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HIL > SEC Filings for HIL > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for HILL INTERNATIONAL, INC.

Form 10-Q for HILL INTERNATIONAL, INC.


9-Aug-2013

Quarterly Report


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, 2012 filed with the Securities and Exchange Commission on March 18, 2013 (the "2012 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

We provide project management and construction claims services to clients worldwide, but primarily in the U.S./Canada, Latin America, Europe, the Middle East, Africa and Asia/Pacific. Our clients include the United States and other national governments and their agencies, state and local governments and their agencies, and the private sector. Hill is organized into two key operating segments: the Project Management Group and the Construction Claims Group.

We are one of the leading firms in the world in both the project management and construction claims consulting businesses. We are a global company with approximately 3,900 employees operating from 100 offices in more than 30 countries.

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.

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.

We derive our revenues from fees for professional services. As a service company we are labor intensive rather than capital intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. Our income from operations is derived from our ability to generate revenue and collect cash under our contracts in excess of direct labor and other direct costs of executing the projects, subcontractors and other reimbursable costs and selling, general and administrative costs.

In addition, we believe there are high barriers to entry for new competitors, especially in the project management market. We compete for business based on reputation and past experience, including client requirements for substantial similar projects and claims work. We have developed significant long-standing relationships which bring us repeat business and


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would be very difficult to replicate. We have an excellent reputation for developing and rewarding employees, which allows us to attract and retain superior professionals.

We currently have open but inactive contracts in Libya. Due to the political unrest which commenced there in February 2011, we suspended our operations in, and demobilized substantially all of our personnel from Libya. Although we reopened our office there in November 2011, we are unable to predict when, or if, the work will resume. At June 30, 2013, the accounts receivable related to the work performed under contracts in the region was approximately $60,000,000. We are unable to determine the effect the political and economic uncertainty will have on the collectibility of the accounts receivable. We believe that the amounts due will be collected during 2013, however, if we are unable to do so, there could be a significant adverse impact on our results of operations and consolidated financial position.

Non-GAAP Financial Measures

Regulation G, conditions for use of Non-Generally Accepted Accounting Principles ("Non-GAAP") financial measures, and other SEC regulations define and prescribe the conditions for use of certain Non-GAAP financial information. Generally, a Non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. We believe earnings before interest, taxes, depreciation and amortization ("EBITDA"), in addition to operating profit, net earnings and other GAAP measures, is a useful indicator of our financial and operating performance and our ability to generate cash flows from operations that are available for taxes and capital expenditures. This measure, however, should be considered in addition to, and not as a substitute or superior to, operating profit, cash flows, or other measures of financial performance prepared in accordance with GAAP. The following table is a reconciliation of EBITDA to the most directly comparable GAAP measure in accordance with SEC Regulation S-K for the three-and six- month periods ended June 30, 2013 and 2012 (in thousands):

                                   Three months ended June 30,         Six months ended June 30,
                                      2013              2012             2013             2012

Net earnings (loss)              $           719    $        (324 )  $         339    $      (7,060 )
Interest expense, net                      6,281            3,150           11,768            7,991
Income tax expense (benefit)               2,288             (471 )          4,162           (1,512 )
Depreciation and amortization              2,657            3,017            5,196            6,322
EBITDA                           $        11,945    $       5,372    $      21,465    $       5,741


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Three Months Ended June 30, 2013 Compared to

Three Months Ended June 30, 2012

Results of Operations



Consulting Fee Revenue ("CFR")



                           Three months ended June 30,
                            2013                2012              Change
                                      (dollars in thousands)
Project Management    $  98,979    77.1 % $  77,175    74.2 % $ 21,804   28.3 %
Construction Claims      29,448    22.9      26,894    25.8      2,554    9.5
Total                 $ 128,427   100.0 % $ 104,069   100.0 % $ 24,358   23.4 %

The increase in Hill's CFR in the second quarter of 2013 over the second quarter of 2012 was substantially all organic and was primarily due to increased work in the Middle East.

The increase in Project Management CFR during the second quarter of 2013 consisted of a $20,501,000 increase in foreign projects and an increase of $1,303,000 in domestic projects. The increase in foreign Project Management CFR included increases of $11,999,000 in Oman, $3,537,000 in Qatar and $2,290,000 in Saudi Arabia, where several new projects started recently. The increase in domestic Project Management CFR was due primarily to increases in our Mid-Atlantic and Northeast regions.

During the second quarter of 2013, the increase in Hill's Construction Claims CFR was primarily due to increases in the Middle East and Asia/Pacific, partially offset by a decrease in the United Kingdom.

Reimbursable Expenses



                          Three months ended June 30,
                            2013               2012             Change
                                     (dollars in thousands)
Project Management    $ 18,609    92.9 % $ 14,707    95.8 % $ 3,902    26.5 %
Construction Claims      1,428     7.1        652     4.2       776   119.0
Total                 $ 20,037   100.0 % $ 15,359   100.0 % $ 4,678    30.5 %

Reimbursable expenses consist of amounts paid to subcontractors and other third parties and travel and other job-related expenses that are contractually reimbursable from clients. These items are reflected as separate line items in both our revenue and cost of services captions in our consolidated statements of operations.

The increase in Project Management reimbursable expenses was due primarily to increased use of subcontractors of $2,413,000 in our Northeast region and $709,000 in the Western region.

The increase in Construction Claims reimbursable expenses was primarily due to increased use of subcontractors in the Middle East and the United States.


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Cost of Services



                                 Three months ended June 30,
                               2013                      2012                 Change
                                            (dollars in thousands)
                                         % of                      % of
                                         CFR                       CFR
Project Management    $ 62,589    83.1 % 63.2 % $ 47,824    80.0 % 62.0 % $ 14,765   30.9 %
Construction Claims     12,768    16.9   43.4     11,977    20.0   44.5        791    6.6
Total                 $ 75,357   100.0 % 58.7 % $ 59,801   100.0 % 57.5 % $ 15,556   26.0 %

Cost of services consists of labor expenses for time charged directly to contracts and non-reimbursable job-related travel and out-of-pocket expenses.

The increase in Project Management cost of services is primarily due to increases in the Middle East in support of increased work in Oman, Qatar, Saudi Arabia and the United Arab Emirates.

The increase in the cost of services for Construction Claims was due primarily to increases in direct cost in the Middle East and Asia/Pacific in support of increased work.

Gross Profit



                                Three months ended June 30,
                               2013                     2012                 Change
                                           (dollars in thousands)
                                        % of                      % of
                                        CFR                       CFR
Project Management    $ 36,390   68.6 % 36.8 % $ 29,351    66.3 % 38.0 % $ 7,039   24.0 %
Construction Claims     16,680   31.4   56.6     14,917    33.7   55.5     1,763   11.8
Total                 $ 53,070    100 % 41.3 % $ 44,268   100.0 % 42.5 % $ 8,802   19.9 %

The increase in Project Management gross profit included an increase of $5,938,000 from international operations including increases of $7,222,000 from the Middle East, primarily Oman, Qatar, Saudi Arabia, Iraq and Afghanistan. This was partially offset by decreases in Brazil, Spain and Romania.

The increase in Construction Claims gross profit was driven by increases in the Middle East and Asia/Pacific, partially offset by a decrease in the United Kingdom.

Gross profit percentages for the Project Management group decreased slightly from 38.0% in 2012 to 36.8% in 2013 due to lower margins attained in Brazil, Spain and Romania, partially offset by higher margins in the Middle East.

Gross margin as a percentage of CFR increased slightly for the Construction Claims group from 55.5% in 2012 to 56.6% in 2013 primarily due to higher margin percentages in the United Kingdom and the Middle East.

Selling, General and Administrative ("SG&A") Expenses

Three months ended June 30,

                      2013               2012            Change
                              (dollars in thousands)
                             % of              % of
                             CFR               CFR
SG&A Expenses   $   43,230   33.7 % $ 41,071   39.5 % $ 2,159   5.3 %

As a percentage of CFR, SG&A expense decreased to 33.7% in 2013 from 39.5% in 2012. The significant components of the increase in the amount of SG&A are as follows:


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An increase of $1,636,000 in indirect labor including $1,100,000 in staff termination costs primarily in Spain and Brazil where several projects ended;

An increase in unapplied labor of $1,279,000 due primarily to increases in staff required for new work in the Middle East. Unapplied labor, which increased 10.9% over the prior year compared to a 23.4% increase in CFR, represents the labor costs of operating staff for non-billable tasks. This represents improved utilization of billable staff over the prior year;

An increase of $579,000 in professional fees due to statutory, audit and tax filings for increased international operations;

An increase in administrative travel cost of $367,000 in support of expanded international operations;

An increase of $229,000 for additional bad debt reserves primarily in the domestic Project Management Group; and

A credit of $2,579,000 resulting from the elimination of a 2012 reserve for potential employment tax liabilities for a foreign subsidiary which has now been indemnified by the former majority shareholders of the subsidiary, partially offset by an increase in the second installment payment for the purchase of ESA.

Operating Profit



                          Three months ended June 30,
                             2013               2012            Change
                                     (dollars in thousands)
                                    % of             % of
                                    CFR              CFR
Project Management    $   13,334    13.5 % $ 7,079    9.2 % $ 6,255    88.4 %
Construction Claims        3,384    11.5     2,524    9.4       860    34.1
Corporate                 (6,878 )          (6,406 )           (472 )   7.4
Total                 $    9,840     7.7 % $ 3,197    3.1 % $ 6,643   207.8 %

The increase in Project Management operating profit included an increase of $6,075,000 in the Middle East, primarily Oman, Qatar, Saudi Arabia, Iraq and Afghanistan, $1,744,000 in Brazil primarily due to the elimination of the 2012 potential employment tax liability and $630,000 in the United States, partially offset by a decrease of $2,162,000 in Spain.

The increase in Construction Claims operating profit was primarily due to increases of $531,000 in the Middle East and $399,000 in Asia/Pacific.

Corporate expenses were held to an increase of 7.4% compared to the CFR increase of 23.4%. Increases included travel expenses, professional fees, computer costs and depreciation expense in support of the growth in revenue.

Interest Expense and Related Financing Fees, net

Net interest and related financing fees increased $3,131,000 to $6,281,000 in the second quarter of 2013 as compared with $3,150,000 in the second quarter of 2012, primarily due to higher levels of debt outstanding and higher interest rates. Included in interest expense for the second quarter of 2013 is a non-cash charge of $1,957,000 attributable to the accretion on the term loan and $522,000 of fees related to the Fourth Amendment to the Credit Agreement.

Income Taxes

For the three-month periods ended June 30, 2013 and 2012, the Company recognized an income tax expense (benefit) of $2,288,000 and ($471,000), respectively. The income tax expense in 2013 was related to the pre-tax income generated from foreign operations without recognizing an income tax benefit related to the 2013 U.S. net operating loss which management believes the Company will not be able to utilize. The income tax benefit in 2012 is primarily related to the U.S. net operating loss generated during that quarter offset by pre-tax income from foreign operations.

The effective income tax rates for the three-month periods ended June 30, 2013 and 2012 were 64.3% and (1002.1%), respectively. The difference in the Company's effective tax rate was primarily a result of not recording an income tax


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benefit related to the 2013 U.S. net operating loss.

Net Earnings (Loss) Attributable to Hill International, Inc.

Net earnings (loss) attributable to Hill International, Inc. for the three months ended June 30, 2013 were $719,000 or $0.02 per diluted common share based on 38,943,000 diluted common shares outstanding, as compared to a net loss for the three months ended June 30, 2012 of ($324,000) or ($0.01) per diluted common share based upon 38,590,000 diluted common shares outstanding. The primary reasons for the change are a higher gross profit and reduced SG&A expenses offset by higher interest expenses and the loss of an income tax benefit related to U.S. net operating losses.


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Six Months Ended June 30, 2013 Compared to

Six Months Ended June 30, 2012

Results of Operations



Consulting Fee Revenue ("CFR")



                                Six months ended June 30,
                            2013                     2012                  Change
                                            (dollars in thousands)
Project Management    $ 193,977    77.3 % $      150,316        74.0 % $ 43,661   29.0 %
Construction Claims      57,006    22.7           52,950        26.0      4,056    7.7
Total                 $ 250,983   100.0 % $      203,266       100.0 % $ 47,717   23.5 %

The increase in Hill's CFR was substantially all organic and was primarily due to increased work in the Middle East.

During the first six months of 2013, Hill's Project Management CFR consisted of a $41,203,000 increase in foreign projects and an increase of $2,458,000 in domestic projects. The increase in foreign Project Management CFR included increases of $20,946,000 in Oman, $6,656,000 in Qatar, $5,738,000 in Saudi Arabia and $3,383,000 in the United Arab Emirates where several new projects started recently. The increase in domestic Project Management CFR was due primarily to increases in our Mid-Atlantic region.

During the first six months of 2013, the increase in Hill's Construction Claims CFR was primarily due to increases in the Middle East and Asia/Pacific, partially offset by a decrease in the United Kingdom.

Reimbursable Expenses



                                Six months ended June 30,
                            2013                    2012                   Change
                                           (dollars in thousands)
Project Management    $ 31,190    93.0 % $       30,603         95.7 % $   587    1.9 %
Construction Claims      2,364     7.0            1,372          4.3       992   72.3
Total                 $ 33,554   100.0 % $       31,975        100.0 % $ 1,579    4.9 %

Reimbursable expenses consist of amounts paid to subcontractors and other third parties, and travel and other job-related expenses that are contractually reimbursable from clients. These items are reflected as separate line items in both our revenue and cost of services captions in our consolidated statements of operations.

The increase in Project Management reimbursable expenses was due primarily to increased use of subcontractors in the Mid-Atlantic region, Western region and Egypt, partially offset by a decrease in the Northeast region.

The increase in Construction Claims reimbursable expenses was primarily due to increases in the Middle East and Asia/Pacific.


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Cost of Services



                                          Six months ended June 30,
                                 2013                              2012                        Change
                                                      (dollars in thousands)
                                            % of                                  % of
                                            CFR                                   CFR
Project Management    $ 122,862     83.0 %   63.3 % $       94,473        79.9 %   62.8 % $ 28,389     30.0 %
Construction Claims      25,193     17.0     44.2           23,790        20.1     44.9      1,403      5.9
Total                 $ 148,055    100.0 %   59.0 % $      118,263       100.0 %   58.2 % $ 29,792     25.2 %

Cost of services consists of labor expenses for time charged directly to contracts and non-reimbursable job-related travel and out-of-pocket expenses.

The increase in Project Management cost of services is primarily due to increases in the Middle East in support of increased work in Oman, Qatar, Saudi Arabia and the United Arab Emirates.

The increase in the cost of services for Construction Claims was due primarily to increases in direct cost in the Middle East and Asia/Pacific in support of increased work, partially offset by a decrease in the United Kingdom.

Gross Profit



                                          Six months ended June 30,
                                 2013                               2012                        Change
                                                      (dollars in thousands)
                                            % of                                   % of
                                            CFR                                    CFR
Project Management    $  71,115     69.1 %   36.7 % $       55,843         65.7 %   37.2 % $ 15,272     27.3 %
Construction Claims      31,813     30.9     55.8           29,160         34.3     55.1      2,653      9.1
Total                 $ 102,928    100.0 %   41.0 % $       85,003        100.0 %   41.8 % $ 17,925     21.1 %

The increase in Project Management gross profit included an increase of $13,507,000 from international operations including increases of $13,885,000 from the Middle East, primarily Oman, Qatar and Saudi Arabia.

The increase in Construction Claims gross profit was driven by increases in the Middle East and Asia/Pacific, partially offset by a decrease in the United Kingdom.

The overall gross profit percentage declined slightly due to an increase in the mix of work towards the Project Management group which generally has lower gross margin percentages than the Construction Claims group.

Selling, General and Administrative ("SG&A") Expenses

                         Six months ended June 30,
                     2013                    2012                 Change
                                    (dollars in thousands)
                           % of                       % of
                           CFR                        CFR
SG&A Expenses   $ 85,689   34.1 % $       84,543        41.6 % $ 1,146   1.4 %

As a percentage of CFR, SG&A expense decreased to 34.1% in 2013 compared to 41.6% in 2012.

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

An increase of $2,080,000 in unapplied labor primarily in the Middle East due to an increase in staff required for the new work. Unapplied labor, which increased 8.5% over the prior year compared to a 23.5% increase in CFR,


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represents the labor costs of operating staff for non-billable tasks. This represents improved utilization of billable staff over the prior year;

An increase of $1,885,000 in indirect labor including $1,300,000 in staff termination costs primarily in Spain and Brazil where staff was reduced as several projects ended;

An increase in administrative travel costs of $459,000 in support of expanded international operations;

An increase of $471,000 in bad debt expense for reserves placed primarily in the domestic Projects Group;

An increase of $320,000 in professional fees due to statutory, audit and tax filings for increased international operations;

A decrease of $3,683,000 for the reversal of a 2012 reserve for potential employment tax liabilities for a foreign subsidiary which has now been indemnified by the former majority shareholders of the subsidiary; and

A credit of $882,000 in amortization expense due to the full amortization of the shorter-lived intangible assets of companies we acquired over the last several years.

Operating Profit



                               Six months ended June 30,
                           2013                    2012                   Change
                                          (dollars in thousands)
                                 % of                       % of
(in thousands)                   CFR                        CFR
. . .
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