents

 

their ESA Put Option whereby Hill Spain will pay approximately 7,838,000 Brazilian Reais (approximately $3,203,000 at September 30, 2014).  After the transaction is completed, Hill Spain will own approximately 72% of ESA.  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 paid the liability plus interest in October 2014.

 

The Company was contingently committed to issue shares of its common stock to the former shareholders of BCA in satisfaction of the Third Tranche Payment, which was to be based upon the difference between the average net profit before taxes for the two-year periods ended July 31, 2014 and the net profit before taxes for the year ended July 31, 2012.  BCA’s average net profit before taxes for the two years ended July 31, 2014 was not sufficient to earn any of the Third Tranche Payment, which had been estimated to be approximately $902,000 at the date of acquisition.  The Company had included the estimated liability in other current liabilities at December 31, 2013. Since no amount is due to the selling shareholders, the liability has been eliminated by a credit to selling, general and administrative expenses in the consolidated statements of operations for the three- and nine-month periods ended September 30, 2014.

 

The Company is committed to issue shares of its common stock to the former shareholders of CPI for certain contingent consideration.  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. On December 24, 2014, the former shareholders will receive, subject to potential offset, an additional $350,000 in shares of common stock; the number of shares will be determined based on the average closing price of the common stock for the ten trading days ending on December 18, 2014. The final issuance will be determined based upon 50% of the operating profit of CPI in excess of $1,000,000 for the first twelve-month period after closing, but in no event more than $500,000.

 

Note 16 — Subsequent Events

 

On October 31, 2014, the Company acquired all of the outstanding common stock of Angus Octan Scotland Ltd., which includes its subsidiary companies Cadogan Consultants Ltd., Cadogan Consult Ltd. and Cadogan International Ltd. (collectively, “Cadogans”), a group of firms that provide multi-disciplinary engineering and other technical consulting services.  Cadogans, which has approximately 30 professionals, has offices in Glasgow and Dundee in Scotland.  Total consideration for the acquisition consists of £1,800,000 plus the net asset value of the business to be determined within 30 days of closing.  This consideration consists of £1,000,000 paid in cash at closing, £600,000 to be paid in cash on October 31, 2015, and an earnout based upon the average earnings before interest, taxes, depreciation and amortization for the two-year period ending on October 31, 2016 (which amount shall not be less than £0 nor more than £200,000).

 

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Table of Contents

 

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 $15,143,000, or 11.6%, to $145,324,000 during the third quarter of 2014 from $130,181,000 during the third quarter of 2013.  CFR for the Project Management segment increased $7,386,000, principally due to increased work in the Middle East, primarily the United Arab Emirates, Qatar and Iraq.  CFR for the Construction Claims segment increased by $7,757,000, due primarily to increases in the Middle East and Asia/Pacific.

 

CFR increased $45,924,000, or 12.0%, to $427,088,000 during the nine-month period ended September 30, 2014 from $381,164,000 during the nine-month period ended September 30, 2013.  CFR for the Project Management segment increased $23,718,000, principally due to increased work in the Middle East, primarily Oman, Qatar and Iraq.  CFR for the Construction Claims segment increased by $22,206,000, due primarily to increases in the United Kingdom, Asia/Pacific, South Africa and the Middle East.

 

Net loss attributable to Hill was ($8,966,000) during the third quarter of 2014 compared to net earnings of $2,556,000 during the third quarter of 2013.  The net loss was primarily due to the recognition in interest expense of a $9,338,000 principal prepayment and the expensing of $1,482,000 of deferred financing costs related to the refinancing of our senior credit facility and term loan.  Diluted loss per common share was ($0.19) during the third quarter of 2014 based upon 46,606,000 diluted common shares outstanding compared to a diluted earnings per common share of $0.06 during the third quarter ended 2013 based upon 39,494,000 diluted common shares outstanding.

 

Net loss attributable to Hill was ($7,395,000) during the nine-month period ended September 30, 2014 compared to net earnings of $2,895,000 during the nine-month period ended September 30, 2013.  The net loss was primarily due to the recognition in interest expense of a $9,338,000 principal prepayment and the expensing of $1,482,000 of deferred financing costs related to the refinancing of our senior credit facility and term loan.  Diluted loss per common share was ($0.17) during the nine—month period ended September 30, 2014 based upon 42,348,000 diluted common shares outstanding compared to a diluted earnings per common share of $0.07 during the nine-month period ended September 30, 2013 based upon 39,135,000 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

 

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Table of Contents

 

performed prior to March 2011.  The remaining accounts receivable balance with ODAC is now approximately $50,100,000.  Currently, the Company is seeking to recover its receivable 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 were made in good faith and are a positive indication that ODAC intends to satisfy its obligations to Hill.  However, the Company cannot predict with certainty when the remaining accounts receivable will be paid by the Libyan auth