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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

or

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from                            to                           

Commission File Number: 001-33961

HILL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:  (856) 810-6200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

There were 50,332,922 shares of the Registrant’s Common Stock outstanding at August 6, 2014.

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HILL INTERNATIONAL, INC. AND SUBDISIARIES

Index to Form 10-Q

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PART I — FINANCIAL INFORMATION

Item 1.         Financial Statements.

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(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 COMPREHENSIVE EARNINGS (LOSS)

(In thousands)

(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 that provides program management, project management, construction management, construction claims and other consulting services primarily to the buildings, transportation, environmental, energy and industrial markets worldwide.  Hill’s clients include the U.S. federal government, U.S. state and local governments, foreign governments and the private sector.  The Company is organized into two key operating divisions: the Project Management Group and the Construction Claims Group.

Note 2 — Basis of Presentation

The accompanying unaudited interim consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.  In the opinion of management, these statements include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the consolidated financial statements.

The consolidated financial statements include the accounts of Hill and its wholly- and majority-owned subsidiaries.  All intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The interim operating results are not necessarily indicative of the results for a full year.

Note 3 — Accounts Receivable

The components of accounts receivable are as follows (in thousands):

In early 2014, the Company received additional payments against accounts receivable related to work performed by Hill prior to March 2011 pursuant to contracts with the Libyan government of approximately $6,800,000 consisting of approximately 200,000 pounds sterling ($300,000), approximately LYD 2,100,000 ($1,700,000) and $4,800,000 in U.S. dollars. Total receipts to date amounted to approximately $9,900,000 and, at June 30, 2014, the remaining accounts receivable outstanding related to Hill’s work in Libya amounted to approximately $50,100,000.

Since the end of the Libyan civil unrest in October 2011, the Company has sought to recover the receivable from its client, the Libyan Organization for the Development of Administrative Centres (“ODAC”) through ongoing negotiations rather than pursue its legal rights for payment under the contracts. The Company continues to believe that this course of action provides the best likelihood for recovery as it could result in completion of and payment on the existing contracts as well as the potential for the award of new contracts.  There is at present no formal agreement, understanding or timetable for

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further payments of Hill’s accounts receivable from ODAC or a return to work on Hill’s existing contracts.  Management believes that the recent payments made in 2013 and 2014, along with standby letters of credit of approximately $14,000,000 posted in our favor by ODAC, were made in good faith and are a positive indication that ODAC intends to satisfy its obligations to Hill.  Currently, the Company and ODAC are in the process of extending the standby letters of credit for an additional six-month term.  However, the Company cannot predict with certainty when, or if, the remaining accounts receivable will be paid by the Libyan authorities or when work will resume there.  In the event that the Company does not realize any further payments, there could be a significant adverse impact on its consolidated results of operations and consolidated financial position.

Note 4 — Intangible Assets

The following table summarizes the Company’s acquired intangible assets (in thousands):

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

The following table presents the estimated amortization expense based on our present intangible assets for the next five years (in thousands):

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Note 5 — Goodwill

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

Note 6 — Accounts Payable and Accrued Expenses

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

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Note 7 — Notes Payable and Long-Term Debt

On June 12, 2014, the Company and its subsidiary Hill International N.V. entered into a Commitment Letter with Société Générale (the “Agent”) and SG Americas Securities, LLC, (the “Arranger”) pursuant to which the Arranger and the Agent committed, subject to the conditions and other terms and provisions of the Commitment Letter, to provide secured debt facilities to the Company in an aggregate principal amount of $165,000,000 which would be used to payoff and terminate the existing Term Loan and existing Revolving Credit Agreement. These secured debt facilities are expected to close during August 2014.  See Note 16 for further information.

Outstanding debt obligations are as follows (in thousands):

Term Loan Agreement

The Company entered into a Term Loan Agreement on October 18, 2012, which was amended on May 23, 2013 (the “First Amendment”) and again on July 25, 2014 (the “Second Amendment”). The First Amendment contains identical provisions as those in the Fourth Amendment to Credit Agreement (see below) and the Second Amendment contains identical provisions as the Fifth Amendment and Limited Waiver to Credit Agreement (see below).  Borrowings under the Term Loan Agreement are collateralized by a second lien on substantially all of the Company’s assets, including, without limitation, accounts receivable, equipment, securities, financial assets and the proceeds of the foregoing, as well as by a pledge of 65% of the outstanding capital stock of its wholly-owned foreign subsidiary, Hill International N.V., and of certain of its other foreign subsidiaries.  The maturity date of the Term Loan is October 18, 2016.

The Company will pay interest on amounts outstanding from time to time under the Term Loan at a rate per annum equal to 7.50%, however, such rate may be increased to 9.50% per annum if fixed price contracts (as defined under the Term Loan Agreement) or certain accounts receivable of the Company and its subsidiaries exceed percentages specified in the Term Loan Agreement.

Also, contemporaneous with its entry into the Term Loan Agreement, the Company entered into a Fee Letter.  The Fee Letter requires the Company to pay to the Lenders an exit fee (the “Exit Fee”), which fee shall be earned in full on the Closing Date and due and payable on the date the Term Loan is paid in full (the “Exit Date”).  “Exit Fee” means the amount, if any, when paid to the Term Loan Lenders on the Exit Date, that will result in the internal annual rate of return to the Term Loan Lenders on the Exit Date being equal to, but no greater than, 20%; provided that in no event shall the Exit Fee Amount be less than $0 or greater than $11,790,000.  The IRR is to be calculated as the rate of return earned by the Term Loan Lenders on their initial investment in the Term Loan (to be calculated as the principal amount of the Term Loan less the Closing Fee of $25,000,000) through the Exit Date taking into account the payment by the Company to the

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Term Loan Lenders of all principal, interest and other payments to the Term Loan Lenders pursuant to the Term Loan Agreement.

At June 30, 2014, the Company was in compliance with all of the Term Loan covenants.

Revolving Credit Agreement

The Company entered into a Credit Agreement, dated June 30, 2009 (the “Credit Agreement”), with Bank of America, N.A., Capital One, N.A., The PrivateBank and Trust Company, PNC Bank N.A. (the “Lenders”), and Bank of America, N.A., as Administrative Agent (the “Agent”).  On May 23, 2013, the Company entered into a Fourth Amendment to Credit Agreement pursuant to which, among other things, the Lenders agreed to :  (a) permit the Company to enter into an agreement with Qatar National Bank for the issuance of letters of credit (“LCs”) not to exceed $17,000,000, (b) increase the limit on LCs available to the Company’s foreign subsidiaries who are not loan parties from $4,000,000 to $11,800,000 and (c) permit the Company to provide up to $20,000,000 as cash collateral for letters of credit and performance bonds.  On July 25, 2014, the Company entered into a Fifth Amendment and Limited Waiver to Credit Agreement pursuant to which the Lenders agreed, among other things, to permit the Company to sell its common stock through a follow-on offering (see Note 16) resulting in receipt by the Company of net proceeds aggregating not less than $30,000,000.

The following tables set forth the requirements for the consolidated leverage ratio, consolidated fixed charge ratio and the senior leverage ratio as of June 30, 2014:

At June 30, 2014, the Company had $19,530,000 in outstanding letters of credit.  Due to conditions of the Credit Facility, as amended, total remaining availability was $2,870,000.

The maturity date of the Credit Agreement is March 31, 2015. Accordingly, the Company has classified all borrowings under the Credit Agreement as current in the consolidated balance sheet at June 30, 2014.

Other Debt Arrangements

The Company’s subsidiary, Hill International (Spain) S.A. (“Hill Spain”), maintains a revolving credit facility with 12 banks (the “Financing Entities”) in Spain providing for total borrowings, with interest at 6.50%, of up to €5,640,000 (approximately $7,695,000 at June 30, 2014). At June 30, 2014, total borrowings outstanding were €5,528,000 (approximately $7,542,000). The amount being financed (“Credit Contracts”) by each Financing Entity is between €156,000 (approximately $213,000) and €689,000 (approximately $940,000). The facility expires on December 17, 2016. The maximum available amount will be reduced to 75.0% at December 31, 2014 and to 50.0% at December 31, 2015. To guarantee Hill Spain’s obligations resulting from the Credit Contracts, Hill Spain provided a guarantee in favor of each one of the Financing Entities, which, additionally, and solely in the case of unremedied failure to make payment, and at the request of each of the Financing Entities, shall grant a first ranking pledge over a given percentage of corporate shares of Hill International Brasil Participacoes Ltda. for the principal, interest, fees, expenses or any other amount owed by virtue of the Credit Contracts, coinciding with the percentage of credit of each Financing Entity with respect to the total outstanding borrowings under this facility.

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Hill Spain maintains an unsecured credit facility with the Caja Badajoz bank in Spain for €800,000 (approximately $1,091,000) at June 30, 2014.  The interest rate at June 30, 2014 was 7.50%. At June 30, 2014, total borrowings outstanding were €800,000 (approximately $1,091,000).  The facility expires on December 23, 2014.

The Company maintains a credit facility with the National Bank of Abu Dhabi which provides for total borrowings of up to AED 11,500,000 (approximately $3,131,000 at June 30, 2014) collateralized by certain overseas receivables. The interest rate is the one-month Emirates InterBank Offer Rate plus 3.50% (or 4.70% at June 30, 2014) but no less than 5.50%. At June 30, 2014, total borrowings outstanding were AED 3,364,000 (approximately $916,000). This facility also allows for to AED 127,033,000 (approximately $34,589,000 at June 30, 2014) in Letters of Guarantee of which AED 122,577,000 (approximately $33,375,000) were utilized at June 30, 2014. This facility is being renewed on a month-to-month basis.

The Company maintains a credit facility with Egnatia Bank that allows for letters of guarantee up to €4,500,000 (approximately $6,139,000 at June 30, 2014), of which €2,180,000 (approximately $2,974,000) had been utilized at June 30, 2014.  The facility expires on April 30, 2018.

Engineering S.A. maintains three unsecured revolving credit facilities with two banks in Brazil aggregating 2,900,000 Brazilian Reais (BR) (approximately $1,316,000 at June 30, 2014), with a weighted average interest rate of 3.32% per month at June 30, 2014.  There were no borrowings outstanding on any of these facilities which are renewed automatically every three months.

The Company maintains a revolving credit facility with Barclays Bank PLC up to £550,000 (approximately $937,000 at June 30, 2014), with interest rates of 2.00% at June 30, 2014, collateralized by cross guarantees of several of the United Kingdom companies.  Aggregate of all debt owing to the bank will be, at all times, covered 3 times by the aggregate value of the UK accounts receivable less than 90 days old and excluding any receivables which are due from any associate, subsidiary or overseas client. There were no borrowings outstanding under this facility at June 30, 2014. This facility is on demand with no fixed expiration date. It is subject to an annual review on September 12, 2014.

At June 30, 2014, the Company had $4,621,000, of available borrowing capacity under its foreign credit agreements.

The Company also maintains relationships with other foreign banks for the issuance of letters of credit, letters of guarantee and performance bonds in a variety of foreign currencies.  At June 30, 2014, the maximum U.S. dollar equivalent of the commitments was $62,017,000 of which $17,307,000 is outstanding.

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Note 8 — Supplemental Cash Flow Information

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

Note 9 — Earnings per Share

Basic earnings per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share incorporates the incremental shares issuable upon the assumed exercise of stock options, if dilutive.  Dilutive stock options increased the average common stock outstanding by approximately 2,023,000 shares for the three-month period ended June 30, 2014 and by approximately 1,386,000 shares for the six-month period ended June 30, 2014. Options to purchase 1,355,000 shares and 2,034,000 shares were excluded from the calculation of diluted earnings (loss) per common share for the three- and six-month periods ended June 30, 2014 because they were antidilutive.  Stock options were excluded from the calculation of diluted loss per common share because their effect was antidilutive for both of the three-and six-month periods ended June 30, 2013.  The total number of such shares excluded from diluted loss per common share was 5,547,000 shares for the three-month period ended June 30, 2013 and 5,303,000 shares for the six-month period ended June 30, 2013.

Note 10 — Share-Based Compensation

At June 30, 2014, the Company had 7,518,620 options outstanding with a weighted average exercise price of $4.59.  During the six-month period ended June 30, 2014, the Company granted     500,000 options which vest over a four-year period, have an exercise price of $4.35 and a contractual life of 5 years; 1,285,000 options which vest over a five-year period, have a weighted average exercise price of $4.56 and a contractual life of seven years; and 63,870 options which vested immediately, have an exercise price of $6.61 and a contractual live of five years. The aggregate fair value of the options was $4,210,000 calculated using the Black-Scholes valuation model.  The weighted average assumptions used to calculate fair value were: expected life — 4.59 years; volatility — 62.85% and risk-free interest rate — 1.67%. During the first six months of 2014, options for 480,406 shares with a weighted average exercise price of $2.95 were exercised and options for 424,000 shares with a weighted average exercise price of $7.67 lapsed.

During the six-month period ended June 30, 2014, the Company issued 26,475 shares of its common stock to its Non-Employee Directors. The Company recognized compensation expense amounting to $175,000.

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During the six-month period ended June 30, 2014, employees purchased 12,136 common shares, for an aggregate purchase price of $54,000, pursuant to the Company’s 2008 Employee Stock Purchase Plan.

The Company recognized share-based compensation expense in selling, general and administrative expenses in the consolidated statement of operations totaling $1,129,000    and $973,000 for the three-month periods ended June 30, 2014 and 2013, respectively, and $1,927,000 and $1,583,000 for the six-month periods ended June 30, 2014 and 2013, respectively.

Note 11 — Stockholders’ Equity

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

In February 2014, the Company issued 171,308 shares of its common stock aggregating $618,000 to the former shareholders of Collaborative Partners, Inc. as payment for equity in excess of that required under the acquisition agreement.

In March 2014, the Company’s Chairman and Chief Executive Officer exercised 200,000 options with an exercise price of $2.70 through the Company on a cashless basis.  The Company withheld 112,788 shares as payment for the options and placed those shares in treasury stock.  The Chairman and Chief Executive Office received 87,212 shares from this transaction.

During the six months ended June 30, 2014, the Company received cash proceeds of $877,000 from the exercise of stock options.

On August 6, 2014, the Company sold 9,546,629 shares of its common stock in an underwritten equity offering.  See Note 16 for further information.

Note 12 — Income Taxes

The effective tax rates for the three-month periods ended June 30, 2014 and 2013 were 33.0% and 64.3%, respectively, and 41.3% and 76.1% for the six-month periods ended June 30, 2014 and 2013, respectively.  The Company’s effective tax rate represents the Company’s effective tax rate for the year based on projected income and mix of income among the various foreign tax jurisdictions, adjusted for discrete transactions occurring during the period.  The difference in the Company’s 2014 effective tax rate compared to the 2013 effective tax rate was primarily related to the $2,514,000 reversal of the reserve for uncertain tax positions in 2014 discussed below. The Company also recognized an income tax expense resulting from adjustments to agree the prior year’s book amounts to the actual amounts per the tax returns totaling $44,000 and $0 for the three-month periods ending June 30, 2014 and 2013, respectively, and $44,000 and $145,000 for the six-month periods ended June 30, 2014 and 2013, respectively. If the discrete transactions noted

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previously were excluded, the Company’s effective tax rate would have been higher in both years primarily as a result of not recording an income benefit related to the U.S. net operating loss.

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

The reserve for uncertain tax positions amounted to $840,000 and $2,933,000 at June 30, 2014 and December 31, 2013, respectively, and is included in “Other liabilities” in the consolidated balance sheet at those dates. During the three-month period ended June 30, 2014, the reserve for uncertain tax positions was reduced by $2,514,000 based on management’s assessment that these items were effectively settled with the appropriate foreign tax authorities. During the six-month period ended June 30, 2014, the Company also reclassified $420,000 from  “Income taxes payable” to the reserve for uncertain tax positions primarily due to tax positions taken in foreign jurisdictions. During the three- and six-month periods ended June 30, 2013, there were no changes in the reserve for uncertain tax positions.

The Company’s policy is to record income tax related interest and penalties in income tax expense. At June 30, 2014, potential interest and penalties related to uncertain tax positions amounting to $592,000 was included in the balance above.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC740, Income Taxes. They consider both positive and negative evidence. In making this determination, management assesses all of the evidence available at the time including recent earnings, internally-prepared income projections, and historical financial performance.

Note 13 — Business Segment Information

The Company’s business segments reflect how executive management makes resource decisions and assesses its performance. The Company bases these decisions on the type of services provided (Project Management and Construction Claims) and secondarily by their geography (U.S./Canada, Latin America, Europe, the Middle East, Africa and Asia/Pacific).

The Project Management business segment provides extensive construction and project management services to construction owners worldwide. Such services include program management, project management, construction

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management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, and labor compliance services.

The Construction Claims business segment provides such services as claims consulting, management consulting, litigation support, expert witness testimony, cost/damages assessment, delay/disruption analysis, adjudication, lender advisory, risk management, forensic accounting, fraud investigation and Project Neutral services to clients worldwide.

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

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

Consulting Fee Revenue (“CFR”)

Total Revenue:

Operating Profit: