Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
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)
Delaware
 
20-0953973
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
One Commerce Square
2005 Market Street, 17th Floor
Philadelphia, PA
 
19103
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:  (215) 309-7700
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  o     No  ý
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  o     No  ý
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.
Large Accelerated Filer
o
 
Accelerated Filer
ý
Non-Accelerated Filer
o
 
Smaller Reporting Company
o
 
 
 
Emerging Growth Company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  o     No  ý
 
There were 55,135,158 shares of the Registrant’s Common Stock outstanding at July 6, 2018.
 


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Explanatory Note
 
On May 8, 2018, the Hill International Inc. (the "Company") filed its Annual Report on Form 10-K/A Amendment No. 2 which amended and restated the Company’s financial statements as of December 31, 2016, and for each of the three years in the period ended December 31, 2016 and the related notes thereto originally filed on Form 10-K with the SEC on March 31, 2017. This Form 10-Q amends the Company’s unaudited consolidated financial statements for the three and nine months ended September 30, 2016 and the related notes thereto, included on Form 10-Q filed on August 14, 2016 and Form 10-Q/A filed on August 15, 2016 (“Prior Filings”).

This restatement in this Form 10-Q ("Restatement") reflects the correction of the following errors identified subsequent to the filing of the Prior Filings:
 
A.
The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with U. S. generally accepted accounting principles ("US GAAP"). The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under Accounting Standard Codification (ASC) 830 “Foreign Currency Matters.”

B.
The Company identified departures from US GAAP under ASC 605-35 “Construction-Type and Production-Type Contracts” in its historical accounting for revenue recognition on six long-term customer contracts with fee constraints (e.g., fixed fee, lump sum, maximum contract value). The Company enters into agreements for construction management and consulting services with customers, and the guidance of ASC 605-35 states that contracts for construction consulting services, such as under agency contracts or construction management agreements, fall within the scope of the standard and should follow either Percentage of Completion or Completed Contract methods of accounting. Historically, the Company had not consistently applied the percentage of completion method of revenue recognition.

C.
The Company discovered that it had not properly performed the required impairment testing of amortizable intangible assets in accordance with US GAAP in that an asset that was no longer in use as of July 2013 was not identified and impaired. In addition, an improper useful life was used for some of the Company’s internally developed software assets resulting in an improper amount of amortization expense being recorded in previous periods.

D.
The Company discovered that the amounts of liabilities pertaining to the obligation for end of service benefits in six foreign countries were improperly accounted for under the guidance in ASC 715 “Compensation — Retirement Benefits”.

E.
The Company determined the accrual for uncertain tax benefits taken with respect to income tax matters in Libya had been improperly released during 2013 and 2014 prior to the expiration of the statute of limitations on the Libyan tax authority’s right to audit the related tax years.

F.
During the restatement process, the Company identified other transactions that had been recorded to incorrect accounts and/or in improper amounts.

G.
Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact.

This Form 10-Q does not reflect adjustments for events occurring after the filing of the Prior Filings except to the extent they are otherwise required to be included and discussed herein and did not substantively modify or update the disclosures herein other than as required to reflect the adjustments described above. See Note 1 to the accompanying consolidated financial statements, set forth in Item 1 of this Form 10-Q, for additional information.
 
See “Item 9A — Controls and Procedures” to the Company’s Amended Form 10-K/A filed on May 8, 2018 that discloses additional material weaknesses in the Company’s internal controls associated with the restatement, as well as management’s restated conclusion that the Company’s internal controls over financial reporting were not effective as of December 31, 2016. As disclosed therein, management is currently developing and implementing the changes needed in the Company’s internal control over financial reporting to remediate these material weaknesses. These changes are still in process.
 



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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
 
Index to Form 10-Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and it the Company's 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, earnings before interest, taxes, depreciation and amortization (“EBITDA”), margin, profit improvement, cost savings or other financial items; any statements of belief, any statements concerning the Company's plans, strategies and objectives for future operations; and any statements regarding future economic conditions or performance, are forward-looking statements.
 
These forward-looking statements are based on the Company's current expectations, estimates and assumptions and are subject to certain risks and uncertainties. Although the Company believes that the expectations, estimates and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.
 
Those forward-looking statements may concern, among other things:
 
The markets for the Company's services;
Projections of revenues and earnings, anticipated contractual obligations, funding requirements or other financial items;
Statements concerning the Company's plans, strategies and objectives for future operations; and
Statements regarding future economic conditions or the Company's performance.
 
Important factors that could cause the Company's actual results to differ materially from estimates or projections contained in our forward-looking statements include:
 
The risks set forth in Item 1A, “Risk Factors,” in the Company's most recent Annual Report on Form 10K/A;
Unfavorable global economic conditions may adversely impact its business;
Backlog, which is subject to unexpected adjustments and cancellations, may not be fully realized as revenue;
The Company may incur difficulties in implementing the Profit Improvement Plan;
The Company's expenses may be higher than anticipated;
Modifications and termination of client contracts;
Control and operational issues pertaining to business activities that the Company conducts pursuant to joint ventures with other parties;
Difficulties that may incur in implementing the Company's acquisition strategy; and
The need to retain and recruit key technical and management personnel.
 
Other factors that may affect the Company's business, financial position or results of operations include:
 
Unexpected delays in collections from clients, particularly those located in the Middle East;
Risks of the Company's ability to obtain debt financing or otherwise raise capital to meet required working capital needs and to support potential future acquisition activities;
Risks of international operations, including uncertain political and economic environments, acts of terrorism or war, potential incompatibilities with foreign joint venture partners, foreign currency fluctuations, civil disturbances and labor issues; and
Risks of contracts with governmental entities, including the failure of applicable governing authorities to take necessary actions to secure or maintain funding for particular projects with us, the unilateral termination of contracts by the government and reimbursement obligations to the government for funds previously received.
 
The Company does not intend, and undertakes no obligation to, update any forward-looking statement. In accordance with the Reform Act, Item 1A of this Report entitled “Risk Factors” contains cautionary statements that accompany those forward-looking statements. You should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-Q, in our other filings with the SEC or in materials incorporated therein by reference.

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PART I — FINANCIAL INFORMATION
Item 1.   Financial Statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
September 30, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
Assets
 
 

 
 

Assets
 
 
 
 
Cash and cash equivalents
 
$
14,933

 
$
25,637

Cash - restricted
 
4,534

 
4,312

Accounts receivable, less allowance for doubtful accounts of $67,952 and $71,082
 
155,562

 
164,844

Accounts receivable - affiliates
 
6,963

 
5,712

Prepaid expenses and other current assets
 
7,628

 
7,751

Income tax receivable
 
4,515

 
3,554

Current assets held for sale
 

 
54,651

Total current assets
 
194,135

 
266,461

Property and equipment, net
 
13,940

 
16,389

Cash - restricted, net of current portion
 
1,160

 
313

Retainage receivable
 
9,778

 
17,225

Acquired intangibles, net
 
4,556

 
6,006

Goodwill
 
53,041

 
50,665

Investments
 
4,469

 
3,501

Deferred income tax assets
 
3,573

 
3,200

Other assets
 
5,493

 
4,224

Non-current assets held for sale
 

 
32,091

Total assets
 
$
290,145

 
$
400,075

Liabilities and Stockholders’ Equity
 
 
 
 
Current maturities of notes payable and long-term debt
 
$
2,695

 
$
1,983

Accounts payable and accrued expenses
 
82,717

 
85,680

Income taxes payable
 
12,323

 
4,874

Current portion of deferred revenue
 
3,761

 
12,943

Other current liabilities
 
10,430

 
8,157

Current liabilities held for sale
 

 
25,888

Total current liabilities
 
111,926

 
139,525

Notes payable and long-term debt, net of current maturities
 
31,443

 
142,120

Retainage payable
 
641

 
961

Deferred income taxes
 
2,874

 
560

Deferred revenue
 
9,511

 
22,804

Other liabilities
 
14,710

 
12,666

Non-current liabilities held for sale
 

 
5,087

Total liabilities
 
171,105

 
323,723

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Preferred stock, $0.0001 par value; 1,000 shares authorized, none issued
 

 

Common stock, $0.0001 par value; 100,000 shares authorized, 59,358 shares and 58,835 shares issued at September 30, 2017 and December 31, 2016, respectively
 
6

 
6

Additional paid-in capital
 
195,890

 
190,353

Accumulated deficit
 
(44,097
)
 
(81,349
)
Accumulated other comprehensive loss
 
(5,150
)
 
(4,611
)
 
 
146,649

 
104,399

Less treasury stock of 6,977 shares at September 30, 2017 and December 31, 2016, respectively
 
(30,041
)
 
(30,041
)
Hill International, Inc. share of equity
 
116,608

 
74,358

Noncontrolling interests
 
2,432

 
1,994

Total equity
 
119,040

 
76,352

Total liabilities and stockholders’ equity
 
$
290,145

 
$
400,075

 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)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
(As restated)
 
 
 
(As restated)
Revenues
 
$
123,192

 
$
121,222

 
$
364,748

 
$
390,830

Direct expenses
 
85,875

 
82,329

 
251,191

 
267,984

Gross profit
 
37,317

 
38,893

 
113,557

 
122,846

Selling, general and administrative expenses
 
38,945

 
46,867

 
112,482

 
118,983

Share of loss (profit) of equity method affiliates
 

 
12

 
(48
)
 
28

Operating profit (loss)
 
(1,628
)
 
(7,986
)
 
1,123

 
3,835

Interest and related financing fees, net
 
1,035

 
606

 
2,066

 
1,810

(Loss) Earnings before income taxes
 
(2,663
)
 
(8,592
)
 
(943
)
 
2,025

Income tax (benefit) expense
 
(1,068
)
 
2,318

 
(368
)
 
5,523

Loss from continuing operations
 
(1,595
)
 
(10,910
)
 
(575
)
 
(3,498
)
Discontinued operations:
 
 
 
 
 
 
 
 
  Loss from discontinued operations, net of tax
 
(752
)
 
(540
)
 
(12,304
)
 
(2,357
)
  Gain (Loss) on disposal of discontinued operations, net of tax
 
(1,892
)
 

 
50,303

 

     Total gain (loss) from discontinued operations
 
(2,644
)
 
(540
)
 
37,999

 
(2,357
)
 
 
 
 
 
 
 
 
 
Net (loss) earnings
 
(4,239
)
 
(11,450
)
 
37,424

 
(5,855
)
Less: net earnings - noncontrolling interests
 
55

 
96

 
175

 
57

Net (loss) earnings attributable to Hill International, Inc.
 
$
(4,294
)
 
$
(11,546
)
 
$
37,249

 
$
(5,912
)
 
 
 
 
 
 
 
 
 
Basic loss per common share from continuing operations
 
$
(0.03
)
 
$
(0.21
)
 
$
(0.01
)
 
$
(0.07
)
Basic loss per common share from discontinued operations
 
(0.01
)
 
(0.01
)
 
(0.24
)
 
(0.04
)
Basic gain (loss) on disposal of discontinued operations, net of tax
 
(0.04
)
 

 
0.97

 

Basic (loss) earnings per common share - Hill International, Inc.
 
$
(0.08
)
 
$
(0.22
)
 
$
0.72

 
$
(0.11
)
Basic weighted average common shares outstanding
 
52,371
 
51,753

 
52,065

 
51,704

 
 
 
 
 
 
 
 
 
Diluted loss per common share from continuing operations
 
$
(0.03
)
 
$
(0.21
)
 
$
(0.01
)
 
$
(0.07
)
Diluted loss per common share from discontinued operations
 
(0.01
)
 
(0.01
)
 
(0.24
)
 
(0.04
)
Diluted gain (loss) on disposal of discontinued operations, net of tax
 
(0.04
)
 

 
0.97

 

Diluted (loss) earnings per common share - Hill International, Inc.
 
$
(0.08
)
 
$
(0.22
)
 
$
0.72

 
$
(0.11
)
Diluted weighted average common shares outstanding
 
52,371

 
51,753

 
52,065

 
51,704

 
See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
(As restated)
 
 
 
(As restated)
Net earnings (loss)
 
$
(4,239
)
 
$
(11,450
)
 
$
37,424

 
$
(5,855
)
Foreign currency translation adjustment, net of tax
 
1,929

 
(160
)
 
(273
)
 
418

Other, net
 

 
79

 

 
135

Comprehensive earnings (loss)
 
(2,310
)
 
(11,531
)
 
37,151

 
(5,302
)
Less: Comprehensive loss attributable to non-controlling interests
 
454

 
1,914

 
438

 
394

Comprehensive earnings (loss) attributable to Hill International, Inc.
 
$
(2,764
)
 
$
(13,445
)
 
$
36,713

 
$
(5,696
)
 
See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
 
 
(As restated)
Cash flows from operating activities:
 
 
 
 
Net earnings (loss)
 
$
37,424

 
$
(5,855
)
Loss from discontinued operations
 
12,304

 
2,357

Gain on sale of discontinued operations, net of taxes (see note 2)
 
(50,303
)
 

Earnings (loss) from continuing operations
 
(575
)
 
(3,498
)
Adjustments to reconcile net earnings to net cash provided by (used in):
 
 
 
 
Depreciation and amortization
 
5,011

 
5,689

Provision for bad debts
 
2,350

 
10,827

Amortization of deferred loan fees
 
789

 
1,334

Deferred tax provision (benefit)
 
706

 
(685
)
Stock based compensation
 
2,671

 
1,680

Loss on sale of assets
 
184

 

Unrealized foreign exchange losses on intercompany balances
 
407

 
7,463

Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
(1,051
)
 
(190
)
Accounts receivable
 
10,490

 
(3,468
)
Accounts receivable - affiliate
 
(1,243
)
 
(5,778
)
Prepaid expenses and other current assets
 
562

 
(671
)
Income taxes receivable
 
(566
)
 
(762
)
Retainage receivable
 
9,298

 
(14,498
)
Other assets
 
(4,305
)
 
6,944

Accounts payable and accrued expenses
 
(7,888
)
 
(8,822
)
Income taxes payable
 
516

 
(3,676
)
Deferred revenue
 
(25,061
)
 
7,030

Other current liabilities
 
2,131

 
1,604

Retainage payable
 
(326
)
 
(1,059
)
Other liabilities
 
843

 
1,435

Net cash (used in) provided by continuing operations
 
(5,057
)
 
899

Net cash (used in) provided by discontinued operations
 
(10,217
)
 
72

Net cash (used in) provided by operating activities
 
(15,274
)
 
971

Cash flows from investing activities:
 
 
 
 
Purchases of business
 
(123
)
 

Payments for purchase of property and equipment
 
(1,927
)
 
(1,498
)
Proceeds from sale of assets
 
60

 

Net cash used in investing activities of continuing operations
 
(1,990
)
 
(1,498
)
Net cash provided by (used in) investing activities of discontinued operations
 
129,247

 
(920
)
Net cash provided by (used in) investing activities
 
127,257

 
(2,418
)
Cash flows from financing activities:
 
 
 
 
Payments on term loans
 
(75
)
 
(900
)
Proceeds from term loans
 
30,000

 

Net (payments) borrowings on revolving loans
 
(28,885
)
 
8,937

Pay-off and termination of term loan
 
(117,494
)
 

Payments on Philadelphia Industrial Development Corporation loan
 
(42
)
 
(41
)
Deferred Acquisition price payments
 

 
(1,531
)
Dividends paid to noncontrolling interest
 
(18
)
 
(109
)
Payments of financing fees
 
(4,038
)
 

Proceeds from stock issued under employee stock purchase plan
 
138

 
74

Proceeds from exercise of stock options
 
1,838

 
219

Net cash (used in) provided by financing activities
 
(118,576
)
 
6,649

Effect of exchange rate changes on cash
 
(4,111
)
 
(8,072
)
Net decrease in cash and cash equivalents
 
(10,704
)
 
(2,870
)
Cash and cash equivalents — beginning of period
 
25,637

 
24,089

Cash and cash equivalents — end of period
 
$
14,933

 
$
21,219


 See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
 
Note 1 — The Company
 
Hill International, Inc. (“Hill” or the “Company”) is a professional services firm that provides program management, project management, construction management 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.

Restatement of Previously Issued Unaudited Consolidated Financial Statements
On May 8, 2018, the Company filed its Annual Report on Form 10-K/A for the year ended December 31, 2016, which amended the Company’s audited consolidated financial statements for each of the years ended December 31, 2016, 2015 and 2014 and the related notes thereto. This Form 10-Q amends the Company’s unaudited consolidated financial statements for the three and nine months ended September 30, 2016 and the related notes thereto, included on Form 10-Q filed on August 8, 2016 (“Prior Filing”). The Restatement reflects the correction of the following errors identified for the three and nine months ended September 30, 2016 subsequent to the Prior Filing and the impact of restating the three months ended March 31, 2017 on the nine months ended September 30, 2017:
A. In connection with the accounting for the May 2017 sale of its Construction Claims Group, the Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with accounting principles generally accepted in the United States (“US GAAP”). The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under Accounting Standard Codification (ASC) 830 “Foreign Currency Matters.” As a result of these corrections, selling, general and administrative (“SG&A”) expenses increased $710 for the three months ended September 30, 2016; and decreased $1,813 and increased $1,186 for the nine months ended September 30, 2017 and 2016, respectively.

B. The Company identified departures from US GAAP under ASC 605-35 “Construction-Type and Production-Type Contracts” in its historical accounting for revenue recognition on nine long-term customer contracts with fee constraints (e.g., fixed fee, lump sum, maximum contract value). The Company enters into agreements for construction management and consulting services with customers, and the guidance of ASC 605-35-15-3D states that contracts for construction consulting services, such as under agency contracts or construction management agreements, fall within the scope of the standard and should follow either Percentage of Completion or Completed Contract methods of accounting. Historically, the Company had not consistently applied the percentage of completion method of revenue recognition. The corrections to properly apply U.S. GAAP to the identified contracts resulted in a decrease of $4,655 to revenues for the three months ended September 30, 2016; and increase of $3,130 and decrease of $499 to revenues for the nine months ended September 30, 2017 and 2016, respectively.

C. The Company discovered that it had not properly performed the required impairment testing of amortizable intangible assets in accordance with US GAAP in that certain assets no longer in use were not identified and impaired. In addition, an improper useful life was used for some of the Company’s internally developed software assets resulting in an improper amount of amortization expense being recorded in previous periods. The net effect of correcting these errors resulted in a $28 increase in SG&A expense for the three months ended September 30, 2016; and increases of $29 and $83 in SG&A expense for the nine months ended September 30, 2017 and 2016, respectively.


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D. The Company identified other transactions that had been recorded to incorrect accounts and/or in improper amounts. The net corrections of these transactions resulted in an increase of $5 and a decrease of $757 in revenues for the three and nine months ended September 30, 2016, respectively, and a $5,421 increase in revenues for the nine months ended September 30, 2017; a $5,305 increase in direct expenses for the nine months ended September 30, 2017; a decrease of $798 and $3,306 in SG&A expenses for the three and nine months ended September 30, 2016, respectively and an increase of $473 in SG&A expenses for the nine month ended September 30, 2017; a $415 and a $1,245, increase in interest expenses for the three and nine months ended September 30, 2016, respectively; a $261 and $1,829 increase in net loss from discontinued operations for the three and nine months ended September 30, 2016, respectively and a $1,057 decrease in net loss from discontinued operations for the nine months ended September 30, 2017; and a $15 and $45 decrease in earnings from noncontrolling interest for the three and nine months ended September 30, 2016, respectively and a $58 increase in earnings from noncontrolling interest for the nine months ended September 30, 2017. In conjunction with the sale of the construction claims group, interest expense of $676 and $3,075 for the three and nine months ended September 30, 2016, respectively, and interest expense of $552 for the nine months ended September 30, 2017 was reclassified from continuing operations to discontinued operations.

E. Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact. The net impact was a decrease in income tax expense of $571 and $263 for the three and nine months ended September 30, 2016, respectively and an increase in income tax expense of $695 for the nine months ended September 30, 2017.
 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended September 30, 2016
(in thousands, except per share data)
 
 
As Previously
 
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
 
Reference
 
 
 
 
 
 
 
 
 
Revenues
 
$
125,872

 
$
(4,650
)
 
$
121,222

 
B, D
Direct expenses
 
82,329

 

 
82,329

 
 
Gross profit
 
43,543

 
(4,650
)
 
38,893

 
 
Selling, general and administrative expenses
 
46,927

 
(60
)
 
46,867

 
A, C, D
Share of loss of equity method affiliates
 
12

 

 
12

 
 
Operating loss
 
(3,396
)
 
(4,590
)
 
(7,986
)
 
 
Interest and related financing fees, net
 
191

 
415

 
606

 
D
Loss before income taxes
 
(3,587
)
 
(5,005
)
 
(8,592
)
 
 
Income tax expense
 
2,889

 
(571
)
 
2,318

 
E
Loss from continuing operations
 
(6,476
)
 
(4,434
)
 
(10,910
)
 
 
Loss from discontinued operations
 
(279
)
 
(261
)
 
(540
)
 
D
Net loss
 
(6,755
)
 
(4,695
)
 
(11,450
)
 
 
Less: net earnings - noncontrolling interests
 
111

 
(15
)
 
96

 
D
Net loss attributable to Hill International, Inc.
 
$
(6,866
)
 
$
(4,680
)
 
$
(11,546
)
 
 
 
 
 
 
 
 
 
 
 
Basic loss per common share from continuing operations
 
$
(0.13
)
 
$
(0.08
)
 
$
(0.21
)
 
 
Basic loss per common share from discontinued operations
 

 
(0.01
)
 
(0.01
)
 
 
Basic loss per common share - Hill International, Inc.
 
$
(0.13
)
 
$
(0.09
)
 
$
(0.22
)
 
 
Basic weighted average common shares outstanding
 
51,753

 

 
51,753

 
 
 
 
 
 
 
 
 
 
 
Diluted loss per common share from continuing operations
 
$
(0.13
)
 
$
(0.08
)
 
$
(0.21
)
 
 
Diluted loss per common share from discontinued operations
 

 
(0.01
)
 
(0.01
)
 
 
Diluted loss per common share - Hill International, Inc.
 
$
(0.13
)
 
$
(0.09
)
 
$
(0.22
)
 
 
Diluted weighted average common shares outstanding
 
51,753

 

 
51,753

 
 




11

Table of Contents

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2016
(in thousands, except per share data)
 
 
As Previously
 
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
 
Reference
 
 
 
 
 
 
 
 
 
Revenues
 
$
392,087

 
$
(1,257
)
 
$
390,830

 
B, D
Direct expenses
 
267,984

 

 
267,984

 
 
Gross profit
 
124,103

 
(1,257
)
 
122,846

 
 
Selling, general and administrative expenses
 
121,020

 
(2,037
)
 
118,983

 
A, C, D
Share of loss of equity method affiliates
 
28

 

 
28

 
 
Operating profit
 
3,055

 
780

 
3,835

 
 
Interest and related financing fees, net
 
565

 
1,245

 
1,810

 
D
Earnings before income taxes
 
2,490

 
(465
)
 
2,025

 
 
Income tax expense
 
5,786

 
(263
)
 
5,523

 
E
Loss from continuing operations
 
(3,296
)
 
(202
)
 
(3,498
)
 
 
Loss from discontinued operations
 
(528
)
 
(1,829
)
 
(2,357
)
 
D
Net loss
 
(3,824
)
 
(2,031
)
 
(5,855
)
 
 
Less: net earnings - noncontrolling interests
 
102

 
(45
)
 
57

 
D
Net loss attributable to Hill International, Inc.
 
(3,926
)
 
(1,986
)
 
(5,912
)
 
 
 
 
 
 
 
 
 
 
 
Basic loss per common share from continuing operations
 
$
(0.07
)
 
$

 
$
(0.07
)
 
 
Basic loss per common share from discontinued operations
 
(0.01
)
 
(0.03
)
 
(0.04
)
 
 
Basic loss per common share - Hill International, Inc.
 
$
(0.08
)
 
$
(0.03
)
 
$
(0.11
)
 
 
Basic weighted average common shares outstanding
 
51,704

 

 
51,704

 
 
 
 
 
 
 
 
 
 
 
Diluted loss per common share from continuing operations
 
$
(0.07
)
 
$

 
$
(0.07
)
 
 
Diluted loss per common share from discontinued operations
 
(0.01
)
 
(0.03
)
 
(0.04
)
 
 
Diluted loss per common share - Hill International, Inc.
 
$
(0.08
)
 
$
(0.03
)
 
$
(0.11
)
 
 
Diluted weighted average common shares outstanding
 
51,704

 

 
51,704

 
 



12

Table of Contents

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three Months Ended September 30, 2016
(in thousands)

 
 
As Previously
 
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
 
Reference
 
 
 
 
 
 
 
 
 
Net loss
 
$
(6,755
)
 
$
(4,695
)
 
$
(11,450
)
 
A, B, C, D, E
Foreign currency translation adjustment, net
 
(1,638
)
 
1,478

 
(160
)
 
A, B, C, D
Other, net
 
79

 

 
79

 
 
Comprehensive loss
 
$
(8,314
)
 
$
(3,217
)
 
$
(11,531
)
 
 
Comprehensive earnings attributable to noncontrolling interest
 
132

 
1,782

 
1,914

 
 
Comprehensive loss attributable to Hill International Inc.
 
$
(8,446
)
 
(4,999
)
 
$
(13,445
)
 
 


HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Nine Months Ended September 30, 2016
(in thousands)

 
 
As Previously
 
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
 
Reference
 
 
 
 
 
 
 
 
 
Net earnings
 
$
(3,824
)
 
$
(2,031
)
 
$
(5,855
)
 
A, B, C, D, E
Foreign currency translation adjustment, net
 
(1,257
)
 
1,675

 
418

 
A, B, C, D
Other, net
 
135

 

 
135

 
 
Comprehensive loss
 
$
(4,946
)
 
$
(356
)
 
(5,302
)
 
 
Comprehensive (loss) earnings attributable to noncontrolling interest
 
(1,223
)
 
1,617

 
394

 
 
Comprehensive loss attributable to Hill International Inc.
 
$
(3,723
)
 
$
(1,973
)
 
$
(5,696
)
 
 

In addition to the items noted above as part of the Restatement, the Company identified departures from US GAAP in its historical preparation and presentation of its statement of cash flows. The Company did not report its cash flows in the reporting currency equivalent of foreign currency using the exchange rates in effect at the time of the cash flows, or an appropriate average rate to approximate the rates in effect at the time of the cash flows. The impact of properly preparing a cash flow statement in each functional currency, translating the cash flow statement using the appropriate rate in effect at the time of a transaction, or substantially equivalent average rate for the period, and consolidation of the individual functional currency cash flows, as prescribed by the guidance in ASC 230, is depicted in the table below. The adjustments noted in the cash flow statements that follow are both a result of items “A” through “E” explained above, as well as the foreign currency effect from cash flow statements prepared in functional currency and appropriately translated.


13

Table of Contents

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
Nine Months Ended September 30, 2016
(in thousands)
 
 
As Previously
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 
$
(3,824
)
 
$
(2,031
)
 
$
(5,855
)
Loss from discontinued operations
 

 
2,357

 
2,357

Loss from continuing operations
 
(3,824
)
 
326

 
(3,498
)
Adjustments to reconcile net loss to net cash provided by (used in):
 
 
 
 
 
 
Depreciation and amortization
 
7,705

 
(2,016
)
 
5,689

Provision for bad debts
 
11,879

 
(1,052
)
 
10,827

Amortization of deferred loan fees
 
1,334

 

 
1,334

Deferred tax benefit
 
663

 
(1,348
)
 
(685
)
Stock based compensation
 
1,838

 
(158
)
 
1,680

Unrealized foreign exchange losses (gains) on intercompany balances
 

 
7,463

 
7,463

Changes in operating assets and liabilities:
 
 
 
 
 
 
Restricted cash
 
(69
)
 
(121
)
 
(190
)
Accounts receivable
 
2,652

 
(6,120
)
 
(3,468
)
Accounts receivable - affiliate
 
(5,665
)
 
(113
)
 
(5,778
)
Prepaid expenses and other current assets
 
(1,001
)
 
330

 
(671
)
Income taxes receivable
 
(756
)
 
(6
)
 
(762
)
Retainage receivable
 
(14,583
)
 
85

 
(14,498
)
Other assets
 
5,191

 
1,753

 
6,944

Accounts payable and accrued expenses
 
(8,582
)
 
(240
)
 
(8,822
)
Income taxes payable
 
(3,951
)
 
275

 
(3,676
)
Deferred revenue
 
124

 
6,906

 
7,030

Other current liabilities
 
2,639

 
(1,035
)
 
1,604

Retainage payable
 
(1,308
)
 
249

 
(1,059
)
Other liabilities
 
385

 
1,050

 
1,435

Net cash (used in) provided by continuing operations
 
(5,329
)
 
6,228

 
899

Net cash provided by discontinued operations
 

 
72

 
72

Net cash (used in) provided by in operating activities
 
(5,329
)
 
6,300

 
971

 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
Payments for purchase of property and equipment
 
(2,584
)
 
1,086

 
(1,498
)
Net cash used in investing activities of continuing operations
 
(2,584
)
 
1,086

 
(1,498
)
Net cash used in investing activities of discontinued operations
 

 
(920
)
 
(920
)
Net cash used in investing activities
 
(2,584
)
 
166

 
(2,418
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
Payments on term loans
 
(900
)
 

 
(900
)
Net borrowings on revolving loans
 
8,950

 
(13
)
 
8,937

Payments on Philadelphia Industrial Development Corporation loan
 
(41
)
 

 
(41
)
Deferred acquisition price payments
 
(1,531
)
 

 
(1,531
)
Dividends paid to noncontrolling interest
 
(111
)
 
2

 
(109
)
Proceeds from stock issued under employee stock purchase plan
 
65

 
9

 
74

Proceeds from exercise of stock options
 
220

 
(1
)
 
219

Net cash provided by financing activities
 
6,652

 
(3
)
 
6,649

Effect of exchange rate changes on cash
 
(1,609
)
 
(6,463
)
 
(8,072
)
Net decrease in cash and cash equivalents
 
(2,870
)
 

 
(2,870
)
Cash and cash equivalents — beginning of period
 
24,089

 

 
24,089

Cash and cash equivalents — end of period
 
$
21,219

 
$

 
$
21,219



14

Table of Contents

Note 2 - Discontinued Operations and Sale of Business Unit
 
On December 20, 2016, the Company and its subsidiary Hill International N.V. (“Hill N.V.” and, collectively with the Company, the “Sellers”) entered into a Stock Purchase Agreement (as amended on May 3, 2017, the “Agreement”) with Liberty Mergeco, Inc. (the “US Purchaser”) and Liberty Bidco UK Limited (the “UK Purchaser” and, collectively with the US Purchaser, the “Purchasers”) pursuant to which the Purchasers were to acquire the Construction Claims Group (the "Claims Group") by the US Purchaser’s acquisition of all of the stock of Hill International Consulting, Inc. from the Company and the UK Purchaser’s acquisition of all of the stock of Hill International Consulting B.V. from Hill N.V. for a total purchase price of $140,000 in cash reduced by assumed indebtedness and certain other items, as set forth in the Agreement.

The Claims Group sale closed on May 5, 2017 with an effective date of April 30, 2017 for a total purchase price of $140,000 in cash less: (1) an estimated working capital adjustment at closing amounting to approximately $8,449; and (2) approximately $2,187 of assumed indebtedness. In addition, the Company was required to provide a $3,750 letter of credit into escrow in order to secure certain of the Company’s indemnification obligations for 12 months following closing. The funds provided by the sale of the Construction Claims Group and the cash received upon the draw down under the 2017 Term Loan Facility and the amended Revolving Credit Facilities (described below) were required to be used as follows: (a) $117,000 to pay off the 2014 Term Loan Facility; (b) approximately $8,793 to pay down the International Revolver; and (c) approximately $1,214 to pay accrued interest and certain bank fees. The remaining proceeds along with a portion of the proceeds from the 2017 Term Loan were used to pay down the $25,000 U.S. Revolver.

The Company and the purchasers of the Construction Claims Group were unable to agree upon a final net working capital amount. After agreeing to a reduction in the proceeds of $3,203 and pursuant to the terms of the agreement, the Company participated in a dispute resolution process by which independent accounting experts determined in June 2018 that the final net working capital should be reduced by an additional $1,876. The total reduction in the proceeds from the buyer of $5,079 was completed and finalized in June 2018 and was included in calculating the gain during the second quarter of 2017.

The Company entered into a transition services agreement (the “TSA”) and certain other agreements with the Purchasers that govern the relationships between the Purchasers and the Company following the Claims Group sale. Pursuant to the TSA, the Company provides the Purchasers with certain specified services on a transitional basis for periods generally up to six months following the Claims Group sale, including support in areas such as facilities, finance, human resources, legal, marketing, technology and treasury. In addition, the Company granted the Purchasers a license to use certain office premises as specified in the TSA. The TSA also outlined the services that the Purchasers provide to the Company for a period of generally up to six months following the Claims Group sale, including support in areas such as finance, legal and treasury. The charges for the transition services and licensed premises generally allows the providing company to recover the incremental costs and expenses it actually incurs in connection with providing the services and premises apart from the provision of certain services that are to be provided at no cost for terms specified in the TSA.

As of April 30, 2017, the assets and liabilities of the Claims Group were reflected as held for sale in the Company’s Consolidated Balance Sheets, and the operating results and cash flows of the Claims Group were reflected as discontinued operations in the Company’s Consolidated Statements of Operations, Consolidated Statements of Comprehensive Earnings, and Consolidated Statements of Cash Flows for all periods presented.


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Table of Contents

The carrying amounts of assets and liabilities of the discontinued operations of the Claims Group that were classified as held for sale are as follows (in thousands): 
 
 
April 30, 2017
 
December 31, 2016
 
 
 
 
 
Accounts receivable, net
 
47,611

 
50,892

Prepaid expenses and other current assets
 
3,153

 
3,064

Income taxes receivable
 

 
695

Total current assets classified as held for sale
 
$
50,764

 
$
54,651

 
 
 
 
 
Property and equipment, net
 
5,786

 
4,617

Acquired intangibles, net
 
3,289

 
3,397

Goodwill
 
23,454

 
23,461

Investments
 
5

 
6

Other assets
 
2,860

 
610

Total non-current assets classified as held for sale
 
$
35,394

 
$
32,091

 
 
 
 
 
Accounts payable and accrued expenses
 
15,960

 
21,539

Income taxes payable
 
(17
)
 
92

Deferred revenue
 

 
1,562

Other current liabilities
 
15,867

 
2,695

Total current liabilities classified as held for sale
 
$
31,810

 
$
25,888

 
 
 
 
 
Deferred income taxes
 

 
385

Deferred revenue
 
92

 
1,012

Retained Earnings
 

 
457

Other liabilities
 
1,257

 
3,233

Total non-current liabilities classified as held for sale
 
$
1,349

 
$
5,087

 
 
 
 
 
Net Assets
 
$
52,999

 
55,767



16

Table of Contents

The line items constituting earnings from discontinued operations consist of the following (in thousands):
 
 
 
Three Months Ended September 30,
 
  Nine Months Ended September 30,
 
 
2017 (1)
 
2016
 
2017 (1)
 
2016
 
 
 
 
(As restated)
 
 
 
(As restated)
Revenues
 
$

 
$
42,203

 
$
62,149

 
$
127,909

Direct expenses
 

 
18,872

 
31,339

 
58,919

Gross profit
 

 
23,331

 
30,810

 
68,990

Selling, general and administrative expenses (2)
 
727

 
21,118

 
33,874

 
61,901

Operating (loss) profit
 
(727
)
 
2,213

 
(3,064
)
 
7,089

Interest and related financing fees, net (3)
 

 
2,762

 
8,858

 
8,293

Loss before income taxes
 
(727
)
 
(549
)
 
(11,922
)
 
(1,204
)
Pretax gain on the disposal of discontinued operations (4)
 

 

 
61,443

 

   Earnings from discontinued operations before income taxes
 
(727
)
 
(549
)
 
49,521

 
(1,204
)
Income tax expense (benefit) (5)
 
1,917

 
(9
)
 
11,522

 
1,153

Net gain (loss) from discontinued operations
 
$
(2,644
)
 
$
(540
)
 
$
37,999

 
$
(2,357
)
 
(1)
Results of operations for the Claims Group are reflected through April 30, 2017, the effective closing date of the Claims Group sale.
(2)
No amortization or depreciation expense was recorded by the Company in 2017 as the Claims Group’s assets were held for sale as of December 31, 2016.
(3)
In connection with the sale of the Claims Group, the Company was required to pay off its existing term loan facility and amend and pay down its existing revolving credit facilities (See Note 9). Interest expense and debt issuance costs attributable to the Claims Group were charged to discontinued operations.
(4)
The pretax gain on the sale of the Construction Claims Group was calculated as follows (in thousands):
    
Adjusted purchase price              $129,364
Cash transferred to buyer              4,041
Net proceeds received from Purchaser     $125,323
Less net assets held for sale          52,999
Less other adjustments              10,881
Pretax gain on disposal             $ 61,443

(5)
The effective tax rates on pretax income from discontinued operations were (263.7)% and 23.3% for the three and nine months ended September 30, 2017, respectively. The 2017 rate differs from the U.S. federal statutory rate of 35% primarily due to the taxability of the gain on the sale in the U.S and foreign jurisdictions. The “gain on disposal of discontinued operations, net of tax” decreased during the 3-months ended September 30, 2017 due to an increase in tax expense. The tax expense of $1,917 is offset by a tax benefit to continuing operations of $1,893 from the use of its additional loss for the 3-months ended September 30, 2017.


17

Table of Contents

Note 3 - Liquidity
 
At September 30, 2017 our principal sources of liquidity consisted of $14,933 of cash and cash equivalents, $16,847 of available borrowing capacity under the Domestic Revolving Credit Facility, $9,876 of available borrowing capacity under the International Revolving Credit Facility and $2,100 under other foreign credit agreements. Additional information regarding the Company's credit facilities is set forth in Note 9 - Notes Payable and Long-Term Debt.

From July 1, 2018 to July 12, 2018, the date of this filing, the Company was not in compliance with the requirements of its Revolving Credit Facilities, which required the filing of this Quarterly Report on Form 10-Q by June 30, 2018. Upon the filing of this Quarterly Report on Form 10-Q, the Company is compliant under such requirements. Prior waivers of non-compliance with certain covenants in the Revolving Credit Facilities require the Company to file the Form 10-K for the 2017 fiscal year by July 17, 2018 and the Form 10-Q for the first quarter of 2018 by July 30, 2018. If the Company does not file such reports in accordance with these deadlines, it may again be in noncompliance with the requirements of the Revolving Credit Facilities.


Note 4 — Basis of Presentation
 
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/A (Amendment No. 2) for the year ended December 31, 2016. Accordingly, they do not include all of the information and footnotes required by US 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 US 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.

New Accounting Pronouncements

For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 5 to the consolidated financial statements in Item 8 of Form 10K/A (Amendment No. 2) for the year ended December 31, 2016 filed with the SEC on May 4, 2018. There have been no new pronouncements impacting our consolidated financial statements since that filing. See update below.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and most industry-specific topics. The new guidance identifies how and when entities should recognize revenue. The new rules establish a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In connection with this new standard, the FASB has issued several amendments to ASU 2014-09 to provide additional clarification and implementation instructions relating to (i) principal versus agent considerations, (ii) identifying performance obligations and licensing, (iii) narrow-scope improvements and practical expedients and (iv) technical corrections and improvements. However, none of the amendments change the core principle of the guidance in ASU 2014-09.

The new guidance in ASU 2014-09, as well as all amendments, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The new guidance permits two methods of adoption, full retrospective or modified retrospective, and the Company anticipates that it will use the modified retrospective method of adoption in which the cumulative effect of applying the ASU will be recognized at January 1, 2018, the date of initial application. Management has implemented a plan of adoption and is continuing to evaluate the impact that adoption of this guidance will have on the Company’s financial statements.

18

Table of Contents


The Company’s implementation plan includes the following:

Forming an ASU 2014-09 working group comprised of management representatives.
Analyzing the Company’s revenue streams.
Selecting representative contracts within each revenue stream for evaluation under ASU 2014-09.
Identifying the impact from the standard on current business processes.
Evaluating additional disclosure requirements and monitoring changes to the Company’s internal controls.

Management has commenced its plan for adoption of ASU 2014-09 by reviewing various types of revenue contracts and disaggregated the revenue into two revenue streams: (i) fixed price and (ii) time and materials. Thus far, from its contract reviews, the Company does not anticipate a material impact to its results of operations as the pattern of revenue recognition and the measurement of variable consideration is expected to be consistent under the new standard. However, the Company’s initial assessment of the impact could change as the adoption plan progresses. The Company expects that there will be an impact to financial reporting due to the enhanced revenue disclosures and internal control over financial reporting due to the new disclosure requirements of ASC 606. The Company will adopt the requirements of the new standard effective January 1, 2018, in the Company's Form 10-Q for the three months ended March 31, 2018.

Note 5 — Accounts Receivable
 
The components of accounts receivable are as follows (in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
Billed
 
$
190,881

 
$
200,134

Retainage, current portion
 
10,950

 
10,824

Unbilled
 
21,683

 
24,968

 
 
223,514

 
235,926

Allowance for doubtful accounts
 
(67,952
)
 
(71,082
)
Total
 
$
155,562

 
$
164,844

 
Unbilled receivables primarily represent revenue earned on contracts, which the Company is contractually precluded from billing until predetermined future dates.
 
There is approximately $9,778 included in non-current Retainage Receivable in the consolidated balance sheet at September 30, 2017. Of that amount, approximately $9,497 relates to retention and approximately $281 relates to a Defect and Liability Period (“DLP”), on the MOTC in Oman. Fifty percent of the DLP will be released one year from the commencement and the balance will be released upon the issuance of final Completion Certificates. This period commences upon the issuance of a “Taking Over Certificate” (by MOTC) to contractors, continues for a period of up to 24 months, and ends with the issuance of a final certificate closing the project.


19

Table of Contents

Note 6 — Intangible Assets
 
The following table summarizes the Company’s acquired intangible assets (in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 
 
 
 
 
 
 
 
Client relationships
 
$
17,534

 
$
13,420

 
$
16,699

 
$
11,298

Acquired contract rights
 
2,043

 
2,007

 
2,058

 
1,912

Trade names
 
897

 
491

 
959

 
500

Total
 
$
20,474

 
$
15,918

 
$
19,716

 
$
13,710

 
 
 
 
 
 
 
 
 
Intangible assets, net
 
$
4,556

 
 
 
$
6,006

 
 
 

Amortization expense related to intangible assets was as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30, 2017
2017
 
2016
 
2017
 
2016
 
 
(As restated)
 
 
 
(As restated)
$
493

 
$
286

 
$
1,556

 
$
2,279

 

The following table presents the estimated amortization expense based on our present intangible assets for the next five years (in thousands): 
 
 
Estimated
Amortization
Expense
 
 
Year ending December 31,
 
 
 
 
2017 (remaining 3 months)
 
$
485

2018
 
1,088

2019
 
990

2020
 
728

2021
 
338

 
Note 7 — Goodwill
 
The following table summarizes the changes in the Company’s carrying value of goodwill during 2017 (in thousands):
 
 
 
Balance, December 31, 2016
$
50,665

Translation adjustments
2,376

Balance, September 30, 2017
$
53,041



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Note 8 — Accounts Payable and Accrued Expenses
 
Below are the components of accounts payable and accrued expenses (in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
Accounts payable
 
$
29,002

 
$
30,944

Accrued payroll and related expenses
 
34,006

 
32,618

Accrued subcontractor fees
 
11,112

 
9,188

Accrued agency fees
 
2,075

 
5,702

Accrued legal and professional fees
 
1,549

 
2,223

Other accrued expenses
 
4,973

 
5,005

 
 
$
82,717

 
$
85,680

 
Note 9 — Notes Payable and Long-Term Debt
 
Outstanding debt obligations are as follows (in thousands):

 
 
September 30, 2017
 
December 31, 2016
2014 Term Loan Facility, net of unamortized discount and deferred financing costs of $4,416 at December 31, 2016
 
$

 
$
112,884

2017 Term Loan Facility, net of unamortized discount and deferred financing costs of $926 at September 30, 2017
 
28,999

 

Domestic Revolving Credit Facility
 

 
16,500

International Revolving Credit Facility
 

 
11,102

Borrowings under credit facilities with a consortium of banks in Spain
 
2,747

 
2,962

Borrowings under overdraft credit facilities with the National Bank of Abu Dhabi
 
1,779

 

Borrowings from Philadelphia Industrial Development Corporation
 
613

 
655

 
 
34,138

 
144,103

Less current maturities, net of unamortized discount and deferred financing costs of $157 and $1,778 at September 30, 2017 and December 31, 2016, respectively.
 
2,695

 
1,983

Notes payable and long-term debt, net of current maturities
 
$
31,443

 
$
142,120

 
In conjunction with the sale of its Claims Group on May 5, 2017 (See Note 2), the Company terminated and paid off the 2014 Term Loan Facility and amended and paid down its Domestic and International Revolving Credit Facilities with Société Générale (the “Agent”), and other U.S. Loan Parties (the “U.S. Lenders”). There was approximately $117,000 outstanding under the 2014 Term Loan, $25,000 outstanding on the Domestic Revolving Credit Facility and €8,300 ($8,793) outstanding on the International Revolving Credit Facility prior to the debt extinguishment and modification. In the second quarter of 2017, the Company recorded a charge of approximately $4,024 for the write-off of unamortized debt issuance costs related to the extinguishment of the 2014 Term Loan Facility and approximately $325 for the write-off of unamortized debt issuance costs related to the modification and reduction of borrowing capacity of the Domestic Revolving Credit Facility. The write-off of unamortized debt issuance costs is included in the results from discontinued operations.

The Company is party to a credit agreement with Société Générale (the “Agent”), and other U.S. Loan Parties (the “U.S. Lenders”) consisting of the $30,000 (the "2017 Term Loan Facility") and a $25,000 U.S. dollar-denominated revolving credit facility (the “Domestic Revolving Credit Facility”, together with the 2017 Term Loan Facility, the “U.S. Credit Facilities”) available to the Company and a credit agreement with the Agent (the “International Lender”) providing a €9,156 ($10,000 at closing) revolving credit facility (the “International Revolving Credit Facility” and together with the Domestic Revolving Credit Facility, the “Revolving Credit Facilities” and, together with the U.S. Credit Facilities, the “Secured Credit Facilities”) which is available to Hill International N.V. The Domestic Revolving Credit Facility and the International Revolving Credit Facility include sub-limits for letters of credit amounting to $20,000 and €8,000 ($9,130 at closing), respectively.

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The Secured Credit Facilities contain customary default provisions, representations and warranties, and affirmative and negative covenants, and require the Company to comply with certain financial and reporting covenants. The financial covenant is comprised of a maximum Consolidated Net Leverage Ratio of 3.00 to 1.00 for any fiscal quarter ending on or subsequent to March 31, 2017 for the trailing twelve months then-ended. The Consolidated Net Leverage Ratio is the ratio of (a) consolidated total debt (minus unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, depreciation, amortization, share-based compensation and other non-cash charges, including bad debt expense, certain one-time litigation and transaction related expenses, and restructuring charges for the trailing twelve months. In the event of a default, the U.S. Lender and the International Lender may increase the interest rates by 2.0%.

From July 1, 2018 to July 12, 2018, the date of this filing, the Company was not in compliance with the requirements of our Revolving Credit Facilities which required the filing of this Quarterly Report on Form 10-Q by June 30, 2018. Upon the filing of this Quarterly Report on Form 10-Q, the Company is compliant under such requirements. Prior waivers of non-compliance with certain covenants in the Revolving Credit Facilities require the Company to file the Form 10-K for the 2017 fiscal year by July 17, 2018 and the Form 10-Q for the first quarter of 2018 by July 30, 2018. If the Company does not file such reports in accordance with these deadlines, it may again be in noncompliance with the requirements of the Revolving Credit Facilities.

The U.S. Credit Facilities are guaranteed by certain U.S. subsidiaries of the Company, and the International Revolver is guaranteed by the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.
 
2017 Term Loan Facility
 
The disclosures that follow below describe the debt obligations outstanding as of September 30, 2017 under the 2017 Term Loan Facility.

On June 21, 2017, the Company entered into the 2017 Term Loan Facility with a term of 6 years, requiring repayment of 1.0% of the original principal amount annually for the first five years. Any amounts repaid on the 2017 Term Loan Facility will not be available to be re-borrowed.

The 2017 Term Loan Facility was funded net of a 1.0% discount of $300 of the principal amount, which has been deferred. In addition, the Company incurred fees and expenses related to the 2017 Term Loan Facility of approximately $874, which have been deferred. The original issue discount and debt issuance costs are being amortized on a straight-line basis, which approximates the effective interest method, to interest and related financing fees, net over the six years ending June 21, 2023, the loan maturity date. The unamortized original issue discount and debt issuance cost balance of approximately $926 is included as an offset against the notes payable and long-term debt balance in the Consolidated Balance Sheet at September 30, 2017.
 
The interest rate on the 2017 Term Loan Facility is, at the Company’s option, either:
 
the London Inter-Bank Offered Rate (“LIBOR”) for the relevant interest period plus 5.75% per annum, provided that such LIBOR shall not be lower than 1.00% per annum; or
 
the Base Rate (as described below) plus 4.75% per annum.
 
The “Base Rate” is a per annum rate equal to the highest of (A) the prime rate, (B) the federal funds effective rate plus 0.50%, or (C) the LIBOR for an interest period of one month plus 1.00% per annum. Upon a default, the applicable rate of interest under the Secured Credit Facilities may increase by 2.00%. The LIBOR (including when determining the Base Rate) shall in no event be less than 1.00% per annum.
 
At September 30, 2017, the interest rate on the 2017 Term Loan Facility was 6.99%.
 
The Company has the right to prepay the 2017 Term Loan Facility in full or in part at any time without premium or penalty (except customary breakage costs); provided, however that upon the occurrence of prepayments relating to certain repricing transactions within the first six months following closing, a 1.0% prepayment premium will be payable. The Company is required to make certain mandatory prepayments, without premium or penalty (except customary breakage costs; provided, however, that upon the occurrence of any repricing transaction in respect of certain mandatory prepayments within the first six months following closing, a 1.0% prepayment premium is payable), including (i) with net proceeds of any issuance or incurrence of indebtedness by the Company after the closing, (ii) with net proceeds from certain asset sales outside the ordinary course of business, and (iii) with 50% of the excess cash flow for each fiscal year of the Company commencing with the first full fiscal year ending after closing (which percentage would be reduced to 25% if the Consolidated Net Leverage Ratio is equal to or less than 2.00 to 1.00).

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The 2017 Term Loan Facility (along with interest thereon) is generally secured by a first-priority security interest in substantially all assets of the Company and certain of the Company’s U.S. subsidiaries other than accounts receivable and cash proceeds thereof, as to which the 2017 Term Loan Facility (and the interest thereon) is secured by a second-priority security interest.

Revolving Credit Facilities

Simultaneously with the closing of the sale of the Construction Claims Business, the Company amended its Domestic Revolving Credit Facility to reduce the amount available to the Company to $25,000, amended its International Revolving Credit Facility to reduce the amount available to the Company to $10,000, and drew approximately $25,191 in cash and approximately $9,193 in letters of credit against the amended Revolving Credit Facilities. Deferred fees incurred with establishing the Secured Credit Facilities amounting to approximately $325 were charged to discontinued operations during the quarter of the sale.
 
The Domestic Revolving Credit Facility and the International Revolving Credit Facility each have a term of five years from the closing and provide for letter of credit sub-limits in amounts of $20,000 and €8,000 (approximately $9,452 at September 30, 2017), respectively. The maximum Consolidated Net Leverage Ratio will be increased from the prior credit facilities to 3.00 for all test dates and will not decline. The definition of Consolidated Net Leverage Ratio was amended to (i) remove the cap on the amount of permitted cash netting and (ii) permit netting of unrestricted cash and cash equivalents. The Company incurred fees totaling $1,739 which are deferred and will be amortized to interest expense over the five-year term of the facilities. 

The Revolving Credit Facilities require payment of interest only during the term and were substantially drawn as of the date of modification. Under the Revolving Credit Facilities, outstanding loans may be repaid in whole or in part at any time, without premium or penalty, subject to certain customary limitations, and will be available to be re-borrowed from time to time through expiration on May 5, 2022.

The interest rate on borrowings under the Domestic Revolving Credit Facility are, at the Company’s option from time to time, either the LIBOR rate for the relevant interest period plus 3.75% per annum or the Base Rate plus 2.75% per annum. At September 30, 2017, the interest rate was 7.00%.
 
The interest rate on borrowings under the International Revolving Credit Facility will be the European Inter-Bank Offered Rate, or “EURIBOR,” for the relevant interest period (or at a substitute rate to be determined to the extent EURIBOR is not available) plus 4.50% per annum. Throughout the three months ended September 30, 2017, we had no borrowings and, therefore, did not incur such interest expense.
 
The Company has paid commitment fees calculated at 0.50% annually on the average daily unused portion of the Domestic Revolving Credit Facility, and the Subsidiary has paid commitment fees calculated at 0.75% annually on the average daily unused portion of the International Revolving Credit Facility.
 
The ability to borrow under each of the Domestic Revolving Credit Facility and the International Revolving Credit Facility is subject to a “borrowing base.” The Domestic Revolving Credit Facility borrowing base is calculated using a formula based upon approximately 85% of receivables that meet or satisfy certain criteria (“Eligible Domestic Receivables”). The International Revolving Credit Facility borrowing base is calculated using a different formula based upon approximately 10% of international receivables that meet or satisfy certain criteria.
 
The Company or the Subsidiary, as applicable, will be required to make mandatory prepayments under their respective Revolving Credit Facilities to the extent that the aggregate outstanding amount thereunder exceeds the then-applicable borrowing base, which payments will be made without penalty or premium. At September 30, 2017, the domestic borrowing base was $25,000 and the international borrowing base was €9,156 (approximately $10,818 at September 30, 2017).
 
Generally, the obligations of the Company under the Domestic Revolving Credit Facility are secured by a first-priority security interest in the Eligible Domestic Receivables, cash proceeds and bank accounts of the Company and certain of the Company’s U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and such subsidiaries. The obligations of the Subsidiary under the International Revolving Credit Facility are generally secured by a first-priority security interest in substantially all accounts receivable and cash proceeds thereof, certain bank accounts of the Subsidiary and certain of the Company’s non-U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.
 

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The Company incurred fees and expenses related to the Revolving Credit Facilities in excess of $3,000 which has been deferred. The deferred fees are being amortized on a straight-line basis, which approximates the effective interest method, to interest expense and related financing fees, net over a five-year period which ends on May 5, 2022. The unamortized debt issuance cost balances of $2,502 and $1,650 are included in other assets in the consolidated balance sheet at September 30, 2017 and December 31, 2016, respectively.

At September 30, 2017 the Company had $8,153 of outstanding letters of credit and $16,847 of available borrowing capacity under the Domestic Revolving Credit Facility. At September 30, 2017, the Company had $942 of outstanding letters of credit and $9,876 of available borrowing capacity under the International Revolving Credit Facility.
 
Other Debt Arrangements
 
The Company’s subsidiary, Hill International (Spain) S.A. (“Hill Spain”), maintained a revolving credit facility with three banks in Spain which initially provided for total borrowing of up to €5,640 with interest at 6.50% on outstanding borrowings. The facility expired on December 17, 2016. Concurrent with the satisfaction of this facility Hill Spain entered into a new agreement with three new banks. The total new facility is for €2,770 (approximately $3,273 at September 30, 2017) which bears interest between 1.85% and 3.50% and is repaid in equal installments over varying expiration dates between 36 and 60 months.
 
Hill Spain previously maintained an ICO (Official Credit Institute) loan with Bankia Bank in Spain, which expired on August 10, 2017 and was paid in full.
 
The Company maintains a credit facility with the National Bank of Abu Dhabi which provides for total borrowings of up to AED 11,500 (approximately $3,130 at September 30, 2017) collateralized by certain overseas receivables. At September 30, 2017, AED 6,538 was utilized (approximately $1,779). The credit facility is subject to periodic review by the bank and as such has been classified as current in the consolidated balance sheet. The interest rate is the one-month Emirates InterBank Offer Rate plus 3.50% (or 5.50% at September 30, 2017) but no less than 5.50%.  This facility allows for letters of guarantee up to AED 200,000 (approximately $54,431 at September 30, 2017) of which AED 97,182 (approximately $26,448) was outstanding at September 30, 2017
 
Engineering S.A. maintains four unsecured revolving credit facilities with two banks in Brazil aggregating 2,380 Brazilian Reais (BRL) (approximately $752) at September 30, 2017, with a weighted average interest rate of 4.76% per month at September 30, 2017. There were no borrowings outstanding on any of these facilities at September 30, 2017 or December 31, 2016, which are renewed automatically every three months.
 
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 September 30, 2017, the maximum U.S. dollar equivalent of the commitments was $84,087, of which $34,824 is outstanding.

In connection with the 2015 move of its corporate headquarters to Philadelphia, Pennsylvania, the Company received a loan from the Philadelphia Industrial Development Corporation in the amount of $750 which bears interest at 2.75%, is repayable in 144 equal monthly installments of $6 and matures on April 1, 2027.

 
Note 10 — Supplemental Cash Flow Information
 
The following table provides additional cash flow information (in thousands):
 
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Interest and related financing fees paid
 
$
5,831

 
$
8,915

Income taxes paid
 
$
7,713

 
$
9,435

Increase (decrease) in other current liabilities and decrease (increase) in additional paid-in capital related to ESA Put Options
 
$
(777
)
 
$
2,670

Increase in additional paid-in capital from the issuance of shares of common stock from cashless exercise of stock options
 
$

 
$
729



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Note 11 — Earnings per Share
 
Basic earnings per common share have been computed using the weighted-average number of shares of common stock outstanding during the period. On May 10, 2017 the Company's Board of Directors approved a monthly grant of Company stock valued at $80 per month to the Interim Chief Executive Officer ("ICEO") during his term of service, to be delivered to him on the last day of his service as ICEO. There is no circumstance in which these shares will not be issued, therefore, the accumulated shares are included in basic shares outstanding and in the computation of weighted averages basic shares. Basic shares outstanding included 50 shares and 81 shares related to this grant in the three and nine months ended September 30, 2017, respectively.

Diluted earnings per common share incorporates the incremental shares issuable upon the assumed exercise of stock options using the treasury stock method, if dilutive. Options to purchase approximately 1,541 shares and 6,480 shares for the three month periods ended September 30, 2017 and 2016, respectively, and 2,079 shares and 6,478 shares for the nine month periods ended September 30, 2017 and 2016, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.
 
Note 12 — Share-Based Compensation
 
At September 30, 2017, the Company had approximately 5,527 options outstanding with a weighted average exercise price of $4.23.  During the nine months ended September 30, 2017, the Company granted approximately 716 options which vest over a five-year period. The options granted had a weighted average exercise price of $4.98 and a contractual life of 7.0 years. The aggregate fair value of the options was approximately $1,400 calculated using the Black-Scholes valuation model. The weighted average assumptions used to calculate fair value were: expected life—5 years; volatility—48.30% and risk-free interest rate—2.08%. During the nine months ended September 30, 2017, options for approximately 1,541 shares with a weighted average exercise price of $5.41 lapsed and options for approximately 222 shares with a weighted average exercise price of $4.41 were forfeited.
 
During the three and nine months ended September 30, 2017, employees purchased approximately 5 and 36 common shares, respectively, for an aggregate purchase price of approximately $24 and $138, respectively, 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 approximately $1,048 and $581 for the three months ended September 30, 2017 and 2016, respectively, and approximately $2,261 and $1,838 for the nine months ended September 30, 2017 and 2016, respectively.

On May 10, 2017 the Company's Board of Directors approved a monthly grant of Company stock valued at $80 per month to the Interim Chief Executive Officer ("ICEO") during his term of service. At the end of each month during such period, the ICEO is entitled to $80 worth of Company stock based on the closing price of the Company's common stock on the last trading day of the month. The aggregate number of shares earned will be delivered to the ICEO on his the last day of service as ICEO. During the three and nine month periods ended September 30, 2017, the ICEO accumulated 50 shares and 81 shares, respectively. The value of the shares accumulated is remeasured each reporting period. The change in value from the previous reporting period is recorded as an adjustment to compensation expense. The Company recorded compensation expense of $221 and $386 for the three and nine months ended September 30, 2017, respectively related to these monthly grants. The ultimate value of these grants cannot be determined until the shares are delivered, therefore, the accumulated value of these shares is recorded in accrued expenses and will be reclassified to equity when the shares are ultimately delivered on the ICEO's last day of service.
 

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Note 13 — Stockholders’ Equity
 
The following table summarizes the changes in stockholders’ equity during the nine months ended September 30, 2017 (in thousands):
 
 
 
Total
 
Hill International,
Inc.
Stockholders
 
Noncontrolling
Interest
 
 
 
 
 
 
 
Stockholders’ equity, December 31, 2016
 
$
76,352

 
$
74,358

 
$
1,994

Net (loss) earnings
 
37,424

 
37,249

 
175

Other comprehensive earnings
 
(273
)
 
(536
)
 
263

Comprehensive (loss) earnings
 
37,151

 
36,713

 
438

Additional paid in capital
 
5,537

 
5,537

 

Stockholders’ equity, September 30, 2017
 
$
119,040

 
$
116,608

 
$
2,432

 
Note 14 — Income Taxes
 
The effective tax rates for the three months ended September 30, 2017 and 2016 were 40.1% and (27.0)%, respectively, and 39.0% and 272.7% for the nine months ended September 30, 2017 and 2016, respectively. The Company’s effective tax rate represents the Company’s estimated 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 Company’s effective tax rate in both years is higher than it otherwise would be primarily as a result of not recording an income benefit related to the U.S. net operating loss.
 
The components of (loss) earnings before income taxes and the related income tax expense by the United States and foreign jurisdictions were as follows (in thousands):
 
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
 
 
 
(As Restated)
 
 
U.S.
 
Foreign
 
Total
 
U.S.
 
Foreign
 
Total
(Loss) earnings before income taxes
 
(4,505
)
 
$
1,842