Hill International, Inc. - Quarter Report: 2010 September (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 September 30, 2010

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 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  ¨    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.

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 38,248,923 shares of the Registrant’s Common Stock outstanding at November 1, 2010.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Index to Form 10-Q

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Item 8. Financial Statements and Supplementary Data.

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)

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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 project management and construction claims 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. 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, 2009. 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.

During 2009, the Company began charging a portion of depreciation and amortization expense, which had previously been reflected in selling, general and administrative expenses, to cost of services. As a result, the consolidated statements of earnings for the three and nine months ended September 30, 2009 have been revised to increase cost of services and decrease selling, general and administrative expenses by $224,000 and $643,000 respectively and gross profit also declined by the same amount in that period. There was no effect on operating profit or consolidated net earnings in those periods.

New Accounting Pronouncements

Effective January 1, 2010, the Company adopted a new standard pertaining to the consolidation of variable interest entities that requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This standard also requires an ongoing reassessment of the primary beneficiary of the variable interest entity and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. The adoption of this standard did not have a any impact on the Company’s consolidated financial statements.

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Effective January 1, 2010, the Company also adopted a new standard pertaining to accounting for transfers of financial assets that removes the concept of a qualifying special-purpose entity from accounting for transfers and servicing of financial assets and extinguishment of liabilities. This standard also clarifies the requirements for transfers of financial assets that are eligible for sale accounting. The adoption of this standard did not have a any impact on the Company’s consolidated financial statements.

Note 3 – Acquisitions

On June 8, 2010, the Company acquired McLachlan Lister Pty. Ltd. (“MLL”), a firm that provides management consulting and project management services throughout Australia. MLL, which has approximately 50 employees, is based in Sydney with an additional office in Brisbane. The acquisition strengthens the Company’s existing construction claims business and provides opportunities for the project management business in Australia. Total consideration amounted to approximately 15,388,000 Australian dollars (A$) ($13,080,000 at the exchange rate on the date of acquisition), consisting of A$9,393,000 ($7,994,000) in cash, an excess net worth payment of approximately A$995,000 ($846,000) paid on October 8, 2010, a A$2,000,000 ($1,700,000) note payable due June 8, 2011 and contingent consideration amounting to A$3,000,000 ($2,550,000). The contingent consideration is payable if MLL achieves earnings before interest and taxes of at least A$2,500,000 ($2,125,000) during the twelve month period ending June 30, 2011. The Company acquired intangible assets and goodwill amounting to A$6,182,000 ($5,255,000) and A$6,286,000 ($5,356,000), respectively. The acquired intangible assets have a weighted average life of 8.8 years. The acquired intangible assets consist of a client relationship intangible of A$5,275,000 ($4,484,000) with a ten-year life, a contract intangible of A$540,000 ($459,000) with a two-year life and a trade name intangible of A$367,000 ($312,000) with a two-year life. Goodwill, which is not deductible for income tax purposes, has been allocated to the Construction Claims operating segment. The results of operations of MLL are not material to the Company.

On July 6, 2010, the Company acquired certain assets and assumed certain liabilities of the Construction Management Division of dck North America, LLC. The acquired business, with approximately 90 employees, provides program management, agency construction management and construction inspection services primarily on transportation and building projects in Pennsylvania, Ohio and Florida. The acquisition extends our geographic reach and significantly strengthens our highway and bridge practice in the United States. Total consideration amounted to approximately $5,385,000, consisting of $4,885,000 in cash and a deferred payment, due July 8, 2011, amounting to $500,000 secured by a letter of credit in favor of the seller. The Company acquired intangible assets and goodwill amounting to $2,051,740 and $3,272,428, respectively. The acquired intangible assets have a weighted average life of 5.2 years. The acquired intangible assets consist of a client relationship intangible of 571,000 with a ten-year life, a contract intangible of $1,283,100 with a three and one-half year life and a trade name intangible of $197,640 with a two-year life. Goodwill, which is deductible for income tax purposes, has been allocated to the Project Management operating segment. The results of operations of the acquired business are not material to the Company.

The Company expenses all acquisition-related costs rather than including such costs as a component of the purchase consideration. The Company expensed approximately $499,000 and $892,000 of such costs during the three- and nine-month periods ended September 30, 2010, respectively.

Note 4 – Comprehensive Earnings

The following table summarizes the Company’s comprehensive earnings:

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Note 5 – Accounts Receivable

The components of accounts receivable are as follows:

The Company had one client that accounted for 15% of consulting fee revenue for the nine-month period ended September 30, 2010 and that accounted for 29% of accounts receivable at September 30, 2010.

Note 6 – Intangible Assets

The following table summarizes the Company’s acquired intangible assets:

Amortization expense related to intangible assets totaled $1,433,000 and $914,000 for the three months ended September 30, 2010 and 2009, respectively, and $3,838,000 and $2,589,000 for the nine months ended September 30, 2010 and 2009, respectively. The following table presents the estimated amortization expense

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based on our present intangible assets for the next five years:

Note 7 – 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, 2010 and noted no impairment for either of its reporting units. Based on the valuation, the fair value of the Project Management unit and the Construction Claims unit substantially exceeded their carrying values.

The following table summarizes the changes in the Company’s carrying value of goodwill during 2010 (in thousands):

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Note 8 – Accounts Payable and Accrued Expenses

Below are the components of accounts payable and accrued expenses:

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Note 9 – Notes Payable

Outstanding debt obligations are as follows:

The Company has a credit agreement (the “Credit Agreement”), dated as of June 30, 2009 among the Company, Bank of America, N.A., Capital One, N.A., The PrivateBank and Trust Company and PNC Bank N.A., which provides for borrowings of up to $100,000,000. The Credit Agreement also provides for a letter of credit sub-facility of up to $30,000,000. Obligations under the Credit Agreement are collateralized by 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 subsidiary, Hill International S.A. The Credit Agreement expires on June 30, 2012. The Company incurred costs of approximately $1,741,000 in connection with establishing the new credit facility. Such costs have been deferred and are being amortized to interest expense over the life of the loan.

The Credit Agreement provides for Base Rate loans and Eurodollar Rate loans. Base Rate loans bear interest at a fluctuating rate per annum equal to the sum of (a) the highest of (i) the Federal Funds Rate plus 0.5%, (ii) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate” and (iii) the Eurodollar Rate plus 1.00%, plus (b) an Applicable Rate which may vary between 1.75% and

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2.50% depending on the Company’s consolidated leverage ratio at the time of the borrowing. Eurodollar Rate loans bear interest at a rate per annum equal to the British Bankers Association LIBOR Rate plus an Applicable Rate which may vary between 2.75% and 3.50% depending on the Company’s consolidated leverage ratio at the time of the borrowing.

The Credit Agreement contains 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. It also requires the Company to meet certain financial tests at any time that borrowings are outstanding under the facility including minimum consolidated net worth of $100,000,000 plus 50% of consolidated net earnings attributable to Hill International, Inc. for each quarter after June 30, 2009, consolidated leverage ratio not to exceed 2.50 to 1.00, a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a minimum ratio of consolidated billed and unbilled accounts receivable to consolidated senior indebtedness of 2.00 to 1.00. At September 30, 2010, the Company was in compliance with all of the loan covenants.

As of September 30, 2010, the Company had $10,978,000 in outstanding letters of credit which reduced availability under the credit facility. Due to the limitations of the ratio of the Company’s consolidated billed and unbilled accounts receivable to consolidated senior indebtedness, total remaining availability at September 30, 2010 was $16,075,000.

The Company has a revolving credit facility with Barclays Bank PLC which provides for borrowings of up to £500,000 (approximately $790,000 and $804,000 at September 30, 2010 and December 31, 2009, respectively), with interest at 2.00% plus The Bank of England rate of 0.50% (or 2.50%) at September 30, 2010 and 2.00% plus the Bank of England rate of 0.50% (or 2.50%) at December 31, 2009, collateralized by cross guarantees of various United Kingdom companies. There were no outstanding borrowings at September 30, 2010 or December 31, 2009. The loan has an indeterminate term and is subject to annual review by the bank.

The Company maintains a credit facility with a bank in the Middle East for 11,500,000 AED (approximately $3,131,000 at both September 30, 2010 and December 31, 2009) collateralized by certain overseas receivables. The interest rate on this facility is 3.0% plus the one-month Emirates InterBank Offer Rate (“EIBOR”), which was 1.79% (or 4.79%) at September 30, 2010, but no less than 5.50%. The facility also allows for up to 150,000,000 AED (approximately $40,836,000) in Letters of Guarantee of which 90,693,000 AED (approximately $24,691,000) was utilized at September 30, 2010. This facility expired on August 27, 2010. The Company intends to renew this facility which is currently being negotiated under a six month verbal extension.

The Company maintains a revolving credit facility with a European bank up to €1,000,000 (approximately $1,363,000 and $1,434,000 at September 30, 2010 and December 31, 2009, respectively), with interest rates at 2.50% plus the Bank’s prime rate of 6.00% (or 8.5%) at September 30, 2010 and 2.50% plus the Bank’s prime rate of 6.25% (or 8.75%) at December 31, 2009, collateralized by certain assets of the Company. At September 30, 2010 and December 31, 2009, there were no outstanding borrowings under this facility which expires on April 30, 2011. The facility also allows for letters of guarantee up to €4,500,000 (approximately $6,131,000 and $6,454,000 at September 30, 2010 and December 31, 2009 respectively,) of which €213,000 (approximately $290,000) was utilized at September 30, 2010.

The Company maintains an unsecured credit facility with a bank in Spain for €750,000 (approximately $1,022,000 and $1,076,000 at September 30, 2010 and December 31, 2009 respectively). The interest rate on that facility is the three-month EURIBOR rate which at September 30, 2010 was 0.9%, plus 1.75% (or 2.65%) and at December 31, 2009 was 0.71%, plus 1.75% (or 2.46%) but no less than 4.00%. At September 30, 2010

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and December 31, 2009, there were no outstanding borrowings under this facility which expires on December 24, 2011.

Note 10 – Supplemental Cash Flow Information

The following table provides additional cash flow information:

Note 11 – Equity in Earnings of Affiliates

Equity in earnings of affiliates primarily reflects the Company’s ownership of 33.33% of the members’ equity of Stanley Baker Hill, LLC (“SBH”) and its ownership of 50.00% of the members’ equity of Hill TMG.

Stanley Baker Hill, LLC

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 September 30, 2010 and December 31, 2009, the Company reported receivables totaling $940,000 and $3,534,000, 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 September 30, 2010 and 2009 was $2,693,000 and $7,682,000, respectively and $11,206,000 and $28,766,000 for the nine-month periods ended September, 30, 2010 and 2009, respectively. The decline in revenues from SBH is due to the wind-down of the Iraq Reconstruction Program which will be completed within the fourth quarter of 2010.

Hill TMG

Hill TMG is 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 September 30, 2010 and December 31, 2009, the Company reported receivables totaling $1,809,000 and $2,215,000, 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 periods ended September 30, 2010 and 2009 was $286,000 and $786,000, respectively and for the nine-month periods ended September 30, 2010 and 2009 was $1,097,000 and $2,737,000, respectively.

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The following table summarizes the Company’s equity in earnings from affiliates:

Note 12 – 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 449,540 shares and 626,557 shares for the three-month periods ended September 30, 2010 and 2009, respectively and 546,875 shares and 381,062 shares for the nine-month periods ended September 30, 2010 and 2009, respectively. Certain stock options were excluded from the 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 1,466,880 shares and 891,500 shares for the three-month periods ended September 30, 2010 and 2009, respectively, 1,284,518 shares and 808,273 shares for the nine-month periods ended September 30, 2010 and 2009, respectively. The 1,000,000 common shares, which were issued in April 2010 in connection with the 2009 earn-out provision of the merger agreement with Arpeggio, have been included, effective January 1, 2010, in both the basic and diluted weighted average shares for the three- and nine-month periods ended September 30, 2010.

Note 13 – Share-Based Compensation

At September 30, 2010, the Company had 2,720,480 options outstanding with a weighted average exercise price of $4.51. During the nine-month period ended September 30, 2010, the Company granted 305,000 options which vest over a five-year period, 320,000 options which vest over a four year-period and 106,085 options which vested immediately. The options have a weighted average exercise price of $5.81 and a weighted-average contractual life of 5.83 years. The aggregate fair value of the options was $1,596,000 calculated using the Black-Scholes valuation model. The weighted average assumptions used to calculate fair value were: expected life – 5.83 years; volatility – 48.4% and risk free interest rate – 2.21%. During the first nine months of 2010, options for 3,000 shares with a weighted average exercise price of $2.45 were exercised, options for 31,000 shares with a weighted average exercise price of $5.96 were forfeited and options for 16,000 shares with a weighted average exercise price of $7.16 lapsed.

During the nine-month period ended September 30, 2010, the Company issued 63,000 shares of restricted common stock to certain of its officers under the Company’s 2007 Restricted Stock Grant Plan.

During the nine-month period ended September 30, 2010, employees purchased 51,166 common shares, for an aggregate purchase price of $209,000, pursuant to the Company’s 2008 Employee Stock Purchase Plan.

The Company recognized share-based compensation expense in selling, general and administrative expenses in

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the consolidated statement of earnings totaling $517,000 and $433,000 for the three-month periods ended September 30, 2010 and 2009, respectively and $1,673,000 and $1,757,000 for the nine-month periods ended September 30, 2010 and 2009, respectively.

Note 14 – Stockholders’ Equity

On November 10, 2008, the Board of Directors approved a stock repurchase program whereby the Company may purchase shares of its common stock up to a total purchase price of $20,000,000 over the subsequent 12 months. On August 4, 2009, the Board of Directors amended the stock repurchase program to increase the authorized amount to $40,000,000 and extend the program to December 31, 2010. Through September 30, 2010, the Company has purchased 5,834,069 shares of its common stock for an aggregate purchase price of $24,438,000, or $4.19 per share, under this program.

The following table summarizes the changes in stockholders’ equity during the nine months ended September 30, 2010:

Note 15 – Income Taxes

During the three-month period ending September 30, 2010, the Company recognized a benefit in the reserves for uncertain tax positions of $914,000 due to the expiration of the statute of limitations related to the filing of certain income tax returns and a $177,000 tax expense resulting from adjustments to agree the 2009 book amount to the actual amounts per the tax returns. During the nine-month periods ended September 30, 2010 and 2009, the Company recognized income tax benefits of $1,654,000 and $1,807,000, respectively, due to the expiration of the statute of limitations related to the filing of certain income tax returns resulting in a reduction in the reserves for uncertain tax positions. Also, during the nine-month period ended September 30, 2010 and 2009, the Company recognized an increase in the reserve for uncertain tax positions of $1,552,000 and $721,000, respectively, primarily related to foreign subsidiaries.

The following table indicates the changes to the Company’s uncertain tax positions for the nine-month periods ended September 30, 2010 and 2009 including interest and penalties.

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The balance is included in “Other liabilities” in the consolidated balance sheet at September 30, 2010.

The Company’s policy is to record income tax related interest and penalties in income tax expense. At September 30, 2010, the Company has not recorded interest or penalties related to uncertain tax positions.

The effective income tax rates for the three-month periods ended September 30, 2010 and 2009 were 0.0% and 21.4%, respectively, and the effective income tax (benefit) expense rates for the nine-month periods ended September 30, 2010 and 2009 were (0.4%) and 13.2%, respectively. Excluding the effect of the reserve adjustment and the provision to return adjustment the effective income tax rate would have been 14.8% and 25.4% for the three-month periods ended September 30, 2010 and 2009 respectively, and 10.3% and 25.4% respectively, for the nine-month periods ended September 30, 2010 and 2009.

Note 16 – 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, troubled project turnaround, staff augmentation, estimating and cost management, project labor agreement consulting and management consulting services.

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

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

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

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Three Months Ended:

Consulting Fee Revenue:

Total Revenue:

Operating Profit:

Depreciation and Amortization Expense:

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Consulting Fee Revenue by Geographic Region: