Hill International, Inc.
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Greetings and welcome to the Hill International Reports Third Quarter 2014 Financial Results. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Devin Sullivan, Senior Vice President of the Equity Group Incorporated. Thank you Mr. Sullivan, you may now begin.

[Devin Sullivan:]

Thank you, Latonia and thank you everyone. Good morning. Thanks for joining us today. Our speakers for today's call will be David Richter, President and Chief Operating Officer of Hill International and John Fanelli, the Company's Chief Financial Officer. Before we begin, I would like to remind everyone that certain statements made during this call maybe considered forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and it is our intent that any such statements be protected by the Safe Harbor created thereby. Except for historical information, the matters set forth herein including, but not limited to, any projections of revenues, earnings or other financial items; any statements concerning our plans, strategies and objectives for future operations; and statements regarding future economic conditions or performance are forward-looking statements. These forward-looking statements are based on our current expectations, estimates and assumptions and are subject to certain risks and uncertainties. Although we believe that the expectations, estimates and assumptions reflected in forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Important factors that could cause actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements are set forth in the Risk Factors section and elsewhere in the reports that we have filed with the Securities and Exchange Commission. We do not intend, and undertake no obligation, to update any forward-looking statement. With that said, I’d now like to turn the call over to David Richter. David, please go ahead.

[David Richter:]

Thank you Devin and good morning to everyone on today's earnings conference call. Yesterday we announced our financial results for the third quarter of 2014. We accomplished a lot during those 90 days driving our revenues and backlog once again at records including delivering our eight quarter in a row of record consulting fees. We were also able to significantly delever our balance sheet by closing in august a $40 million equity follow-on offering and by closing in September $165 million refinancing of our senior debt at much lower rates. More on all of that later, right now let's jump into our quarterly financial performance. Total revenues for the third quarter of 2014 was a record $161.5 million a 10% increase from the third quarter of 2013. Consulting fee revenue for the third quarter was a record $145.3 million a 12% increase from last year's third quarter. This growth in consulting fees consists of 11% organic growth plus 1% growth as a result of our acquisition last year of Collaborative Partners in Boston which has been performing better than our expectations. Our gross profit in third quarter rose to $62.6 million up 15% from the third quarter of last year. Our gross margin as a percentage of consulting fees improved by 130 basis points to 43.1% in the third quarter versus last year. Our SG&A expenses in the third quarter were $51.4 million up 11% from the year ago quarter and our SG&A margin dropped slightly to 35.3% a 20 basis point improvement year-over-year. EBITDA for the third quarter was $13.4 million up 26% from last year. EBITDA margin as a percentage of consulting fees was 9.2% in the third quarter up 110 basis points from last quarter and our strongest ;performance in quite a while. Operating profit in the third quarter was $11.3 million up a strong 37% from last year's third quarter and our operating margin in the third quarter was 7.8% up 150 basis points from the third quarter of 2013. As I mentioned earlier we refinanced our senior debt at the end of the third quarter. As a result of this refinancing, Hill incurred one-time expenses of $10.8 million during the quarter due to the payoff and early termination of our prior revolving credit facility with Bank of America and our prior second lien term loan with Tennenbaum Capital Partners. As a result, Hill showed a net loss in the third quarter of negative $9 million or negative $0.19 per diluted share compared to net earnings during last year's third quarter of $2.6 million or $0.06 per diluted share. Absent of one-time refinancing expenses I just mentioned, Hill would have had net earnings in the third quarter of $1.9 million or $0.04 per diluted share. Now looking at the third quarter performance of our two operating segments separately, total revenue in Hill's Project Management Group during the third quarter was $121.7 million a 5% increased from the third quarter of 2013. Consulting fee revenue in the third quarter of the Projects Group was $107.0 million a 7% increase from the year ago quarter. This growth was comprised of 6% organic growth and 2% growth from the acquisition of Collaborative Partners last year. The Projects Group saw 11% increase in gross profit to $41.3 million for the quarter with gross margin on a percentage basis at 38.6% up 110 basis points from last year. SG&A expenses at the Projects Group were up 9% in third quarter to $28.3 million as a percentage of consulting fees our consulting fees, our SG&A margin was 26.5% up 30 basis points year-over-year. Operating profit for the Projects Group was $13 million during the third quarter, a 15% increase from last year. Operating margin as a percent of consulting fees was 12.1% an 80 basis point improvement versus the year ago. At Hill Construction Claims Group total revenue during the third quarter was a record $39.7 million a 26% increase from the third quarter of last year. Consulting fees for the Claims Group was also a record at $38.4 million a 25% increase year-over-year. The Claims Group's growth in consulting fees was entirely organic. The Claims Group saw its gross profit rise by 25% to $21.4 million, but saw a slight drop in its gross margin as a percent of consulting fees to 55.7% down just 20 basis points from last year. SG&A expenses for the Claims Group were 21% to $16.1 million in the third quarter, but as a percentage of consulting fees they were down by 150 basis points to 42.0%. As a result third quarter operating profit for the Claims Group was $5.3 million, a strong 38% jump from the third quarter of last year. As a percent of consulting fees this was a 130 basis point improvement from the year-earlier quarter with operating margin for the Claims Group at 13.7% in the third quarter of this year. In addition to the SG&A incurred by our two operating segments we also incurred SG&A expense in our corporate group. For the third quarter our corporate SG&A expenses were $6.9 million up just 1% from the year earlier quarter. As a percentage of consulting fees it was down to 4.8% down 50 basis points from last year's third quarter. This is the first time our corporate overhead costs have been under our target of 5% and we think we can improve this number even further going forward. This combined with our Projects and Claims Group showing operating margin in the third quarter of 12% and 14% respectively much closer to their internal targets of 15% means that we are getting very close to our stated operating margin goal for the entire company of 10% plus. And we think our operational trends in the near term will be in our favor as we seek to achieve this goal and to maintain it consistently. This will be helped by our big increase during the quarter in our backlog at September 30, our company's total backlog was a record $1.073 billion up more than 10% during the quarter. This backlog consisted of 1.026 billion from our Projects Group and $47 million from our Claims Group. 12-month backlog at the end of the third quarter was a record $457 million up 13% during the quarter. This was broken down into $410 million from our Projects Group and product group and $47 million from our Claims Group. Hill had net bookings during the third quarter of $246 million or book-to-bill ratio of 170%. An outstanding sales quarter and I believe the best in our company's history. Some of the major new contracts we announced over the last three months since our last earnings call included a $51 million contract to manage construction of three theme parks in Dubai, a $16 million extension of our contracts to provide PMO services to the Federal Transit Administration, a $7 million contract to act as project manager on two residential skyscrapers in India, a $4 million contract to oversee construction of a new FBI field office building in Puerto Rico, a $4 million contract to manage construction of a highway in Oman, a $3 million contract to manage construction of a new Federal Courts Complex in Abu Dhabi, a $2 million contract to manage construction of a major highway in Romania, a contract from New York City's Housing Recovery Office to manage the City's Build it Back program in response to super storm Sandy, this is a very major contract for our New York City office, a contract to provide project control services for Dallas Area Rapid Transit and numerous other contracts that we won during the quarter but have not yet announced so that had a major positive impact on our backlog during the third quarter. During our last earnings call, we gave guidance for 2014 consulting fees of between $580 million and $590 million, which we equated to approximately 13% of 15% growth for the year. Based on the consulting fees that we've achieved during the first nine months of the year, current market conditions and the current levels of backlog I just discussed we are reaffirming that guidance. During the third quarter we closed on the debt refinancing with a group of new lenders that brought Société Générale that provided us with a new senior debt financing in the amount of $165 million. It allowed us to replace both our prior Bank of America revolver and our second lien term loan from Tennenbaum Capital Partners. The new financing included a $45 million revolver, paying about 5% interest, down from the 8% we were paying Bank of America and a $120 million term loan paying about 8% down from the 20% we were paying Tennenbaum. This was a major step for us to get our interest expense down going forward that will allow the company to keep more of our profits instead of paying that mostly to lenders. The combined effect of this debt refinancing together with the $40 million equity offering that we closed in August means that we expect to be able to lower our interest expense which had been running at a quarterly rate of almost $6 million by more than half going forward. We also were able to significantly improve our borrowing capacity so we have adequate capital for continued growth for this foreseeable future. With that, John Fanelli, our CFO and now we're happy to take any of your questions.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Chase Jacobson with William Blair. Please proceed with your question.

[Chase Jacobson:]

Hi good morning.

[David Richter:]

Good morning, Chase.

[John Fanelli:]

Good morning.

[Chase Jacobson:]

So David I think the thing that everybody wants to hear about is what, you know given the change in oil even though your business isn’t directly tied to it, a lot of the geopolitical issues going on. If you could just talk about how the awards in the Middle East have been trending in the third quarter, but I think more importantly what you've been seeing to date in the fourth quarter and if you've seen any impact on the backlog convergent to revenue which the guidance doesn't imply that you have, but just wondering if you could address that?

[David Richter:]

Yeah, I'll be happy to because we get that question a lot.

[Chase Jacobson:]

Yeah.

[David Richter:]

Price of oil the recent unrest in northwest Iraq have had no material impact at all to our Middle East business. It continues to be one of the strongest in the company and its performing very well brining in work, growing its revenues. The decisions that get made over there regarding construction are not impacted by yesterday's price of oil. These are long term decisions that are made over years and sometimes planned for a decade or longer. Projects that we're involved in are not going to be stopped or slowed or canceled because the price of oil is down this week or next week.

[Chase Jacobson:]

Okay, so still, I mean it sounds like you are still confident and optimistic that that market is holding up and will continue to grow into next year?

[David Richter:]

Into the foreseeable future, absolutely. I get a lot of pessimism, but I'm talking to people on Wall Street who keep expecting some bubble to pop and this isn’t a bubble. This is actually a world that has a tremendous amount of wealth playing into it on a daily basis. That's true whether oil is a $100 a barrel or 80 or even a lot less. And in the markets that we operate in which are the wealthiest more stable countries like the UAE, Saudi Arabia, Qatar, Oman, we don’t see anything changing at all anytime soon.

[Chase Jacobson:]

Okay, and as it relates to your margin targets, construction claims very strong this quarter, good corporate expense control, the SG&A as a percent of revenue is a little bit higher than I'd expected in Project Management. So you know just can you give us any highlights as to you know what's going on with the cost controls in Project Management, given the strong growth that you're seeing? In the backlog there should we see that continue to go lower as a percentage of sales as we go forward here?

[David Richter:]

Go lower you mean the SG&A or the?

[Chase Jacobson:]

Yes, yes as a percentage right?

[David Richter:]

Yeah, the cost there’s nothing wrong with the cost controls in Project Management. I think what you’re seeing is there’s a significant ramp-up occurring both domestically and in certain parts internationally primarily the Middle East because we're getting a lot of work and you can see that reflected in our backlog and we’re beginning to take on staff and for some period time when that happens, you have relatively higher unemployed labor, which goes into SG&A, even though there are billable people when they're not billable that cost goes into our overhead and I think you’re starting to see some of that.

[Chase Jacobson:]

Okay, and John just a housekeeping on the tax rate, I know there are a lot of moving pieces this quarter. What should we expect as the tax rate going forward?

[John Fanelli:]

I think going forward into 2015 as we mentioned in the last quarter, with a lower interest rate we believe that the effective tax rate corporately will be in the mid 40’s.

[Chase Jacobson:]

Okay, got it thank you.

[David Richter:]

Yeah with the, Chase with the, our debt coming down significantly and the quarterly interest expense coming down and our margins heading up, we’re expecting a lot more stability in our tax rate going forward. Last couple of years of down surround significantly based upon where in the world we’re earning money and then the tax rates in those local jurisdictions, but I think you'll see a lot more consistency over the next year or two in our tax rate.

[Operator:]

Thank you. Our next question comes from Tahira Afzal with KeyBanc Capital Markets. Please proceed with your question.

[Tahira Afzal:]

Good morning and congratulations, great quarter.

[David Richter:]

Thank you, Tahira.

[John Fanelli:]

Thank you.

[Tahira Afzal:]

I guess first question is, you know David you gave us some nice breakdown as always of all your key awards in terms of scope and then some other space, you know you haven’t disclosed the amount. It seems the theme parks in Dubai was the biggest award you’ve had in the quarter or one of the undisclosed scope awards potentially be higher even than that?

[David Richter:]

The theme park project in Dubai at $51 million was our largest award that went into our backlog. But we have some significant, several significant awards in the tens of millions that haven’t been announced yet either because we are waiting for signed contracts, board approval from our clients or our client’s approval of the press release that we're hoping we'll be able to get out very shortly. But that was just an outstanding quarter for us, sales wise what was the number, $246 million of sales in one quarter is just a terrific quarter and our backlog being now back to a record closing at $1.1 billion it bodes very well for where our revenue is going to be heading next year.

[Tahira Afzal:]

Got it and David on that, you know you implied fourth quarter revenue growth or consulting fee revenues is you know in the sort of mid teen at this point and you’ve kind of said that in the past you were headed there. As you look at 2015 and the backlog and bidding visibility you have, how should we be looking at 2015 as you are modeling it out from the revenue side, would 2014 fourth quarter be, growth rate be kind of sort of an aggressive target or how would you please that in perspective of what you could potentially do in 2015?

[David Richter:]

The, we've got to fill in our range now, that’s because we only got a one quarter to go above what we're expecting. We're certainly expecting growth from third quarter and fourth quarter. We are ramping up on some of these projects and I expect that that will be right there in probably in the middle of that range for the fourth quarter. We are at the very beginning of our budging process for 2015 till we complete that process even I don’t know what we're projecting for next year. We will most likely do what we did the past two years, which is we have our fourth quarter earnings call in early march, we will at that point be done our budget. We'll have February, January numbers done and potentially a good idea what February looks like and will hopefully feel comfortable at that point in giving out guidance for our 2015 Consulting Group. But that's four months away and until we get there I can’t give you any sense of, you know a percentage number or even a range that we expect to grow next year.

[Tahira Afzal:]

Got it David and if I look at your margin trajectory outside of the pretty impressive G&A initiatives you are taking and just look at the pure mix shift, it seems like you will potentially be generating more revenues from the Project Management side of the business which is slightly lower margins. I assume those margins and net sales will be improving on absorption of overheads, but do we, as you book mix shifts together with the high utilization in the Project Management do we directionally still see margins heading north it seems so on your commentary I just wanted to confirm?

[David Richter:]

The simple answer is yes, we continue to see margins heading north. Right now when you look at the last couple of quarters the Claims Group has been growing significantly faster than the Projects Group.

[Tahira Afzal:]

Right.

[David Richter:]

My guess is going forward you’ll see more acquisition on the Project Management side and those two businesses will sort of stay in that 75% to 25% range that they've been in for several years. So I think the balance between the two sides of our company will still remain. The Project Management Group has lower gross margins, but you know the operating margin line they will typically historically deliver about the same operating margin. It’s typically been between you know the very low side 5% and in good times 15%. We’re expecting that full growth for the improving economy through our focus on keeping our overhead cost down to the maximum extent that we can that we should be over 15% at or over 15% consistently and in the third quarter they both got pretty close.

[Tahira Afzal:]

Yeah they did. I’ve got a couple of other questions David but I’ll just hop back in the queue.

[David Richter:]

No problem Tahira.

[Operator:]

Thank you. Our next question comes from Pete Enderlin with MAZ Partners. Please proceed with you question.

[Pete Enderlin:]

Good morning, thank you. Congratulations on everything you've accomplished during the quarter.

[David Richter:]

Thank you, Pete.

[Pete Enderlin:]

Looking at the overall SG&A as a percentage of revenues it was at about in line with consulting fee revenues in the third quarter which was considerable improvement from the first half of course when SG&A was up 23% I think. So the question is, when do we start to see leverage of revenues going up more than the SG&A expenses overall? I recognize that corporate SG&A is flat to down a little bit, but the overall picture still needs to generate some leverage and you haven’t seen it yet?

[David Richter:]

I think we are beginning to see it actually quite a bit. Certainly we had 11% we had 12% growth in consulting fees, and 11% growth in SG&A which is not our target, our targets for consulting fees to grow much more quickly than SG&A. I think we are beginning to see just over the last several quarters a significant improvement in our operating margins as a result of that growth.

[Pete Enderlin:]

Yeah.

[David Richter:]

You are going to see a significant drop in our interest expense going forward from $6 million a quarter down to under $3 million and I think you are going to see EPS begin to grow significantly as a result of those two things. And I don’t think that we are at where our operating margins should be and can get to, I think we are going to see continued improvement going forward. One of our main targets was to get our corporate overhead under 5% and we’ve done that and yet we still think we can get that number even below 4.8%

[Pete Enderlin:]

So I know you can't really speak very specifically about 2015, but would you expect that for next year that revenue growth would be higher than the overall SG&A number growth?

[David Richter:]

Absolutely, that’s always our goal.

[Pete Enderlin:]

Is that going to require some greater attention to cost controls in the budgeting process in the fourth quarter and on to 2015 than you've had recently?

[David Richter:]

It's not the requirement, but it’s not going to require it, but I would expect that especially in connection with me moving up to CEO probably a little more focus on cutting costs to make sure I have a great first year. The whole company has a great 2015. And you know, I think just continue to keep a close eye on our overheads continue to grow the business as much as we can. But we also see the business more than just, you know just the big picture, we also look at the office by office and we’ve had significant wins lately in some smaller underperforming offices that are going to help them do significantly better than going forward. And as each office starts to win more work and get busier, that just bubbles up through the entire company and you're going to see I think better and better margin going forward. It's not going to require us to do anything radical on the cost side. We just have to keep as someone told me recently, keep blocking and tackling and the numbers will keep heading in the right direction.

[Pete Enderlin:]

David, can you give us some sense of the geographical composition of bookings in the third quarter? I presume a lot of them are in the Middle East, we know they are, but do you have an overall rough breakdown of that?

[David Richter:]

I would say the best market for us during the quarter was the United States followed by the Middle East.

[Pete Enderlin:]

Okay, but if you look at your overall backlog -- long-term backlog of billion plus, how does that roughly break down between the geographical areas?

[David Richter:]

That’s really not the number that we've been disclosing or really tracking internally. Certainly the areas where we have the greatest revenue were the areas with the greatest backlog. Not by coincidence.

[Pete Enderlin:]

Yes. Can you give us an update of the status of the Riyadh Metro project? I believe it was kind of slow getting off the ground, not from your standpoint, but from the government standpoint?

[David Richter:]

That was a project we won, I believe in August or September of last year. It was slow ramping up initially, but keep in mind sometimes we get higher at the beginning of the construction and since we get retained and we get a notice to proceed, while in the job our full staff sometimes and we have metro in that case were hired at the beginning of the design phase and design requires a lot less staff as provided oversight than the construct phase does. That was slow to ramp up and will be probably in design for a couple of more quarters and once it begins construction, we expect a big increase in our staff and revenue on that project.

[Pete Enderlin:]

Right. Would you care to give any update on the potential for getting the Libyan receivable?

[David Richter:]

I don’t have any update to give since the last earnings call. What we were advised recently was that there is a court case coming in the next week or two that will determine which of the two competing governments is the legitimate government of Libya going forward. And we're hoping that once that’s has been decided that there is some progress and stability in the country, although obviously there is also a risk for the opposite result, but hopefully once that case is decided and we are dealing with people that have authority to continue to run the government going forward and we can start to get some more of our money out of that country.

[Pete Enderlin:]

Okay great. Thanks a lot of taking the question.

[David Richter:]

Right now we don’t have a lot of visibility as to the timing, but we continue to maintain a dialogue with our client. Hopefully at point in the near future we will start to see.

[Pete Enderlin:]

Thanks a lot.

[David Richter:]

Thank you, Pete.

[Operator:]

Thank you. Our next question comes from [Arnold] (ph) with Engine Capital Management. Please proceed with your question.

[Unidentified Analyst:]

Hi David. How are you?

[David Richter:]

Hello Arnold. Good morning.

[Unidentified Analyst:]

So first congratulations on a great quarter. My question was the following. So December 31 you will become CEO of the company and I was wondering if you can give us our top four or five strategic priorities -- strategic priorities for the business going forward?

[David Richter:]

That’s a good question. Working with my dad the only CEO in our 39-year history, but I have been the Chief Operating Officer for the last 10 plus years and the strategy that we've put together for the business is the one that’s been working. Unlike some of the big conglomerates the new AECOM URS is probably the best example who try to be everything to everybody. Our strategy has been to stay very focused on two services that we think were world class in project managements and construction claims consulting. And that strategy is going to continue. Our number one means to continue to build our business has been and will continue to be organic growth. The cheapest work that we can bring in the doors is the work we win not the work we buy. We've been an acquisitive company in the past and my guess is you'll continue to see acquisitions to be part of our strategy, but that’s certainly secondary to organic growth and continue to do good work for our clients and getting more work from those clients and from new clients. As I said to one of the prior, I think it was Pete that asked about overhead SG&A on that to try and have a little stronger focus on overhead costs and try and get those down, improving our margins and not just focusing on what are our profits are, our cool profits, but also our cash flow. And we've got still a significant amount of debt even though it's cheaper and even though it's lower than it was couple of months ago. We've got a lot of debt that we want to pay down. We down to de-lever the business and that’s our top priority. We can only do that by selling more stock, which have no intension of our doing at this point in time. Whereby improving our internal cash flow so we can use our profits to pay down that debt. That’s our plan. The overall strategy for the company is not going to change. That's been the same for a long time, but hopefully we will continue in improving economy to do even better for our shareholders going forward.

[Unidentified Analyst:]

Okay great. I applaud this. I think if you guys can focus on improving margins and free cash flow and de-lever I think that should do great things for the company and for the stock price. Second question in the past you’ve talked about the 10% margin goal. Just so I am clear is that the 10% EBITDA margin or is that the 10% EBIT margin.

[David Richter:]

The margin I've talked about for the target of 10% is the operating margin.

[Unidentified Analyst:]

Okay. So it's not EBITDA, its including depreciation.

[David Richter:]

Correct. Except EBITDA we'll have to be well north of 10%.

[Unidentified Analyst:]

Exactly. So I guess as you think and again I understand you're not giving guidance or anything like this at this point. But thinking about the gross profile of the company and assuming it can continue to go at similar rates or just going today as you think about '15 and certainly as you think about '16, do you think that this EBITDA -- do you think this type of margin profile could be achievable in '16 and if that’s the case, I guess what is -- that will be your big jump from now and so what has to happen I think to get to this type of margin?

[David Richter:]

Just for us to continue growing and continuing to focus on keeping our cost as low as possible. As I also said to Pete, if consulting fees are growing by X and our SG&A margin is growing by less than that X, then we'll continue to see improvement in our operating margins. One of the most profitable fronts in our industry, if you look at a lot of the E and C companies that are out there and we did a recent study in 2013, we had the second highest operating margin in the construction industry among the major publically traded firms, second only to Jacobs. And that’s the operating margin that frankly isn’t anywhere near where we should be. I think it was 5.6% on total revenue and Jacobs was at 5.7%. This is not an industry of high margins, but we should be able to do significantly better than the industry because we provide services that are higher margin than typical design and construction companies.

[Unidentified Analyst:]

Okay. Thank you.

[David Richter:]

Thanks Arnold.

[Operator:]

Thank you our next question comes from Michael Conti with Sidoti & Co. Please proceed with your question.

[Michael Conti:]

Hi good morning.

[David Richter:]

Good morning Mike.

[Michael Conti:]

A lot of my questions were answered already, but on the claim side, that’s four quarter in a row of 20% year-over-year growth. So what’s driving that growth?

[David Richter:]

What’s driving is certainly the global construction market is coming back. We have built in our claims practice the premium firm in the world in handling problems, disputes, other issues on major complex construction projects in the world. We're closing in on about 800 employees in that group and we're not aware of the competitor that has more than 300 employees. So we really are the dominant player in that total end of the construction consulting segment. And I think we are starting to see the benefits of size. We're seeing the benefits of us being able to really put together a truly world-class A team. In the regard you’ve seen the benefit of us being truly global. We had our operations in Africa and Latin America within the Claims Practice a year ago and we are seeing a tremendous number of opportunities in Asia, which was an underperforming operation for many years, but now is doing very well and I expect that to continue.

[Michael Conti:]

You sound pretty optimistic just regarding the potential for the claims group. Are these growth rates sustainable as you look into '15 and beyond?

[David Richter:]

I really have no idea. Because of the consulting practice it's got short-term contracts unlike the project management group, which is long-term contracts. Work can go up and down time to time just to bring upon how busy the people are and how often the phone is ringing. Right now we're seen improving environment. We see lots of opportunities for that business to continue adding staff and growing but being able to see beyond the next quarter and that business is very difficult.

[Michael Conti:]

Sure. And lastly just on the claim SG&A tick down as a percentage from a year ago, but what plans or changes were implemented throughout the quarter? I know you’ve spoken in the past on some type of strategy to get the cost down?

[David Richter:]

Are you talking specifically in the claims group?

[Michael Conti:]

Yeah.

[David Richter:]

Just given the nature of that business is as I said the revenue can go up and down and fluctuate quite a bit. It’s the business that has to stay very much in tune with keeping its workforce in its workload in balance. We've gone through areas where there was downsizing. We've gone through areas where they were upsizing in anticipation of growth, but sometimes it's got a little bit delayed, but I'll tell you when you look at the numbers this year it just looks like they are hitting it out of park and I think that’s very true.

[Michael Conti:]

Okay great.

[David Richter:]

…hopefully that will continue. I am sure like most businesses it will have its up and down quarters, but right now they're having just a fantastic 2014.

[Michael Conti:]

Great. That’s all I have.

[David Richter:]

Thanks Mike.

[Operator:]

Thank you. (Operator Instruction) We have a follow-up question from Tahira Afzal. Please proceed with your question.

[Tahira Afzal:]

Hi David. Some of my follow-up have been answered, but may be a follow-up to that question that just was asked on the claim side, I am not looking at it from the demand side, but the supply side. Let's assume demand continues to be strong. Do you feel there is enough opportune for you to build staff to really accommodate it?

[David Richter:]

Yeah. We don’t see any obstacle in the claims side of our company to adding staff in response to more work.

[Tahira Afzal:]

Thanks David. And then there were two things that we were hoping what happened post all your balance sheet clean up. Number one, really with the improvements of the balance sheet and LC continuality etcetera, I would love to get a sense as you’ve gone out to clients, whether that's being received incrementally well by clients than its opening more doors for you or larger project opportunities? And secondly, an update on the M&A activity going forward now that this is out of the way?

[David Richter:]

Yes, I don’t think that the refinancing has any impact on our clients or our ability to win work or anything else. The New York Stock Exchange Company, our clients view us as Blue chip and expensive debt that we had in place didn’t do anything to damage that. You talked specifically about letters of credit, which is something else that with the new facility in place, we're not just paying less interest. We're going to be in a position now to take hopefully in the next call it two quarter the letters of credit that we had historically been and are currently doing providing out of our U.S. revolver whether it's most expensive and ties up our borrowing capacity and be able to push those into local relationships with local banks. And these are primarily the Middle East, but also some in Europe as well where we can have a much cheaper facility, solely focused on prime letters of credit that’s much cheaper for us to issue those LCs and also doesn’t have any impact on our buying capacity. We have a significant amount of those right now that were put in place one, two, three years ago with a much more tenuous senior banking relationship where we have high collateral requirements in some cases 50% in some cases 100%. And now we're going back to those banks or new banks to negotiate facilities where we might be able to provide 25% cash collateral for LC at a much cheaper rate than we were paying before. So we were expecting the cost of LC will go down and certainly those are required now in the biggest projects especially the Middle East and also being able to free up a significant amount of cash that will come out of LC cash collateral accounts probably for the tune of $10 million or more that will help our cash flow going forward as well. On the M&A side, we see lots of opportunities. Certainly we were constrained over the last couple of years. Our last two acquisitions were for stock because we couldn’t do cash acquisition under our event banking facility. We have the ability to do that now. We're looking at a handful of acquisitions smaller companies that go niche or tuck-ins, but acquisitions that we feel fill the gap that we have or give us some geographic expansion so that we can add on to our -- what we think is extraordinary organic growth.

[Tahira Afzal:]

Got it. That is very helpful. And last question from me David, we heard your commentary on the Middle East and from the most recent channel checks and presentations that have been made on CapEx and spending on the Middle East just seem to concur with what you're saying. Really in the U.S. you’ve talked about this market picking up again. We're seeing leading indicators also picking up. Would love to get an update on the different end markets and regions that you're seeing in the U.S. where things are improving.

[David Richter:]

Well, a couple of things. Our business has really changed in the last five or six years since the recession began. Much more of a focus -- I am talking about the U.S. market, much more of a focus by us and a lot more work won on the transportation and infrastructure side but so on the building side and our businesses have evolved more towards supporting that market. It's a great market, its large projects that are long-term and require high levels of staffing and I think we're doing a better job than ever before of winning some of the biggest and best assignments in that category. As the buildings market begins to recover, as the economy continues to improve, I think that's going to bode very well for us and we'll see more and more activity on that front as well. We've won a significant amount of work recently and this is some of the work that we haven’t announced yet, but will. In the New York region in response to the Superstorm Sandy, one of those contracts that we have announced, some others that we haven’t. That’s a significant amount of work that has to be done for a lot of publications in that area. They're going to help us grow in the North East and we're continuing to try to grow in areas where I think I eluded to this before where we have some smaller offices, where we can either help them on the business development side and some of our smaller office have won some big assignments lately that help improve their economics or smaller acquisitions that can start to add to the critical mass that we need to really start to ramp up our operating markets.

[Tahira Afzal:]

All right. Thank you very much David.

[David Richter:]

Thank you, Tahira.

[Operator:]

Thank you, our next question comes from [Marcos] (ph) a private investor. Please proceed with your question.

[Unidentified Analyst:]

Good morning David and John. Congratulations on a great quarter.

[David Richter:]

Good morning. Thank you.

[Unidentified Analyst:]

I have a quick question on the revenue. I was comparing your revenues back from 2009 to the projected revenues for 2014 versus your employee count at the end of the year it looks like it's been heading in the wrong direction. It's been revenue per each employee at the end of 2019 was around $180 versus 214 we are trending into $130. Is there any focus or any effort to look into that numbers?

[David Richter:]

I've been asked that question before and I think the response was that we figured out was a couple. One is you got to look at consulting fees not total revenue because the total revenue, the difference in past was that delta has come down over time. So if you're using total revenue, that’s the wrong number to be using. Also the numbers we repot on employees is the yearend number. It's not an average over the course of the year and that number can be misleading as well and also we had a significant amount of work and this is far more than rounding here. We had a significant amount of work during that period of time in Iraq where we had people that were essentially generating 300% of normal revenue because they were working 80 hour weeks. They were being paid for 80-hour weeks. We could bill for that. And on top of that, we were billing for a 50% markup because of the risks of operating in a more danger zone. So we were seeing triple revenue from those employees. They were all very high level expensive employees. We had I think at the peak about 120 people on the ground in Iraq and those numbers really skewed if you look at the '09 and 2010 period that was the higher that worked and that skewed those old numbers higher than they otherwise would have been.

[Unidentified Analyst:]

Okay. I have one last question is are you guys still dealing with HIL Housing or HIL Stone, or did you guys totally walk away from those two segments?

[David Richter:]

No that business has been closed.

[Unidentified Analyst:]

Okay. Thank you.

[David Richter:]

Thank you.

[Operator:]

Thank you. At this time I would like to turn the call back over to Mr. David Richter for closing comments.

[David Richter:]

Thank you very much. We are very pleased with our company’s growth so far this year and our improvement in profitability. With our debt and equity refinancing successfully completed in the third quarter, we're now refocused on topline growth and bottom line improvements. Thank you all for your interest in our company and for your participating in our call this morning. We're looking forward to our next earnings call next March. Thank you.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.