Hill International, Inc. - Quarter Report: 2010 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, 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 40,366,945 shares of the Registrant’s Common Stock outstanding at April 30, 2010.

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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 construction consulting 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 June 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 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 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.

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 months ended March 31, 2009 have been revised to increase cost of services and decrease selling, general and administrative expenses by $204,000 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 years.

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

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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 material impact on the Company’s consolidated financial statements.

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 material impact on the Company’s consolidated financial statements.

Note 3 - Comprehensive Earnings

The following table summarizes the Company’s comprehensive earnings:

Note 4 - Accounts Receivable

The components of accounts receivable are as follows:

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Note 5 - Intangible Assets

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

Amortization expense related to intangible assets totaled $1,166,000 and $824,000 for the three months ended March 31, 2010 and 2009, respectively. The following table presents the estimated amortization expense based on our present intangible assets for the next five years:

Note 6 - 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, 2009 and noted no impairment for either of its reporting units.

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

Note 7 - Accounts Payable and Accrued Expenses

Below are the components of accounts payable and accrued expenses:

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Note 8 - 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 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.

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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 March 31, 2010, the Company was in compliance with all of the loan covenants.

As of March 31, 2010, the Company had $7,242,000 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 March 31, 2010 was $34,663,000.

The Company has a revolving credit facility with Barclays Bank PLC which provides for borrowings of up to £500,000 (approximately $754,000 and $804,000 at March 31, 2010 and December 31, 2009, respectively), with interest at 2.00% plus The Bank of England rate of 0.50% (or 2.50%) at both March 31, 2010 and December 31, 2009, collateralized by cross guarantees of various United Kingdom companies. There were no outstanding borrowings at March 31, 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 March 31, 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 1.78% (or 4.78%) at March 31, 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 62,233,000 AED (approximately $16,942,000) was utilized at March 31, 2010. This facility expires on August 27, 2010.

The Company maintains a revolving credit facility with a European bank up to €1,000,000 (approximately $1,343,000 and $1,434,000 at March 31, 2010 and December 31, 2009, respectively), with interest rates at 2.50% plus the Bank’s prime rate of 6.00% (or 8.50%) at March 31, 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 March 30, 2010 and December 31, 2009, there were no outstanding borrowings under this facility which expires on April 30, 2011.

The Company maintains an unsecured credit facility with a bank in Spain for €750,000 (approximately $1,007,000 and $1,076,000 at March 31, 2010 and December 31, 2009 respectively). The interest rate on that facility is the three month EURIBOR rate which at March 31, 2010 was 0.63%, plus 1.75% (or 2.38%) and at December 31, 2009 was 0.71%, plus 1.75% (or 2.46%) but no less than 4.00%. At March 31, 2010 and December 31, 2009, there were no outstanding borrowings under this facility which expires on December 24, 2011.

The Company maintained another credit facility with another European bank that allowed for €373,000 (approximately $501,000) of bank guarantees at March 31, 2010 and €2,000,000 (approximately $2,868,000 at December 31, 2009) of bank guarantees of which €373,000 (approximately $501,000 at March 31, 2010 and $535,000 at December 31, 2009) was utilized at both March 31, 2010 and December 31, 2009. The facility had an expiration date of March 31, 2010. The Company did not renew this facility.

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Note 9 - Supplemental Cash Flow Information

The following table provides additional cash flow information:

Note 10 - 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 March 31, 2010 and December 31, 2009, the Company reported receivables totaling $1,335,000 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 March 31, 2010 and 2009 was $4,808,000 and $11,590,000, respectively.

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 March 31, 2010 and December 31, 2009, the Company reported receivables totaling $2,329,000 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 March 31, 2010 and 2009 was $533,000 and $628,000, respectively.

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

Note 11 - 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 608,861 shares and 121,877 shares for the three-month periods ended March 31, 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 434,095 and 1,038,500 shares for the three-month periods ended March 31, 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-month period ended March 31, 2010.

Note 12 - Share-Based Compensation

At March 31, 2010, the Company had 2,645,395 options outstanding with a weighted average exercise price of $4.55. During the three-month period ended March 31, 2010, the Company granted 295,000 options which vest over a five-year period and 320,000 options which vest over a four year-period. The options have a weighted average exercise price of $6.11 and a weighted-average contractual life of 5.96 years. The aggregate fair value of the options was $1,429,000 calculated using the Black-Scholes valuation model. The weighted average assumptions used to calculate fair value were: expected life – 4.35 years; volatility – 48.5% and risk free interest rate – 2.30%. During the first three months of 2010, options for 2,000 shares with a weighted average exercise price of $2.45 were exercised, options for 3,000 shares with a weighted average exercise price of $7.67 were forfeited and options for 4,000 shares with a weighted average exercise price of $7.62 lapsed.

During the three-month period ended March 31, 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 three-month period ended March 31, 2010, employees purchased 17,309 common shares, for an aggregate purchase price of $82,000, 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 $428,000 and $465,000 for the three-month periods ended March 31, 2010 and 2009, respectively.

Note 13 - 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

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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 March 31, 2010, the Company has purchased 3,652,572 shares of its common stock for an aggregate purchase price of $15,110,000, or $4.14 per share under this program.

The following table summarizes the changes in stockholders’ equity during the three months ended March 31, 2010:

Note 14 - Income Taxes

During the three-month periods ended March 31, 2010 and 2009, the Company recognized income tax benefits of $761,000 and $1,471,000, respectively, due to the expiration of the statute of limitations upon the filing of certain income tax returns resulting in a reduction in the reserves for uncertain tax positions.

The following table indicates the changes to the Company’s uncertain tax positions for the three-month periods ended March 31, 2010 and 2009, including interest and penalties:

The Company’s policy is to record income tax related interest and penalties in income tax expense. At March 31, 2010, potential interest and penalties related to uncertain tax positions amounting to $385,000 was included in the balance above. The balance is included in “Other liabilities” in the consolidated balance sheet at March 31, 2010.

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The effective income tax (benefit) expense rates for the three-month periods ended March 31, 2010 and 2009 were (21.8%) and (10.3%), respectively. Excluding the effect of the reserve reductions above, the effective income tax rate would have been 10.0% and 31.0% for the three-month periods ended March 31, 2010 and 2009, respectively.

Note 15 - 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 (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:

During a review of the Company’s client information system in the fourth quarter of 2009, management questioned the classification of certain clients. Upon further investigation, it was determined that a particular foreign client, who had been initially identified as private sector, was actually a foreign government-backed entity. Accordingly, the Company has revised its allocation of revenues in the following two tables. The amounts for 2009 have been changed to conform to the new presentation.

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Consulting Fee Revenue By Client Type:

Total Revenue By Client Type:

Property, Plant and Equipment, Net by Geographic Location:

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Note 16 - Concentrations

The Company had one client that accounted for 12% of total revenue for the three-month period ended March 31, 2010 and one client that accounted for 11% of total revenue for the three-month period ended March 31, 2009.

The Company had one client that accounted for 14% of consulting fee revenue for the three-month period ended March 31, 2010 and one client that accounted for 13% of consulting fee revenue for the three-month period ended March 31, 2009.

One client accounted for 18% of accounts receivable as of March 31, 2010.

The Company has numerous contracts with U.S. federal government agencies that collectively accounted for 8% and 14% of total revenue during the three-month periods ended March 31, 2010 and 2009, respectively.

Note 17 - Commitments and Contingencies

Litigation

On July 16, 2009, Al Areen Desert Resort Holding Company (“Al Areen”) filed a complaint with the Ministry of Justice & Islamic Affairs in the Kingdom of Bahrain against the Company alleging breach of contract and other causes of action in connection with its performance of a construction project known as Al Areen Desert Spa and Resort (the “Project”), seeking the sum of approximately 10,200,000 Bahraini Dinars (approximately $27,052,000 at March 31, 2010) in damages. The Company provided project management services on the Project and Al Areen failed to pay the Company 679,000 Bahraini Dinars (approximately $1,801,000 at March 31, 2010) for services rendered on the Project. The Company served notice of termination on April 28, 2009. On September 26, 2009, the Company filed a Request for Arbitration with the International Chamber of Commerce, International Court of Arbitration, seeking the sum of 679,000 Bahraini Dinars. The Company has reserved approximately $531,000 against the receivable; however, the Company believes that Al Areen’s claim is without merit and, based on the Company’s current understanding and evaluation of the relevant facts and circumstances, no accrual has been made because the Company considers the chance of loss to be remote.

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,” “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 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 2009 Form 10-K. 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 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 Americas, 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 approximately 2,400 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 generally accepted accounting principles, 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 have not materially changed from those identified in the Company’s 2009 Annual Report on Form 10-K filed March 12, 2010 with the Securities and Exchange Commission.

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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, 2010 Compared to

Three Months Ended March 31, 2009

Results of Operations

Consulting Fee Revenue (“CFR”)

Hill’s CFR decreased 0.2% to $91,936,000 in the first quarter of 2010 from $92,148,000 in the first quarter of 2009. This was comprised of an organic 3.5% decrease partially offset by an increase of 3.3% from acquisitions. The organic decrease is primarily due to a decrease in the Middle East, partially offset by an increase in North Africa.

During the first quarter of 2010, Hill’s project management CFR decrease of 3.4% included an organic decrease of 7.8% primarily in the Middle East partially offset by a 4.4% increase due to the acquisitions of Boyken International, Inc. (“Boyken”) and TRS Consultants, Inc. (“TRS”). The dollar decrease in project management CFR consisted of a $6,483,000 decrease in foreign projects and an increase of $4,109,000 in domestic projects. The decrease in foreign project management CFR was primarily due to decreases of $6,782,000 in Iraq, where the Iraq Reconstruction Program began to wind down, and $2,561,000 in the rest of the Middle East where work in Dubai decreased due to poor economic conditions. This was partially offset by an increase of $4,924,000 in North Africa due to expansions of contracts in Libya. The increase in domestic projects consisted primarily of the acquisitions of Boyken and TRS, along with increases in the New York and the Southwest regions.

During the first quarter of 2010, Hill’s construction claims CFR increase of 9.6% was all organic. The primary increase in construction claims took place in the Middle East where some large projects started in late 2009 and early 2010 and in the United Kingdom where a $2,000,000 contingency fee was recognized due to the successful resolution of one client’s significant claim. This was partially offset by a decrease in Asia/Pacific.

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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 $635,000 in the Southwest Region, $741,000 in Europe, and $786,000 in the Middle East, partially offset by decreases of $917,000 in New York and $460,000 in Pennsylvania.

Cost of Services