Hill International, Inc. - Quarter Report: 2009 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2009

or

For the transition period from              to             

Commission File Number: 001-33961

HILL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  ¨    No  ¨

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. (Check one):

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

There were 39,964,078 shares of the Registrant’s Common Stock outstanding at May 1, 2009.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Index to Form 10-Q

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

See accompanying notes to consolidated financial statements.

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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 headquartered in Marlton, New Jersey that provides both fee-based project management and construction claims consulting services to clients worldwide. Hill’s clients include the U.S. federal government, U.S. state and local governments, foreign governments, and the private sector. Hill’s business was established in 1976 as a closely held corporation. On September 28, 2006, the closely held Hill (“Old Hill”) merged with and into Arpeggio Acquisition Corp. (“Arpeggio”), a specified purpose acquisition company, at which time Arpeggio changed its name to “Hill International, Inc.” 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 accounting principles generally accepted in the United States and the interim financial statement rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles 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 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, 2008.

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 accounting principles generally accepted in the United States 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.

Noncontrolling interests

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which became effective for the Company on January 1, 2009. SFAS No. 160 requires that noncontrolling interests (previously referred to as minority interests) be reported as a component of shareholders’ equity; net income attributable to the parent and the noncontrolling interest be separately identified in the consolidated results of operations; changes in a parent’s ownership interest be treated as equity transactions if control is maintained; and upon a loss of control, any gain or loss on the interest be recognized in the consolidated results of operations. Prior period amounts were reclassified to conform to the current period presentation. The effect on the Company’s consolidated financial statements was not material.

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Note 3 - Comprehensive Earnings

The following table summarizes the Company’s comprehensive earnings:

See accompanying notes to consolidated financial statements.

Note 4 - Accounts Receivable

The components of accounts receivable are as follows:

Note 5 - Intangible Assets

The following table summarizes the Company’s acquired intangible assets as of March 31, 2009 and December 31, 2008:

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Amortization expense related to intangible assets totaled $824,000 and $479,000 for the three-month periods ended March 31, 2009 and 2008, respectively. Estimated amortization expense based on our present intangible assets for the next five years:

Note 6 - Goodwill

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, the Company performs its annual goodwill impairment testing, by reportable segment, 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 following table summarizes the changes in the Company’s carrying value of goodwill during the three months ended 2009 (in thousands):

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7 - Accounts Payable and Accrued Expenses

Below are the components of accounts payable and accrued expenses:

Note 8 - Notes Payable

Outstanding debt obligations are as follows:

The Company is a party to a loan and security agreement with Bank of America which provides for up to $60,000,000 to be made available on a revolving basis (the “Credit Facility”). The Credit Facility provides for a letter of credit sub-facility of $20,000,000. The Credit Facility is secured by substantially all of the Company’s domestic assets, including, without limitation, its accounts receivable, equipment, securities, financial assets and

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proceeds from the sale of the foregoing, as well as by a pledge of 66.6% of the outstanding capital stock of the following subsidiaries: Hill International S.A., Hill International (UK) Ltd., Hill International (Middle East) Ltd. and James R. Knowles (Holdings) Ltd.

The Credit Facility has a term extending until October 31, 2011. The Credit Facility provides for LIBOR loans and prime rate loans, payable at margins above either Bank of America’s prime rate or LIBOR based on the Company’s ratio of total debt to EBITDA ranging from 125 to 250 basis points above prime or LIBOR. At March 31, 2009, the applicable margins were 175 basis points above both the Bank of America’s prime rate of 3.25% (or 5.00%) and the LIBOR rate of 0.56% (or 2.31%). At December 31, 2008 the applicable margins were 175 basis points above Bank of America’s prime rate of 3.25% or (5.0%) and 175 basis points above LIBOR of 0.44% (or 2.19%). The Credit Facility contains covenants with respect to the Company’s minimum net worth, total debt to EBITDA ratios, fixed charge coverage ratios and billed accounts receivable to total debt ratios, as well as other financial covenants and certain restrictions on the incurrence of debt, on the making of investments, on the payment of dividends, on transactions with affiliates and other affirmative and negative covenants and events of default customary for facilities of its type. At March 31, 2009 the Company had $9,637,000 in outstanding letters of credit which reduced availability under the Credit Facility.

The Company also maintains a credit facility with a bank in the Middle East for AED 11,500,000 (approximately $3,132,000 at both March 31, 2009 and December 31, 2008) collateralized by certain overseas receivables. The interest rate on that facility is the three-month Emirates InterBank Offer Rate (“EIBOR”), which at both March 31, 2009 and December 31, 2008 was 3.0%, plus 2.0%. At March 31, 2009 and December 31, 2008, there were no outstanding borrowings under this facility. This facility expires on December 24, 2009.

The Company also maintains a revolving credit loan payable with a European Bank up to €1,000,000 (approximately $1,318,000 and $1,414,000 at March 31, 2009 and December 31, 2008, respectively), with interest rates at 2.50% plus the Bank’s prime rate of 8.0% (or 10.5% at both March 31, 2009 and December 31, 2008), collateralized by certain assets of the Company. At March 31, 2009 and December 31, 2008, there were no outstanding borrowings under this facility which expires on April 30, 2010.

The Company also maintains an unsecured credit facility with a bank in Spain for €750,000 (approximately $989,000 and $1,061,000 at March 31, 2009 and December 31, 2008 respectively). The interest rate on that facility is the three month EURIBOR rate which at March 31, 2009 was 2.26%, plus 0.75% (or 3.01%) and at December 31, 2008 was 3.68%, plus 0.75% (or 4.43%). At March 31, 2009 and December 31, 2008 there were no outstanding borrowings under this facility which expires on December 18, 2009.

Note 9 - Supplemental Cash Flow Information

The following table provides additional cash flow information:

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Note 10 - Equity in Earnings of Affiliates

Stanley Baker Hill, LLC

Equity in earnings of affiliates reflects ownership by the Company of 33.33% of the members’ equity of Stanley Baker Hill, LLC (“SBH”). SBH is a joint venture formed in February 2004 between Stanley Consultants, Inc., Michael Baker, Jr. Inc., and Hill.

SBH has a contract for an indefinite delivery and indefinite quantity for construction management and general architect-engineer services for facilities in Iraq with the U.S. Army Corps of Engineers.

At March 31, 2009 and December 31, 2008, the Company reported receivables totaling $3,432,000 and $7,654,000, respectively, from SBH for work performed by the Company as a subcontractor to SBH. Such amounts were payable in accordance with the subcontract agreement between the Company and SBH.

Revenue from SBH pursuant to such subcontract agreement for the three-month periods ended March 31, 2009 and 2008 was $11,590,000 and $7,417,000, respectively.

Hill TMG

Equity in earnings of affiliates also reflects ownership by the Company of 50% of the members’ equity of Hill TMG, a joint venture formed in May 2008 between Talaat Moustafa Group Holding Co. (“TMG”), and Hill. Hill TMG is managing the construction of several of TMG’s largest developments in Egypt and elsewhere in the Middle East.

At March 31, 2009 and December 31, 2008 the Company reported receivables totaling $2,353,000 and $1,482,000, respectively for work performed by the Company as a subcontractor to Hill TMG. Such amounts are payable in accordance with the subcontract agreement between the Company and Hill TMG.

Revenue from Hill TMG pursuant to such subcontract agreement for the three-month period ended March 31, 2009 was $628,000.

The following table summarizes the equity in earnings for each of the above affiliates:

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Note 11 - Earnings per Share

Basic earnings per common share and diluted earnings per common share are presented in accordance with SFAS No. 128, Earnings per Share. Basic earnings per common share have been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options, warrants and unit purchase options, if dilutive. Dilutive shares were 121,877 shares and 330,731 shares for the three-month periods ended March 31, 2009 and 2008, respectively. Certain stock options were excluded from the 2009 and 2008 calculation of diluted earnings per common share because their effect was antidilutive. The total number of such shares excluded from diluted earnings per common share was 1,038,500 shares and 100,000 shares for the three-month periods ended March 31, 2009 and 2008, respectively. The 1,000,000 common shares, which were issued in April 2009 in connection with the 2008 earn-out provision of the merger agreement with Arpeggio Acquisition Corporation, have been included, effective January 1, 2009, in both the basic and diluted weighted average shares for the three-month period ended March 31, 2009.

Note 12 - Share-Based Compensation

At March 31, 2009, the Company had 2,011,500 options outstanding with a weighted average exercise price of $5.39. During the three-month period ended March 31, 2009, the Company granted 850,000 options which vest over a five-year period and 200,000 options which vest over a four-year period. The options have a weighted average exercise price of $2.50 and a weighted-average contractual life of 6.43 years. The aggregate fair value of the options was $1,086,931 calculated using the Black-Scholes valuation model. The weighted average assumptions used to calculate the fair value were: expected life – 4.81 years; volatility – 48.1% and risk free interest rate – 1.83%. During the first three months of 2009, options for 18,000 shares with a weighted average exercise price of $6.22 were forfeited.

During the three-month period ended March 31, 2009, the Company issued 66,000 shares of restricted common stock to certain of its officers under the Company’s 2007 Restricted Stock Grant Plan.

During the three-month period ended March 31, 2009, employees purchased 88,694 common shares, for an aggregate purchase price of $234,000, 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 earnings totaling $465,000 and $122,000 for the three-month periods ended March 31, 2009 and 2008, respectively.

Note 13 - Income Taxes

During the three-month period ended March 31, 2009, the Company recognized an income tax benefit principally relating to a tax benefit of $1,471,000 due to the expiration of statutes upon the filing of certain income tax returns resulting in the reduction in the reserves for uncertain tax positions.

The following table indicates the changes to the Company’s uncertain tax positions for the period ended March 31, 2009, including interest and penalties:

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The balance noted above of $1,664,000 is included in “Other liabilities” in the consolidated balance sheet.

Note 14 - 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 services) and secondarily by their geography (Americas, Europe, the Middle East, North 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, staff augmentation, management consulting, and estimating and cost management services.

The Construction Claims business segment provides such services as claims consulting, litigation support, expert witness testimony, cost and damages assessment, delay and disruption analysis, lender advisory, and adjudication services to clients worldwide.

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

The following tables reflect the required disclosures for the Company’s reportable segments for the three-month periods ended March 31, 2009 and 2008 (in thousands):

Consulting Fee Revenue:

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Total Revenue:

Operating Profit:

Depreciation and Amortization Expense:

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Consulting Fee Revenue by Geographic Region:

Total Revenue by Geographic Region:

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Consulting Fee Revenue By Client Type:

Total Revenue By Client Type:

Total Assets by Geographic Region:

Property, Plant and Equipment, Net by Geographic Location:

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Note 15 - Concentrations

The Company had one client that accounted for 11% of total revenue for the three-month period ended March 31, 2009. The Company had no client which accounted for 10% or more of total revenue for the three-month period ended March 31, 2008.

The Company had one client that accounted for 13% of consulting fee revenue for the three-month period ended March 31, 2009 and 10% of consulting fee revenue for the three-month period ended March 31, 2008.

One of the Company’s clients accounted for 14% of accounts receivable as of March 31, 2009 and no clients accounted for more than 10% of accounts receivable at December 31, 2008.

The Company has numerous contracts with U.S. federal government agencies that collectively accounted for 14% and 13% of total revenue during the three-month periods ended March 31, 2009 and 2008, respectively.

Note 16 - Commitments and Contingencies

Litigation

On September 23, 1996, William Hughes General Contractors, Inc. (“Hughes”) filed a complaint in the Superior Court of New Jersey, Law Division, Gloucester County, against the Monroe Township Board of Education, the Company and other parties, alleging breach of contract and other causes of action in connection with its performance of a construction project for Monroe Township, seeking in excess of $3,500,000 in damages. Monroe Township, which had terminated Hughes from the construction project prior to the commencement of the litigation on the basis of Hughes’ performance, made a cross claim against the Company and other parties for contribution and indemnification. Monroe Township is seeking approximately $89,000 in damages from the Company, in addition to an indemnification for Hughes’ claims. In relation to the Hughes claims, a claim was made against the Company by Fidelity and Deposit Company of Maryland (“F&D”). F&D is claiming damages in the range of $425,000 to $470,000. The F&D claim is being defended by the New Jersey Professional Liability Insurance Guarantee Association (“NJPLIGA”) and losses are covered up to $300,000. The Company believes that the claims of Hughes, Monroe Township and F&D are without merit and, based on the Company’s current understanding and evaluation of the relevant facts and circumstances, no accruals have been made for any of these claims because the Company considers the chance of loss to be remote.

On May 23, 2007, the Company filed a Demand for Arbitration with the American Arbitration Association alleging breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment and/or fraudulent inducement against Bachmann Springs Holdings, LLC and Thomas Bachmann (hereinafter, collectively “Bachmann”). The Company was hired by Bachmann to provide professional support services and was demanding payment of invoices in the amount of $634,904. On October 17, 2007, Bachmann filed a counterclaim with the American Arbitration Association alleging fraud and breach of contract and seeking damages in the amount of $8,600,000. The matter was settled on June 12, 2008 wherein Bachmann agreed to pay the Company $500,000 within 90 days after the settlement date, $700,000 within 150 days or $800,000 thereafter. Due to uncertainty surrounding collection, the Company has fully reserved all amounts due from Bachmann.

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General Litigation

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

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We make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” 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 of 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 2008 Form 10-K. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of hereof. All forward-looking statements included herein attributable to us 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.

We provide fee-based project management and construction claims services to clients worldwide, but primarily in the United States, Europe, the Middle East/North Africa and Asia/Pacific. Our clients include the United States and other national governments and their agencies, state and local governments and their agencies and the private sector. 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 2,300 employees operating from 80 offices in more than 30 countries.

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 project and claims work. We have developed significant long-standing relationships which bring us repeat business and would be very difficult to replicate. We have an excellent reputation for developing and rewarding employees, which allows us to attract and retain superior professionals.

Critical Accounting Policies

The Company’s interim financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgment increases, such judgments become even more subjective. While management believes its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions identified in the Company’s 2008 Annual Report on Form 10-K filed March 16, 2009 with the Securities and Exchange Commission have not materially changed.

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We operate through two segments: the Project Management Group and the Construction Claims Group. Reimbursable expenses are reflected in equal amounts in both total revenue and total direct expenses. Because these revenues/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 consulting fee revenue (“CFR”), as we believe that this is a better and more consistent measure of operating performance than total revenue.

Three Months Ended March 31, 2009 Compared to

Three Months Ended March 31, 2008

Results of Operations

Consulting Fee Revenue (“CFR”)

Hill’s CFR grew 32.3% to $92,148,000 in the first quarter of 2009 from $69,638,000 in the first quarter of 2008. This was comprised of 22.5% organic growth primarily from the Middle East, Europe and North Africa and 9.8% from acquisitions.

During the first quarter of 2009, Hill’s project management CFR growth of 41.2% was comprised of 29.4% organic growth and 11.8% growth from acquisitions. The dollar increase in project management CFR consisted of a $21,011,000 increase in foreign projects and a decrease of $687,000 in domestic projects. The increase in foreign project management CFR was primarily due to a $6,305,000 increase generated in the Middle East, $6,450,000 in North Africa and $7,929,000 in Europe. Growth in our CFR in the Middle East has been strong primarily due to our involvement with the Iraq reconstruction efforts funded by the United States government which continues to provide additional work for us. After the first quarter of 2008, the Company commenced work on several new projects in North Africa, primarily in Libya. Growth in Europe is mainly due to the acquisitions of Gerens and Euromost generating CFR of $4,803,000. The decrease in domestic project management CFR revenue was primarily due to decreased work in the Texas region.

During the first quarter of 2009, Hill’s construction claims CFR growth of 10.8% was comprised of 5.8% organic growth and 5.0% growth from the acquisitions of PCI and Chitester. The dollar increase in construction claims CFR is primarily attributable to an increase in foreign construction claims CFR of $992,000 driven primarily by increased work in the Middle East and an increase in domestic construction claims CFR of $1,194,000 due primarily to PCI and Chitester which were acquired after the first quarter of 2008.

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Reimbursable Expenses

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 earnings. The increase in project management reimbursable expenses was due primarily to increased use of subcontractors of $1,762,000 in New York and $933,000 in Philadelphia partially offset by a decrease in subcontractor fees in Europe of $1,085,000.

Cost of Services

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 an increase in direct labor of $8,600,000 required to produce the higher volume of CFR. Of this amount, $2,316,000 is attributable to the acquisitions of Gerens and Euromost.

The increase in the cost of services for construction claims was due primarily to an increase of $1,507,000 in the Middle East and Asia/Pacific in line with an increase of $2,115,000 in CFR.

Gross Profit