HILL INTERNATIONAL, INC. Introduction
The following discussion should be read in conjunction with the information contained inHill International, Inc.'s (collectively referred to as "Hill", "we", "us", "our" and "the Company") unaudited consolidated financial statements, including the notes thereto. Statements regarding future economic performance, management's plans and objectives and any statements concerning assumptions related to the foregoing contained in Management's Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements. See our 2021 Annual Report, including the factors disclosed therein, as well as "Disclosure Regarding Forward-looking Statements" for certain factors that may cause actual results to vary materially from these forward-looking statements. We assume no obligation to update any of these forward-looking statements other than as required by law.
Overview
We earn revenue by deploying professionals to provide services to our clients,
including project management, construction management, facilities management and
related consulting. These services are primarily delivered on a "cost plus" or
"time and materials" ("T&M") basis in which we bill negotiated hourly or monthly
rates or a negotiated multiple of the direct cost of these professionals, plus
actual out-of-pocket expenses. Our direct expenses are the actual cost of these
professionals, including payroll and benefits, except for paid time-off, which
is recorded in selling, general and administrative expenses ("SG&A") on our
consolidated statements of operations. We also provide services under fixed
price contracts and T&M contracts with a cap.
Our revenue consists of two components: consulting fee revenue ("CFR") and
reimbursable expenses. The professionals we deploy are occasionally
subcontractors. We generally bill the actual cost of these subcontractors and
recognize this cost as both revenue (reimbursable expenses) and direct expense.
CFR refers to our revenue excluding amounts paid or due to subcontractors. We
believe CFR is an important measure because it represents the revenue on which
we earn gross profit, whereas total revenue includes subcontractors on which we
generally pass through the cost and earn minimal or no gross profit.
We compete for business based on a variety of factors such as technical
capability, global resources, price, reputation and past experience, including
client requirements for substantial experience in similar projects. We have
developed significant long-standing relationships, which bring us repeat
business and may be difficult for others to replicate. We believe we have an
excellent reputation for attracting and retaining professionals. In addition, we
believe there are high barriers to entry for new competitors especially in the
project management market.
SG&A expenses consist primarily of personnel costs that are not billable and corporate or regional costs such as sales, business development, proposals, operations, finance, human resources, legal, marketing, management and administration.
The Company operates as a single reporting segment, known as theProject Management Group which provides fee-based construction management services to our clients, leveraging our construction expertise to identify potential trouble, difficulties and sources of delay on a construction project before they develop into costly problems. Our experienced professionals are capable of managing all phases of the construction process from concept through completion, including cost and budget controls, scheduling, estimating, expediting, inspection, contract administration and management of contractors, subcontractors and suppliers. OnAugust 26, 2022 , Hill,Global Infrastructure Solutions Inc. ("Parent"), andLiberty Acquisition Sub Inc. , an indirect wholly owned subsidiary of Parent ("Merger Sub"), entered into an Amended and Restated Agreement and Plan of Merger (the "Merger Agreement"), which amended and restated the Agreement and Plan of Merger, dated as ofAugust 16, 2022 , by and among the Company, Parent and Merger Sub. The Merger Agreement provides that, upon the terms and conditions set forth therein and in accordance with the General Corporation Law of theState of Delaware ("DGCL"), Merger Sub will be merged with and into Hill (the "Merger") with Hill surviving the Merger as the surviving corporation and an indirect wholly owned subsidiary of Parent. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each share of Hill's common stock, other than as provided below, will be converted into the right to receive$3.40 , without interest (such amount of cash, the "Merger Consideration"). The following shares of Hill common stock will not be converted into the right to receive the Merger Consideration in connection with the Merger: (i) shares held in treasury by Hill or owned by Parent or Merger Sub or any direct or indirect wholly owned subsidiaries of Parent, Merger Sub or Hill immediately prior to the effective time, and (ii) shares issued and outstanding immediately prior to the effective time that are held by a holderwho is entitled to demand and has properly exercised and perfected demand and has properly exercised and perfected demand for 30 -------------------------------------------------------------------------------- Table of Contents appraisal of such shares pursuant to, andwho complies in all respects with, Section 262 of the General Corporation Law of theState of Delaware (the "DGCL") and has not effectively and validly withdrawn or lost such holder's rights to appraisal. Pursuant to the terms of the Merger Agreement, the consummation of the Merger remains subject to various closing conditions, including but not limited to (i) the receipt of consent or authorization under certain foreign antitrust laws, and (ii) the absence of any order that has the effect of preventing, making illegal or otherwise prohibiting the consummation of the Merger. As of the date hereof, the Company continues to expect to complete the Merger in the fourth calendar quarter of 2022. Upon the consummation of the Merger, Hill will no longer be traded or listed on any public securities exchange.
Impact of COVID-19 on our Business
InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic as a result of the further spread of the virus into all regions of the world, including those regions where our primary operations occur. Variants of the virus continue to emerge in various regions and countries worldwide. We instituted a work-from-home policy for all offices and employees globally in lateMarch 2020 , except for field-based employeeswho normally work on-site at our client's facilities. These field-based employees are complying with our respective clients' policies. The majority of our field employees were already located in the regions where they deliver their services, so the travel restrictions that have been enacted by various government authorities have not materially impaired our ability to continue to perform services for our clients. As ofSeptember 30, 2022 , most of our employees have returned to their assigned offices, on a modified basis, as their city, state and country reopens, consistent with the applicable requirements of local law. Most of the projects to which we provide services have been classified as essential services by the relevant governmental authority and as such have continued despite restrictions on the operation of "non-essential" businesses by certain governmental authorities. The majority of our billable employees have continued to provide billable services to our clients, either on-site or remotely. Nearly all our employees had company laptop computers and the ability to work remotely prior to the institution of our work-at-home policy. The work-at-home policy did not have a significant impact on our employees' ability to perform their job requirements. Our internal control structure does not generally require physical access to our office locations, and has not to date and is not expected in the future, to be adversely impacted by the pandemic and the corresponding response by certain governmental authorities. Processes that require physical access to our offices, such as receiving mail (including collections) and processing and mailing manual checks, are being performed by designated individuals at a reduced frequency while certain of our offices continue to operate on a limited basis. The main impacts on our business, other than those discussed above, were delays in the procurement processes of a number of our current and potential clients and a temporary slowing of certain collections. Management currently believes that it has adequate liquidity and business plans to continue to operate the business and mitigate the continuing risks associated with the COVID-19 pandemic for at least the next 12 months from the date of this report. 31
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Results of Operations
Consolidated Results
(In thousands)
Three Months Ended September
30, Change Nine Months Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
Income Statement Data:
Consulting fee revenue $ 85,142 $ 77,061 $ 8,081 10.5 % $ 254,262 $ 227,158 $ 27,104 11.9 %
Reimbursable expenses 24,429 19,543 4,886 25.0 % 63,275 58,079 5,196 8.9 %
Total revenue $ 109,571 $ 96,604 $ 12,967 13.4 % $ 317,537 $ 285,237 $ 32,300 11.3 %
Direct expenses 74,917 64,196 10,721 16.7 % 213,620 194,314 19,306 9.9 %
Gross profit $ 34,654 $ 32,408 $ 2,246 6.9 % $ 103,917 $ 90,923 $ 12,994 14.3 %
Selling, general and administrative
expenses 31,035 28,121 2,914 10.4 % 92,831 82,906 9,925 12.0 %
Foreign currency exchange loss 803 511 292 57.1 % 3,730 2,751 979 35.6 %
Plus: Share of profit of equity
method affiliates 506 551 (45) (8.2) % 1,456 1,805 (349) (19.3) %
Operating profit$ 3,322 $ 4,327 $ (1,005) (23.2) %$ 8,812 $ 7,071 $ 1,741 24.6 % Interest and related financing fees, net 2,098 1,226 872 71.1 % 4,805 4,077 728 17.9 % Other loss, net 104 - 104 -% 319 - 319 100.0 % Earnings before income taxes$ 1,120 $ 3,101
1,823 1,784 39 2.2 % 3,602 4,653 (1,051) (22.6) %
Net (loss) earnings$ (703) $ 1,317 $ (2,020) (153.4) %$ 86 $ (1,659) $ 1,745 (105.2) % Less: net (loss) earnings - noncontrolling interests (14) 58 (72) (124.1) % (112) 265 (377) (142.3) % Net (loss) earnings attributable to Hill International, Inc.$ (689) $ 1,259 $ (1,948) (154.7) %$ 198 $ (1,924) $ 2,122 (110.3) % 32
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Three Months Ended September 30, 2022 Compared to the
Three Months Ended September 30, 2021 Total Revenue by
Three Months Ended September 30, Change
2022 2021 $ %
Americas $ 57,875 52.7 % $ 51,362 53.1 % $ 6,513 12.7 %
Middle East/Asia/Pacific 25,378 23.2 % 21,621 22.4 % 3,757 17.4 %
Europe 16,284 14.9 % 13,897 14.4 % 2,387 17.2 %
Africa 10,034 9.2 % 9,724 10.1 % 310 3.2 %
Total $ 109,571 100.0 % $ 96,604 100.0 % $ 12,967 13.4 %
Consulting Fee Revenue by
Three Months Ended September 30, Change
2022 2021 $ %
Americas $ 37,896 44.5 % $ 34,510 44.8 % $ 3,386 9.8 %
Middle East/Asia/Pacific 23,436 27.5 % 21,345 27.7 % 2,091 9.8 %
Europe 14,500 17.0 % 12,328 16.0 % 2,172 17.6 %
Africa 9,310 10.9 % 8,878 11.5 % 432 4.9 %
Total $ 85,142 99.9 % $ 77,061 100.0 % $ 8,081 10.5 %
Total revenue increased approximately $12,967 for the three months ended
September 30, 2022 when compared to the same period in 2021. CFR was $85,142 and
$77,061 of the total revenue for the three months ended September 30, 2022 and
2021, respectively, which was 77.7% and 79.8% of total revenues, respectively.
The increase in total revenue and CFR during the three months ended September
30, 2022 compared to the same period in the prior year is primarily driven by
activity returning to pre-COVID levels, including returns to full staffing on
certain existing projects and mobilizations on certain newly awarded projects.
Gross Profit by
Three Months Ended September 30, Change
2022 2021 $ %
% of Total % of Total
Revenue Revenue
Americas $ 15,277 44.1 % 26.4 % $ 15,358 47.3 % 29.9 % $ (81) (0.5) %
Middle East/Asia/Pacific 8,951 25.8 % 35.3 % 8,086 25.0 % 37.4 % 865 10.7 %
Europe 6,136 17.7 % 37.7 % 5,299 16.4 % 38.1 % 837 15.8 %
Africa 4,290 12.4 % 42.8 % 3,665 11.3 % 37.7 % 625 17.1 %
Total $ 34,654 100.0 % 31.6 % $ 32,408 100.0 % 33.5 % $ 2,246 6.9 %
Gross profit (margin) as a percentage of total revenue decreased for the three
months ended September 30, 2022 compared to the same period in 2021. In the
Middle East /Asia/Pacific margin decreased as a percentage of total revenue due
to the closeout of higher margin projects new projects and increased labor
wages. In Africa , the increase in margin as a percentage of total revenue was
due to a decline in labor costs.
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SG&A Expenses
Our SG&A expenses increased $2,914 for the three months ended September 30, 2022
compared to the same period in 2021. The increase in year-over-year SG&A
reflected increased investments in Hill's business development team as well as
higher costs associated with consultants, temporary office support, and travel.
Foreign Currency Exchange Loss
There was a foreign currency exchange loss of$803 and$511 for the three months endedSeptember 30, 2022 and 2021, respectively. The currency exchange loss for nine months endedSeptember 30, 2022 was primarily the result of the weakening of the Euro against the dollar. The currency exchange loss for the three months endedSeptember 30, 2021 was primarily the result of the weakening of the Libyan Dinar against the Euro.
Interest and Related Financing Fees, net
Interest and related financing fees for the three months endedSeptember 30, 2022 were$2,098 , net of$101 of interest income, compared to interest and related financing fees for the three months endedSeptember 30, 2021 of$1,226 , net of$94 of interest income.
Other Loss, net
Other loss, net is comprised primarily of interest cost from the Company's End of Service Benefit Plan.
Income Taxes
For the three months ended
The effective income tax rate for the three months endedSeptember 30, 2022 and 2021 were 162.8% and 57.5%, respectively. The change in our effective tax rate for the three months endedSeptember 30, 2022 was primarily a result of the mix of income among various jurisdictions with different statutory tax rates, as well as certain withholding taxes and uncertain tax positions recorded in 2021. 34
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Nine Months Ended September 30, 2022 Compared to the
Nine Months Ended September 30, 2021 Total Revenue by
Nine Months Ended September 30, Change
2022 2021 $ %
Americas $ 166,666 52.4 % $ 147,701 51.7 % $ 18,965 12.8 %
Middle East/Asia/Pacific 75,892 23.9 % 63,320 22.2 % 12,572 19.9 %
Europe 46,220 14.6 % 44,942 15.8 % 1,278 2.8 %
Africa 28,759 9.1 % 29,274 10.3 % (515) (1.8) %
Total $ 317,537 100.0 % $ 285,237 100.0 % $ 32,300 11.3 %
Consulting Fee Revenue:
Nine Months Ended September 30, Change
2022 2021 $ %
Americas $ 113,572 44.7 % $ 100,996 44.5 % $ 12,576 12.5 %
Middle East/Asia/Pacific 72,305 28.4 % 62,100 27.3 % 10,205 16.4 %
Europe 41,618 16.4 % 36,968 16.3 % 4,650 12.6 %
Africa 26,767 10.5 % 27,094 11.9 % (327) (1.2) %
Total $ 254,262 100.0 % $ 227,158 100.0 % $ 27,104 11.9 %
Total revenue increased $32,300 for the nine months ended September 30, 2022
when compared to the same period in 2021. CFR was $254,262 and $227,158 for the
nine months ended September 30, 2022 and 2021, respectively, which comprised
80.1% and 79.6% of total revenues, respectively.
The increases in total revenue and CFR for the nine months ended September 30,
2022 compared to the prior year period is primarily driven by activity returning
to pre-COVID levels, including returns to full staffing on certain existing
projects and mobilizations on certain newly awarded projects. Additionally, the
purchase of NEYO group at the end of the second quarter of 2021 provided an
additional $1,453 to total revenue and CFR during the current year period.
Gross Profit by
Nine Months Ended September 30, Change
2022 2021 $ %
% of Total % of Total
Revenue Revenue
Americas $ 47,553 45.7 % 28.5 % $ 43,622 47.9 % 29.5 % $ 3,931 9.0 %
Middle East/Asia/Pacific 28,160 27.1 % 37.1 % 21,781 24.0 % 34.4 % 6,379 29.3 %
Europe 17,129 16.5 % 37.1 % 14,743 16.2 % 32.8 % 2,386 16.2 %
Africa 11,075 10.7 % 38.5 % 10,777 11.9 % 36.8 % 298 2.8 %
Total $ 103,917 100.0 % 32.7 % $ 90,923 100.0 % 31.9 % $ 12,994 14.3 %
35-------------------------------------------------------------------------------- Table of Contents Gross profit (margin) as a percentage of total revenue increased 0.8% for the nine months endedSeptember 30, 2022 compared to the same period in the 2021. In theMiddle East /Asia/Pacific region, gross profit as a percentage of total revenue increased primarily due to new projects with lower labor costs. InEurope , gross profit as a percentage of total revenue increased due to mix of labor used on projects. SG&A Expenses SG&A expenses for the nine months endedSeptember 30, 2022 increased by approximately$9,925 when compared to the same period in the prior year. The increase was primarily due to investments in the business development team and additional expenses associated with the NEYO group purchased at the end of the second quarter of 2021. In addition, consultants and temporary office support increased due to vacancies and additional work needed to address internal control deficiencies, and travel related expenses continue to increase towards a pre-COVID level. SG&A in 2022 also included a$0.6 million charge related to a bond that was called. The Company has received a final court order to have the bond returned and expects to reverse its charge in the second half of 2022. Also, the prior year period was reduced by an increase in bad debt recoveries associated with the receipt of payments against previously reserved receivables, primarily on a Libyan-based project. Excluding the impact of the above-referencedLibya bad debt recoveries and bond cost, SG&A expenses as a percentage of gross profit in the nine months endedSeptember 30, 2022 andSeptember 30, 2021 would have been 92.8% and 94.7%, respectively.
Foreign Currency Exchange Loss
There were foreign currency exchange losses of$3,730 and$2,751 for the nine months endedSeptember 30, 2022 and 2021, respectively. For the nine months endedSeptember 30, 2022 , the foreign currency exchange losses were primarily caused by the weakening of the Euro. For the nine months endedSeptember 30, 2021 , the foreign currency exchange losses were primarily caused by a 70% weakening of the Libyan Dinar against the Euro and an 8% weakening of the Egyptian pound against the Euro.
Interest and Related Financing Fees, net
Interest and related financing fees increased$728 to$4,805 net of$69 interest income for the nine months endedSeptember 30, 2022 as compared with$4,077 for nine months endedSeptember 30, 2021 , net of$17 of interest income.
Other Loss, net
Other loss, net is comprised primarily of interest cost from the Company's End of Service Benefit Plan.
Income Taxes
For the nine months ended
The effective income tax rate for the nine-month periods endedSeptember 30, 2022 and 2021 was 97.7% and 155.4%, respectively. The change in the Company's effective tax rate for the nine months endedSeptember 30, 2022 was primarily a result of the mix of income among various foreign jurisdictions with different statutory tax rates, as well as certain withholding taxes and uncertain tax positions recorded in 2021.
Liquidity and Capital Resources
Our primary cash obligations are our payroll and our project subcontractors. Our primary source of cash is receipts from clients. We generally pay our employees semi-monthly in arrears and invoice our clients monthly in arrears. Our clients generally remit payment approximately three months, on average, after invoice date. This creates a lag between the time we pay our employees and the time we receive payment from our clients. We bill our clients for any subcontractors used and pay those subcontractors after receiving payment from our clients, so no such timing lag exists for the payments we make to subcontractors. We utilize cash on hand and our revolving credit facilities to fund the working capital requirement caused by the lag discussed above and other operating needs. We believe our expected cash receipts from clients, together with current cash on hand and revolving credit facilities, are sufficient to support the reasonably anticipated cash needs of our operations over the next twelve months fromNovember 14, 2022 , the date of this report. 36 -------------------------------------------------------------------------------- Table of Contents AtSeptember 30, 2022 , our primary sources of liquidity consisted of$22,834 of cash and cash equivalents, of which$18,474 was on deposit in foreign locations, and$3,618 of available borrowing capacity under our various credit facilities. We also have relationships with other foreign banks for the issuance of letters of credit, letters of guarantee and performance bonds in a variety of foreign currencies. AtSeptember 30, 2022 , we had approximately$66,979 of availability under these arrangements. Our sources of liquidity under arrangements with foreign banks are available for repatriation as deemed necessary by us, with some restrictions and tax implications. OnMarch 31, 2022 , we entered into an amendment of our main credit facility with Société Générale that extends the maturity dates of the Domestic and International Revolving Credit Facilities toMay 5, 2023 and the term loan facility toNovember 5, 2023 . The interest rates on the Domestic and International Revolving Credit Facilities increased by 1.1% and 1.5%, respectively, while the term loan facility interest rate increased by 1.0% and the Company paid an amendment fee of$463 . The aggregate amount of the credit commitments under the facilities will automatically and permanently be reduced by an amount equal to$500 on each ofSeptember 30, 2022 andDecember 31, 2022 . Pursuant to the Merger Agreement, we also have agreed to various specific restrictions relating to the conduct of our business between the date of the Merger Agreement and the time at which the Merger becomes effective, including but not limited to, agreeing to not to (i) issue or sell shares of our common stock or other equity or voting securities of the Company or any of its subsidiaries, or (ii) incur or assume any indebtedness, including by the issuance of any debt security (or any option, warrant, call or similar right to acquire any debt security), in each case subject to the terms of the Merger Agreement and any exceptions set forth therein. The Merger Agreement provides that, if requested by the Company, Parent and the Company shall use their respective commercially reasonable efforts to negotiate and enter into definitive documentation evidencing a credit facility or other interim financing in an amount to be mutually agreed by the parties thereto and otherwise on customary market terms as the parties shall mutually agree upon. However, this does not constitute a commitment to provide financing by Parent. We believe that the Company has adequate liquidity and business plans to continue to operate the business for the next 12 months fromNovember 14, 2022 , the date of this filing. This ability to continue as a going concern is dependent upon the ability to refinance the Domestic and International Revolving Credit Facilities prior to theirMay 5, 2023 maturity date. As such, the consolidated interim financial statements included in this Form 10-Q do not include any adjustments that might result from the inability to refinance the Domestic and International Revolving Credit Facilities. The Company has retained a debt advisor to assist in the refinancing of these facilities and is conducting a formal process to secure this funding. The Company expects to refinance these facilities by the end of 2022.
Sources of
A significant increase in our current backlog or impacts on our liquidity from
the COVID-19 pandemic may require us to obtain additional financing. If
additional financing is required in the future due to an increase in backlog,
impacts from the COVID-19 pandemic or changes in strategic or operating plans,
we cannot provide any assurance that any other sources of financing will be
available, or if available, that the financing will be on terms acceptable to
us.
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