Document
 
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 March 31, 2019
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  ý     No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 
Yes  ý     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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




Securities registered pursuant to Section 12(b) of the Act:

 
 
 
 
Name of Each
 
 
 
 
Exchange
 
 
Trading
 
on Which
Title of Each Class
 
Symbol
 
Registered
 
 
 
 
New York Stock
Common Stock, par value $0.0001
 
HIL
 
Exchange (NYSE)


There were 55,659,788 shares of the Registrant’s Common Stock outstanding at April 30, 2019.
 



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


3


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 is 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, 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;
Unfavorable global economic conditions may adversely impact its business;
Our backlog, which is subject to unexpected adjustments and cancellations, may not be fully realized as revenue;
Our 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; and
The ability 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;
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 related to 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 governments and reimbursement obligations to the government for funds previously received.
 
We do not intend, and undertake no obligation to, update any forward-looking statement. In accordance with the Reform Act, Part II, 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 Securities and Exchange Commission ("SEC") or in materials incorporated therein by reference.

4


PART I — FINANCIAL INFORMATION
Item 1.   Financial Statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
March 31, 2019
 
December 31, 2018
Assets
 
(Unaudited)
 
 
Cash and cash equivalents
 
$
25,746

 
$
18,711

Cash - restricted
 
2,041

 
2,945

Accounts receivable, less allowance for doubtful accounts of $71,685 and $70,617
 
112,609

 
117,469

Current portion of retainage receivable
 
16,890

 
18,397

Accounts receivable - affiliates
 
19,479

 
19,261

Prepaid expenses and other current assets
 
5,288

 
5,554

Income tax receivable
 
957

 
758

Total current assets
 
183,010

 
183,095

Property and equipment, net
 
10,984

 
10,787

Cash - restricted, net of current portion
 
2,832

 
1,451

Operating lease right-of-use assets
 
16,771

 

Retainage receivable
 
7,142

 
5,895

Acquired intangibles, net
 
1,165

 
1,316

Goodwill
 
48,340

 
48,869

Investments
 
3,068

 
3,015

Deferred income tax assets
 
4,777

 
4,521

Other assets
 
5,138

 
5,820

Total assets
 
$
283,227

 
$
264,769

Liabilities and Stockholders’ Equity
 
 
 
 
Current maturities of notes payable and long-term debt
 
$
3,778

 
$
3,364

Accounts payable and accrued expenses
 
86,868

 
80,036

Income taxes payable
 
9,848

 
8,826

Current portion of deferred revenue
 
9,097

 
11,169

Current portion of operating lease liabilities
 
5,327

 

Other current liabilities
 
5,355

 
5,644

Total current liabilities
 
120,273

 
109,039

Notes payable and long-term debt, net of current maturities
 
45,081

 
44,587

Retainage payable
 
978

 
927

Deferred income taxes
 
326

 
418

Deferred revenue
 
3,752

 
5,105

Non-current operating lease liabilities
 
17,723

 

Other liabilities
 
4,330

 
10,248

Total liabilities
 
192,463

 
170,324

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, 62,205 shares and 62,181 shares issued at March 31, 2019 and December 31, 2018, respectively
 
6

 
6

Additional paid-in capital
 
210,325

 
210,084

Accumulated deficit
 
(87,579
)
 
(85,444
)
Accumulated other comprehensive loss
 
(4,381
)
 
(2,575
)
Less treasury stock of 6,546 shares at March 31, 2019 and December 31, 2018
 
(28,231
)
 
(28,231
)
Hill International, Inc. share of equity
 
90,140

 
93,840

Noncontrolling interests
 
624

 
605

Total equity
 
90,764

 
94,445

Total liabilities and stockholders’ equity
 
$
283,227

 
$
264,769


See accompanying notes to consolidated financial statements.

5


HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Revenues
 
$
98,683

 
$
113,897

 
Direct expenses
 
67,247

 
77,635

 
Gross profit
 
31,436

 
36,262

 
Selling, general and administrative expenses
 
31,311

 
34,364

 
 Plus: Share of profit of equity method affiliates
 
414

 
800

 
 Less: Loss on performance bond
 

 
7,938

 
Operating profit (loss)
 
539

 
(5,240
)
 
Interest and related financing fees, net
 
1,512

 
1,334

 
Loss before income taxes
 
(973
)
 
(6,574
)
 
Income tax expense
 
1,095

 
1,095

 
Loss from continuing operations
 
(2,068
)
 
(7,669
)
 
Discontinued operations:
 
 
 
 
 
  Loss from discontinued operations, net of tax
 

 
(482
)
 
     Total loss from discontinued operations
 

 
(482
)
 
 
 
 
 
 
 
Net loss
 
(2,068
)
 
(8,151
)
 
Less: net earnings (loss) - noncontrolling interests
 
67

 
(2
)
 
Net loss attributable to Hill International, Inc.
 
$
(2,135
)
 
$
(8,149
)
 
 
 
 
 
 
 
Basic loss per common share from continuing operations
 
$
(0.04
)
 
$
(0.14
)
 
Basic loss per common share from discontinued operations
 

 
(0.01
)
 
Basic loss per common share - Hill International, Inc.
 
$
(0.04
)
 
$
(0.15
)
 
Basic weighted average common shares outstanding
 
55,946

 
52,992

 
 
 
 
 
 
 
Diluted loss per common share from continuing operations
 
$
(0.04
)
 
$
(0.14
)
 
Diluted loss per common share from discontinued operations
 

 
(0.01
)
 
Diluted loss per common share - Hill International, Inc.
 
$
(0.04
)
 
$
(0.15
)
 
Diluted weighted average common shares outstanding
 
55,946

 
52,992

 
 
See accompanying notes to consolidated financial statements.

6


HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Net loss
 
$
(2,068
)
 
$
(8,151
)
 
Foreign currency translation adjustment, net of tax
 
(1,854
)
 
421

 
Comprehensive loss
 
(3,922
)
 
(7,730
)
 
Less: Comprehensive loss attributable to non-controlling interests
 
19

 
(2
)
 
Comprehensive loss attributable to Hill International, Inc.
 
$
(3,941
)
 
$
(7,728
)
 
 
See accompanying notes to consolidated financial statements.

7


HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands) 

 
 
Common Stock
 
Additional
Paid-in
 
Retained
Earnings
 
Accumulated Other
Comprehensive
 
Treasury Stock
 
Hill Share of Stockholders’
 
Non-controlling
 
Total
Stockholders’
 
 
Shares
 
Amount
 
Capital
 
(Deficit)
 
(Loss)
 
Shares
 
Amount
 
Equity
 
Interests
 
Equity
Balance - December 31, 2018
 
62,181

 
6

 
210,084

 
(85,444
)
 
(2,575
)
 
6,546

 
(28,231
)
 
93,840

 
605

 
94,445

Net (loss) earnings
 

 

 

 
(2,135
)
 

 

 

 
(2,135
)
 
67

 
(2,068
)
Other comprehensive loss
 

 

 

 

 
(1,806
)
 

 

 
(1,806
)
 
(48
)
 
(1,854
)
Stock issued to Board of Directors
 
24

 

 

 

 

 

 

 

 

 

Stock-based compensation expense
 

 

 
241

 

 

 

 

 
241

 

 
241

Balance March 31, 2019
 
62,205

 
$
6

 
$
210,325

 
$
(87,579
)
 
$
(4,381
)
 
6,546

 
$
(28,231
)
 
$
90,140

 
$
624

 
$
90,764

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2017
 
59,389

 
6

 
197,104

 
(53,983
)
 
(4,011
)
 
6,977

 
(30,041
)
 
109,075

 
1,595

 
110,670

Net (loss) earnings
 

 

 

 
(8,149
)
 

 

 

 
(8,149
)
 
(2
)
 
(8,151
)
Other comprehensive loss
 

 

 

 

 
421

 

 

 
421

 
(464
)
 
(43
)
Stock-based compensation expense
 

 

 
135

 

 

 

 

 
135

 

 
135

Exercise of stock options
 
568

 

 
2,295

 

 

 
(13
)
 
55

 
2,350

 

 
2,350

Reversal of accrual for portion of ESA put option (1)
 

 

 
745

 

 

 

 

 
745

 

 
745

Acquisition of additional interest in subsidiary
 

 

 
(122
)
 

 

 

 

 
(122
)
 
(623
)
 
(745
)
Balance - March 31, 2018
 
59,957

 
$
6

 
$
200,157

 
$
(62,132
)
 
$
(3,590
)
 
6,964

 
$
(29,986
)
 
$
104,455

 
$
506

 
$
104,961

(1) Engineering S.A. ("ESA") now known as Hill International Brasil S.A.

See accompanying notes to consolidated financial statements.


8


HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(2,068
)
 
$
(8,151
)
Loss from discontinued operations
 

 
482

Loss from continuing operations
 
(2,068
)
 
(7,669
)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in):
 
 
 
 
Depreciation and amortization
 
791

 
1,291

Provision for bad debts
 
934

 
24

Amortization of deferred loan fees
 
179

 
6

Deferred tax benefit
 
(349
)
 
(31
)
Stock based compensation
 
241

 
451

Operating lease right-of-use assets
 
1,408

 

Unrealized foreign exchange (losses) gains on intercompany balances
 
(511
)
 
1,446

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
5,390

 
7,469

Accounts receivable - affiliate
 
(218
)
 
(2,035
)
Prepaid expenses and other current assets
 
551

 
890

Income taxes receivable
 
(199
)
 
(162
)
Retainage receivable
 
(1,247
)
 
(725
)
Other assets
 
690

 
(533
)
Accounts payable and accrued expenses
 
6,851

 
(4,836
)
Income taxes payable
 
1,020

 
99

Deferred revenue
 
(3,423
)
 
(641
)
Operating lease liabilities
 
(1,442
)
 

Other current liabilities
 
31

 
(1,278
)
Retainage payable
 
51

 
108

Other liabilities
 
(222
)
 
582

Net cash provided by (used in) continuing operations
 
8,458

 
(5,544
)
Net cash used in discontinued operations
 

 
(482
)
Net cash provided by (used in) operating activities
 
8,458

 
(6,026
)
Cash flows from investing activities:
 
 
 
 
Purchases of business
 

 
(122
)
Purchase of property and equipment
 
(873
)
 
(986
)
Net cash used in investing activities
 
(873
)
 
(1,108
)
Cash flows from financing activities:
 
 
 
 
Payments on term loans
 
(266
)
 
(89
)
Net borrowings on revolving loans
 
1,192

 
2,069

Proceeds from stock issued under employee stock purchase plan
 
34

 

Proceeds from exercise of stock options
 

 
2,350

Net cash provided by financing activities
 
960

 
4,330

Effect of exchange rate changes on cash
 
(1,033
)
 
(601
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
7,512

 
(3,405
)
Cash, cash equivalents and restricted cash — beginning of period
 
23,107

 
26,920

Cash, cash equivalents and restricted cash — end of period
 
$
30,619

 
$
23,515


 
 
Three Months Ended March 31,
Supplemental disclosures of cash flow information:
 
2019
 
2018
Interest and related financing fees paid
 
$
1,414

 
$
1,189

Income taxes paid
 
$
601

 
$
1,148

Cash paid for amounts included in the measurement of lease liabilities
 
$
1,814

 
$

Right-of-use assets obtained in exchange for operating lease liabilities
 
$
18,178

 
$


 See accompanying notes to consolidated financial statements.

9


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.

All amounts included in the following Notes to the Consolidated Financial Statements are in thousands, except per share data.

Note 2 — Liquidity
 
At March 31, 2019 our principal sources of liquidity consisted of $25,746 of cash and cash equivalents, $105 of available borrowing capacity under the Domestic Revolving Credit Facility, $165 of available borrowing capacity under the International Revolving Credit Facility and $687 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.

The Company believes that it has sufficient liquidity to support the reasonably anticipated cash needs of its operations over the next twelve months from the date of this filing. The Company produced cash from operations of $8,458 in the first quarter of 2019. The Company's net cash used in operations during 2018 was primarily due to a number of costs related to the financial statement restatement, restructuring and a performance bond that was called. We do not expect these costs to reoccur.

Note 3 — Basis of Presentation
 
Summary
 
The accompanying unaudited interim consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") pertaining to reports on Form 10-Q and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. 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 U.S. 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.

Construction Claims Group Sale

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 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. The Construction Claims Group sale closed on May 5, 2017. For a detailed description of the transaction, see "Note 5 Discontinued Operations" in the Company's 2018 Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019.

10



Reclassification

A reclassification was made in the presentation of the consolidated statement of operations for the three months ended March 31, 2018. The Company moved $1,577 related to the middle east vacation expense accrual from direct expense and included it in selling, general and administrative expenses to conform to current year presentation.

Summary of Significant Accounting Policies

(a)                                 Foreign Currency Translations and Transactions

Assets and liabilities of all foreign operations are translated at period-end rates of exchange while revenues and expenses are translated at the average monthly exchange rates. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholders’ equity entitled accumulated other comprehensive loss until the entity is sold or substantially liquidated. Gains or losses arising from foreign currency transactions (transactions denominated in a currency other than the entity’s local currency), including those resulting from intercompany transactions, are reflected in selling, general and administrative expenses in the consolidated statement of operations. The impact of foreign exchange on long-term intercompany loans, for which repayment has not been scheduled or planned, are recorded in accumulated other comprehensive loss on the consolidated balance sheet.

(b)                                 Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and accounts receivable.

The Company maintains its cash accounts with high quality financial institutions. Although the Company believes that the financial institutions with which it does business will be able to fulfill their commitments, there is no assurance that those institutions will be able to continue to do so.

No single client accounted for 10% or more of revenue for the three months ended March 31, 2019 or 2018.

There was 1 client in the Middle East who contributed 10% or more to accounts receivable at March 31, 2019 and December 31, 2018, respectively which represents 18% and 17% of the accounts receivable balance at March 31, 2019 and December 31, 2018, respectively.

(c)                                 Allowance for Doubtful Accounts

The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectability of specific accounts and the overall condition of the receivable portfolios. When evaluating the adequacy of the allowance for doubtful accounts, the Company specifically analyzes trade receivables, including retainage receivable, historical bad debts, client credits, client concentrations, client credit worthiness, current economic trends and changes in client payment terms. If the financial condition of clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should the Company determine that it would be able to realize more of its receivables in the future than previously estimated, an adjustment to the allowance would increase earnings in the period such determination was made. The allowance for doubtful accounts is reviewed on a quarterly basis and adjustments are recorded as deemed necessary.

(d)                                    Retainage Receivable

Retainage receivable represents balances billed but not paid by clients pursuant to retainage provisions in certain contracts and will be due upon completion of specific tasks or the completion of the contract.


11


(e)                                 Income Taxes

The Company estimates income taxes in each of the jurisdictions in which it operates. This process involves estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheets. The Company assesses the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent it believes recovery is not likely, the Company establishes a valuation allowance. To the extent the Company establishes a valuation allowance in a period, it must include an expense within the tax provision in the consolidated statements of operations. The Company has recorded a valuation allowance to reduce the deferred tax asset to an amount that is more likely than not to be realized in future years. If the Company determines in the future that it is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position, that the deferred tax assets subject to the valuation allowance will be realized, then the previously provided valuation allowance will be adjusted.

The Company recognizes a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is more likely than not that the benefit will be ultimately realized. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.

(f)                                 Revenue Recognition

The Company generates revenue primarily from providing professional services to its clients under various types of contracts. In providing these services, the Company may incur reimbursable expenses, which consist principally of amounts paid to subcontractors and other third parties and travel and other job related expenses that are contractually reimbursable from clients. The Company includes reimbursable expenses in computing and reporting its total revenue as long as the Company remains responsible to the client for the fulfillment of the contract and for the overall acceptability of all services provided.

If estimated total costs on any contract project a loss, the Company charges the entire estimated loss to operations in the period the loss becomes known. The cumulative effect of revisions to revenue, estimated costs to complete contracts, including penalties, incentive awards, change orders, claims, anticipated losses, and others are recorded in the accounting period in which the events indicating a loss are known and the loss can be reasonably estimated. These loss projects are re-assessed for each subsequent reporting period until the project is complete. Such revisions could occur at any time and the effects may be material.

See footnote 4, "Revenue from Contracts with Customers," for more detail, regarding how the Company recognizes revenue under each type of its contractual arrangements.

(g)                                    Restricted Cash

Restricted cash primarily represents cash collateral required to be maintained in foreign bank accounts to serve as collateral for letters of credit, bonds or guarantees on certain projects. The cash will remain restricted until the respective project has been completed, which typically is greater than one year.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows:
 
 
March 31, 2019
 
March 31, 2018
Cash and cash equivalents
 
$
25,746

 
$
18,711

Cash - restricted
 
2,041

 
2,945

Cash - restricted, net of current portion
 
2,832

 
1,451

Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
 
30,619

 
23,107


(h)                                    Earnings (loss) per Share

Basic earnings (loss) per common share have been computed using the weighted-average number of shares of common stock outstanding during the period.


12


Diluted earnings (loss) per common share incorporates the incremental shares issuable upon the assumed exercise of stock options, the assumed vesting of stock and deferred and restricted stock unit awards using the treasury stock method, if dilutive. The Company has outstanding options to purchase approximately 1,417 shares and 5,339 shares at March 31, 2019 and 2018, respectively. In addition, the Company had 471 restricted stock units outstanding at March 31, 2019. These awards were excluded from the calculation of diluted earnings (loss) per share for the three months ended March 31, 2019 because they were antidilutive due to the Company's net loss from continuing operations.

The following table provides a reconciliation to net earnings (loss) used in the numerator for earnings (loss) per share from continuing operations attributable to Hill:
 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Loss from continuing operations
 
$
(2,068
)
 
$
(7,669
)
 
Less: net earnings - noncontrolling interest
 
67

 
(2
)
 
Net loss from continuing operations attributable to Hill
 
$
(2,135
)
 
$
(7,667
)
 

(i)                                    New Accounting Pronouncements

Changes to U.S. GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs and, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Company or adoption will have minimal impact on its consolidated financial statements.

For additional information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 to the consolidated financial statements in Item 8 of Form 10K for the year ended December 31, 2018 filed with the SEC on April 1, 2019. See update below.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842), which required the Company to recognize lease assets and lease liabilities (related to leases previously classified as operating under previous U.S. GAAP) on its consolidated balance sheet for all leases in excess of one year in duration. The ASU was effective for the Company on January 1, 2019. The adoption of this ASU impacted the Company’s financial statements in that all existing leases were recorded as right-of-use ("ROU") assets and liabilities on the balance sheet.

The Company elected to adopt the ASU 2016-2 using the modified retrospective method and, therefore, have not recast comparative periods presented in its unaudited consolidated financial statements. The Company elected the package of transition practical expedients for existing leases and therefore the Company has not reassessed the following: lease classification for existing leases, whether any existing contracts contained leases, if any initial direct costs were incurred and whether existing land easements should be accounted for as leases. The Company did not apply the hindsight practical expedient, accordingly, the Company did not use hindsight in its assessment of lease terms,. As permitted under ASU 2016-2, the Company elected as accounting policy elections to not recognize ROU assets and related lease liabilities for leases with terms of twelve months or less and to not separate lease and non-lease components, and instead account for the non-lease components together with the lease components as a single lease component.

In connection with the adoption of the new standard, the Company recorded $16,876 of operating lease right of use assets and $23,309 of operating lease liabilities as of January 1, 2019. See Note 14 of this Form 10-Q for additional information and required disclosures.

Under Topic 842, the Company determined if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's determined incremental borrowing rate is a hypothetical rate based on its understanding of what the Company's credit rating would be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received and net of the deferred rent balance on the date

13


of implementation. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise such options.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. This ASU was effective for annual and interim reporting periods beginning after December 15, 2018. Our equity incentive plans limit share-based awards to employees and directors of the Company, therefore, adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2019, the Company adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, which amended certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. We have updated our Consolidated Financial Statements to include a reconciliation of the beginning balance to the ending balance of stockholders’ equity for each period for which a statement of comprehensive income is presented.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326) - Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement of credit losses on financial instruments.  The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.  This ASU will be effective for the Company commencing January 1, 2020 with early adoption permitted commencing January 1, 2019.  The Company is in the process of assessing the impact of this ASU on our consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-4, Intangibles - Goodwill and Other (Topic 350), which removes step 2 from the goodwill impairment test. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units’ fair value. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017, and the prospective transition method should be applied. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements and does not expect this update to have a material impact on the Company's consolidated financial statements.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("VIE"). The amendments in this ASU for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required by GAAP). These amendments will create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public companies. Early adoption is permitted. The Company is currently determining the impact that adoption of this guidance will have on the financial statements.


14


In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606, specifically when the collaborative arrangement participant is a customer in the context of a unit-of-account. It provides more comparability in the presentation of revenues for certain transactions between collaborative arrangement participants, including adding unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public companies. Early adoption is permitted. The Company is currently determining the impact that adoption of this guidance will have on the financial statements.

Note 4 — Revenue from Contracts with Customers

The Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for such goods or services.

Below is a description of the basic types of contracts from which the Company may earn revenue:

Time and Materials Contracts

Under the time and materials (“T&M”) arrangements, contract fees are based upon time and materials incurred. The contracts may be structured as basic time and materials, cost plus a margin or time and materials subject to a maximum contract value (the "cap value"). Due to the potential limitation of the cap value, the economic factors of the contracts subject to a cap value differ from the economic factors of basic T&M and cost plus contracts. The majority of the Company’s contracts are for consulting projects where it bills the client monthly at hourly billing rates. The hourly billing rates are determined by contract terms. Under cost plus contracts, the Company charges its clients for its costs, including both direct and indirect costs, plus a fixed fee or rate. Under time and materials contracts with a cap value, the Company charges the clients for time and materials based upon the work performed however there is a cap or a not to exceed value. There are often instances that a contract is modified to extend the contract value past the cap. As the consideration is variable depending on the outcome of the contract renegotiation, the Company will estimate the total contract price in accordance with the variable consideration guidelines and will only include consideration that it expects to receive from the customer. When the Company is reaching the cap value, the contract will be renegotiated, or Hill ceases work when the maximum contract value is reached. The Company will continue to work if it is probable that the contract will be extended. The Company will only include consideration or contract renegotiations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. If the Company continues to work and is uncertain that a contract change order will be processed, the variable consideration will be constrained to the cap until it is probable that the contract will be renegotiated. The Company is only entitled to consideration for the work it has performed, and the cap value is not a guaranteed contract value.

Fixed Price Contracts

Under fixed price contracts, the Company’s clients pay an agreed amount negotiated in advance for a specified scope of work. The Company is guaranteed to receive the consideration to the extent that the Company delivers under the contract. The Company recognizes revenue over a period of time on fixed price contracts using the input method based upon direct costs incurred to date, which are compared to total projected direct costs. Costs are the most relevant measure to determine the transfer of the service to the customer. The Company assess contracts quarterly and may recognize any expected future loss before actually incurring the loss. When the Company is expecting to reach the total value of the contract, the Company will begin to negotiate a change order.

Change Orders and Claims

Change orders are modifications of an original contract that effectively change the provisions of the contract without adding new provisions. Either the Company or its client may initiate change orders. They may include changes in specifications or design, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Management evaluates when a change order is probable based upon its experience in negotiating change orders, the customer’s written approval of such changes or separate documentation of change order costs that are identifiable. Change orders may take time to be formally documented and terms of such change orders are agreed with the client before the work is performed. Sometimes circumstances require that work progresses before an agreement is reached with the client. If the Company is having difficulties in renegotiating the change order, the Company will stop work, record all costs incurred to date, and determine, on a project by project basis, the appropriate final revenue recognition.

Claims are amounts in excess of the agreed contract price that the Company seeks to collect from its clients or others for client-

15


caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. Costs related to change orders and claims are recognized when they are incurred. The Company evaluates claims on an individual basis and recognizes revenue it believes is probable to collect.

U.S. Federal Acquisition Regulations

The Company has contracts with the U.S. government that contain provisions requiring compliance with the U.S. Federal Acquisition Regulations (“FAR”). These regulations are generally applicable to all of its federal government contracts and are partially or fully incorporated in many local and state agency contracts. They limit the recovery of certain specified indirect costs on contracts subject to the FAR. Cost-plus contracts covered by the FAR provide for upward or downward adjustments if actual recoverable costs differ from the estimate billed under forward pricing arrangements. Most of the Company's federal government contracts are subject to termination at the convenience of the federal government. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.

Federal government contracts that are subject to the FAR and that are required by state and local governmental agencies to be audited are performed, for the most part, by the Defense Contract Audit Agency (“DCAA”). The DCAA audits the Company’s overhead rates, cost proposals, incurred government contract costs and internal control systems. During the course of its audits, the DCAA may question incurred costs if it believes the Company has accounted for such costs in a manner inconsistent with the requirements of the FAR or Cost Accounting Standards and recommend that its U.S. government corporate administrative contracting officer disallow such costs. Historically, the Company has not incurred significant disallowed costs because of such audits. However, the Company can provide no assurance that the DCAA audits will not result in material disallowances of incurred costs in the future. The Company provides for a refund liability to the extent that it expects to refund some of the consideration received from a customer.

Disaggregation of Revenues
 
The Company has one operating segment, the Project Management Group, which reflects how the Company is being managed. Additional information related to the Company’s operating segment is provided in Note 12 - Segment and Related Information. The Project Management Group provides extensive construction and project management services to construction owners worldwide. The Company considered the type of customer, type of contract and geography for disaggregation of revenue. The Company determined that disaggregating by (1) contract type; and (2) geography would provide the most meaningful information to understand the nature, amount, timing, and uncertainty of its revenues. The type of customer does not influence the Company’s revenue generation. Ultimately, the Company is supplying the same services of program management, project management, construction management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, labor compliance services and facilities management services. The Company’s contracts are generally long term contracts that are either based upon time and materials incurred or provide for a fixed price. The contract type will determine the level of risk in the contract related to revenue recognition. For purposes of disaggregation of revenue, the contract types have been grouped into: (1) Fixed Price - which include fixed price projects; and, (2) T&M - which include T&M contracts, T&M with a cap and cost plus contracts. The geography of the contracts will depict the level of global economic factors in relation to revenue recognition.

The components of the Company’s revenue by contract type and geographic region for the three months ended March 31, 2019 and 2018 are as follows:

 
 
Three Months Ended March 31, 2019
 
 
Fixed Price
 
T&M
 
Total
 
Percent of revenue
United States
 
$
3,433

 
$
44,659

 
$
48,092

 
48.7
%
Latin America
 
2,016

 
418

 
2,434

 
2.5
%
Europe
 
6,051

 
5,293

 
11,344

 
11.5
%
Middle East
 
11,365

 
16,946

 
28,311

 
28.7
%
Africa
 
571

 
6,378

 
6,949

 
7.0
%
Asia/Pacific
 
300

 
1,253

 
1,553

 
1.6
%
   Total
 
$
23,736

 
$
74,947

 
$
98,683

 
100.0
%


16


 
 
Three Months Ended March 31, 2018
 
 
Fixed Price
 
T&M
 
Total
 
Percent of revenue
United States
 
$
3,056

 
$
48,516

 
$
51,572

 
45.2
%
Latin America
 
1,821

 
991

 
2,812

 
2.5
%
Europe
 
4,803

 
5,654

 
10,457

 
9.2
%
Middle East
 
17,804

 
22,494

 
40,298

 
35.4
%
Africa
 
38

 
6,665

 
6,703

 
5.9
%
Asia/Pacific
 
581

 
1,474

 
2,055

 
1.8
%
   Total
 
$
28,103

 
$
85,794

 
$
113,897

 
100.0
%


The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company exercises judgment in determining if the contractual criteria are met to determine if a contract with a customer exists, specifically in the earlier stages of a project when a formally executed contract may not yet exist. The Company typically has one performance obligation under a contract to provide fully-integrated project management services, and, occasionally, a separate performance obligation to provide facilities management services. Performance obligations are delivered over time as the customer receives the service.
 
The consideration promised within a contract may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. The Company transfers control of its service over time and, therefore, satisfies a performance obligation and recognizes revenue over time by measuring the progress toward complete satisfaction of that performance obligation. The Company’s fixed price projects and T&M contracts subject to a cap value generally use a cost-based input method to measure its progress towards complete satisfaction of the performance obligation as the Company believes this best depicts the transfer of control to the customer. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Due to the nature of the work required to be performed under the Company’s performance obligations, estimating total revenue and cost at completion on its long term contracts is complex, subject to many variables and requires significant judgment.

For basic and cost plus T&M contracts, the Company recognizes revenue over time using the output method which measures progress toward complete satisfaction of the performance obligation based upon actual costs incurred, using the right to invoice practical expedient.

Accounts Receivable

Accounts receivable includes amounts billed and currently due from customers and amounts for work performed which have not been billed to date. The billed and unbilled amounts are stated at the net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables.

Contract Assets and Liabilities

Contract assets include unbilled amounts typically resulting from performance under long-term contracts where the revenue recognized exceeds the amount billed to the customer. Retainage receivable is included in contract assets. The current portion of retainage receivable is a contract asset, which prior to the adoption of ASC 606, had been classified within accounts receivable.
The Company’s contract liabilities consist of advance payments and billings in excess of revenue recognized and are reported as deferred revenue in the consolidated balance sheet. The Company classifies billings in excess of revenue recognized as deferred revenue as current or noncurrent based on the timing of when revenue is expected to be recognized.


17


The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing of the Company’s performance and customer payments. The amount of revenue recognized during the three months ended March 31, 2019 and 2018 that was included in the deferred revenue balance at the beginning of the periods was $9,241 and $5,615, respectively.

Remaining Performance Obligations

The remaining performance obligations represent the aggregate transaction price of executed contracts with customers for which work has partially been performed or not started as of the end of the reporting period. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. T&M contracts are excluded from the remaining performance obligation as these contracts are not fixed price contracts and the consideration expected under these contracts is variable as it is based upon hours and costs incurred in accordance with the variable consideration optional exemption. As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $97,295. During the following 12 months, approximately 61% of the remaining performance obligations are expected to be recognized as revenue with the remaining balance recognized over 1 to 5 years.

Note 5 — Accounts Receivable 

The components of accounts receivable are as follows:
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Billed
 
$
152,969

 
$
155,540

Unbilled *
 
31,325

 
32,546

 
 
184,294

 
188,086

Allowance for doubtful accounts
 
(71,685
)
 
(70,617
)
Accounts receivable, less allowance for doubtful accounts
 
$
112,609

 
$
117,469

 
* Amount is net of unbilled reserves.

Note 6 — Intangible Assets
 
The following table summarizes the Company’s acquired intangible assets:
 
 
 
March 31, 2019
 
December 31, 2018
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 
 
 
 
 
 
 
 
Client relationships
 
$
4,532

 
$
3,367

 
$
4,591

 
$
3,275

Total
 
$
4,532

 
$
3,367

 
$
4,591

 
$
3,275

 
 
 
 
 
 
 
 
 
Intangible assets, net
 
$
1,165

 
 
 
$
1,316

 
 
 

Amortization expense related to intangible assets was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
$
114

 
$
343

 
 

18



The following table presents the estimated amortization expense for the next five years: 
 
 
Estimated
Amortization
Expense
 
 
Year ending December 31,
 
2019 (remaining 9 months)
 
$
343

2020
 
195

2021
 
167

2022
 
167

2023
 
167

 

Note 7 — Goodwill
 
The following table summarizes the changes in the Company’s carrying value of goodwill during 2019:
 
 
Balance, December 31, 2018
$
48,869

Translation adjustments (1)
(529
)
Balance, March 31, 2019
$
48,340


(1) The translation adjustment was calculated based on the foreign currency exchange rates as of March 31, 2019.

The Company performed its 2018 annual impairment test effective July 1, 2018 and noted no impairment. Based on the valuation as of July 1, 2018, the fair value of the Company substantially exceeded its carrying value. The Company also noted no indications of impairment were present at March 31, 2019 requiring reassessment. In the future, the Company will continue to perform the annual test during its fiscal third quarter unless events or circumstances indicate an impairment may have occurred before that time.

Note 8 — Accounts Payable and Accrued Expenses
 
Below are the components of accounts payable and accrued expenses:
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Accounts payable
 
$
33,506

 
$
30,005

Accrued payroll and related expenses
 
29,370

 
28,915

Accrued subcontractor fees
 
13,188

 
13,447

Accrued agency fees
 
348

 
237

Accrued legal and professional fees
 
2,403

 
2,277

Other accrued expenses
 
8,053

 
5,155

 
 
$
86,868

 
$
80,036

 

19



Note 9 — Notes Payable and Long-Term Debt
 
The table below reflects the Company's notes payable and long-term debt, which includes credit facilities:
 
 
 
 
 
 
Interest Rate (1)
 
Balance Outstanding as of
Loan
 
Maturity
 
Interest Rate Type
 
March 31,
2019
December 31,
2018
 
March 31,
2019
December 31,
2018
Secured Credit Facilities
 
 
 
 
 
 
 
 
 
 
Hill International, Inc. - Société Générale 2017 Term Loan Facility
 
06/20/2023
 
Variable
 
7.86%
7.62%
 
$
29,475

$
29,550

Hill International, Inc. - Société Générale Domestic Revolving Credit Facility
 
05/04/2022
 
Variable
 
6.37%
6.31%
 
13,900

14,400

Hill International N.V.. - Société Générale International Revolving Credit Facility
 
05/04/2022
 
Variable
 
5.97%
N/A
 
1,178


Unsecured Credit Facilities
 
 
 
 
 
 
 
 
 
 
Hill International, Inc. - First Abu Dhabi Bank ("FAB") PJSC Overdraft Credit Facility (2)
 
04/18/2020
 
Variable
 
5.58%
5.58%
 
2,779

2,461

Hill International Brasil S.A. - Revolving Credit Facility (3)
 
05/13/2019
 
Fixed
 
3.35%
3.35%
 
175


Unsecured Notes Payable and Long-Term Debt
 
 
 
 
 
 
 
 
 
 
Hill International Spain SA-Bankia S.A. & Bankinter S.A.(4)
 
12/31/2021
 
Fixed
 
2.17%
2.17%
 
1,435

1,594

Hill International Spain SA - IberCaja Banco. S.A. (4)
 
12/31/2019
 
Variable
 
3.45%
3.41%
 
146

198

Philadelphia Industrial Development Corporation Loan
 
03/31/2027
 
Fixed
 
2.75%
2.75%
 
527

542

Total notes payable and long-term debt, gross
 
 
 
 
 
 
 
 
$
49,615

$
48,745

Less: unamortized discount and deferred financing costs related to Société Générale 2017 Term Loan Facility
 
 
 
 
 
 
 
 
(756
)
(794
)
Notes payable and long-term debt
 
 
 
 
 
 
 
 
$
48,859

$
47,951

Current portion of notes payable
 
 
 
 
 
 
 
 
3,954

3,538

Current portion of unamortized debt discount and deferred financing costs
 
 
 
 
 
 
 
 
(176
)
(174
)
Current maturities of notes payable and long-term debt
 
 
 
 
 
 
 
 
3,778

3,364

Notes payable and long-term debt, net of current maturities
 
 
 
 
 
 
 
 
45,081

44,587

(1) Interest rates for variable interest rate debt are reflected on a weighted average basis through March 31, 2019 since inception.
(2) Credit facility lender was formerly known as National Bank of Abu Dhabi. There is no stated maturity date, however, the loan is subject to annual review in April of each year, or at any other time as determined by FAB. Therefore, the amount outstanding is reflected within the current maturities of notes payable and long-term debt. Balances outstanding are reflected in U.S. dollars based on the conversion rates from AED as of March 31, 2019 and December 31, 2018. The Company had $352 of availability under the credit facility as of March 31, 2019.
(3) The unsecured Hill International Brasil S.A. revolving credit facilities were previously held with two banks in Brazil under four separate arrangements and were subject to automatic renewal on a monthly basis. In October 2018, three of the credit facilities were not renewed. The Company had $335 of availability under the credit facility as of March 31, 2019. The amounts outstanding and available are based on conversion rates from Brazilian Real.
(4) Balances outstanding are reflected in U.S. dollars based on the conversion rates from Euros as of March 31, 2019 and December 31, 2018.

Secured Credit Facilities

The Company's secured credit facilities with Société Générale under the 2017 Term Loan and the Domestic Revolving Credit Facility (collectively, the "U.S. Credit Facilities") and under the International Revolving Credit Facility 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%. The Company was in compliance with this financial covenant at March 31, 2019.

The unamortized debt issuance costs under the Domestic and International Revolving Credit Facilities were $1,738 and $1,879 at March 31, 2019 and December 31, 2018, respectively, and were included in other assets in the consolidated balance sheet.


20


Commitment fees are calculated at 0.50% annually on the average daily unused portion of the Domestic Revolving Credit Facility, and are calculated at 0.75% annually on the average daily unused portion of the International Revolving Credit Facility.

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.
 
At March 31, 2019, the Company had $10,995 of outstanding letters of credit and $105 of available borrowing capacity under the Domestic Revolving Credit Facility, based on the maximum borrowing capacity of $25,000. At March 31, 2019, the Company had $2,618 of outstanding letters of credit and $165 of available borrowing capacity under the International Revolving Credit Facility. The availability under the International Revolving Credit Facility as of March 31, 2019 was reduced from the maximum borrowing capacity of €9,156 ($10,273 as of March 31, 2019) to €3,530 ($3,961 as of March 31, 2019).

Note 10 — Share-Based Compensation
 
At March 31, 2019, the Company had approximately 1,417 options outstanding with a weighted average exercise price of $4.33.  The Company did not grant any stock options during the three months ended March 31, 2019. During the three months ended March 31, 2019, options for approximately 525 shares with a weighted average exercise price of $4.42 lapsed.

During the three months ended March 31, 2019, the Company granted certain employees and executive officers equity awards in the form of restricted stock units ("RSU") that are subject to a combination of time and performance-based conditions under the 2017 Equity Compensation Plan (the "2017 Plan"), totaling 758 RSU's. Each RSU entitles each grantee one unit of the Company's common stock. The time-based RSU's vest annually over a three-year period on each anniversary date of the grant. Any unvested time-based RSU's will be forfeited if the grantee separates from the Company prior the vesting date. The related compensation expense is recorded based on a weighted average common stock price of $3.23 and was deemed as equity-classified awards.

The number of common shares to be issued under the performance-based RSU's will be determined based on three levels of performance metrics based on the Company's earnings and will be assessed on an annual basis for the years ended December 31, 2019, 2020 and 2021. If the Company meets the performance metrics for any one of the measurement periods, such units will vest on the next anniversary date of the grant date. All vested RSU's will be settled on the third anniversary of the grant date. Any unvested RSU's are subject to forfeiture if the grantee separates from the Company prior to each vesting date. During the three months ended March 31, 2019, the Company determined it was not probable that the target performance metric would be met and, therefore, did not record any share-based compensation expense related to such RSU's.

The Company recognized total share-based compensation expense in selling, general and administrative expenses in the consolidated statement of operations totaling approximately $241 and $408 for the three months ended March 31, 2019 and 2018, respectively.

Note 11 — Income Taxes
 
The Company calculates the interim tax expense based on an annual effective tax rate (AETR). The AETR represents the Company’s estimated effective tax rate for the year based on full year projection of tax expense, divided by the projection of full year pretax book income/(loss) among the various foreign tax jurisdictions, adjusted for discrete transactions occurring during the period. The effective tax rates for the three months ended March 31, 2019 and 2018 were (112.5)% and (16.7)%, respectively.

The Company’s effective tax rate for the three months ended March 31, 2019 changed from the comparable period of 2018, primarily due to the mix of pretax earnings in jurisdictions with different jurisdictional tax rates, as well as not having the ability to benefit from losses in jurisdictions that have a history of negative earnings.

The 2017 Tax Act reduced the U.S. statutory tax rate from 35% to 21% beginning in 2018. The 2017 Tax Act requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and introduces a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-Taxed Income (GILTI) beginning in 2018.

The reserve for uncertain tax positions amounted to $3,050 and $2,988 at March 31, 2019 and December 31, 2018, respectively, and is included in “Other liabilities” in the consolidated balance sheet at those dates.

21


 
The Company’s policy is to record income tax related interest and penalties in income tax expense. The Company recorded tax related interest and penalties of $2 and $15 for the three months ended March 31, 2019 and 2018, respectively
 
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC 740, Income Taxes. In making this determination, management assesses all available evidence, both positive and negative, at the balance sheet date. This includes, but is not limited to, recent earnings, internally-prepared income projections, and historical financial performance.

Note 12 —Segment and Related Information
 
The Company operates as one reporting segment which reflects how the Company is managed, which provides construction and project management services to construction owners worldwide. Such services include program management, project management, construction management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, labor compliance services (collectively, "integrated project management") and facilities management services.

The following tables present certain information for operations:

Revenue by Geographic Region:
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
 
 
 
 
 
 
United States
 
$
48,092

 
48.7
%
 
$
51,572

 
45.2
%
 
Latin America
 
2,434

 
2.5
%
 
2,812

 
2.5
%
 
Europe
 
11,344

 
11.5
%
 
10,457

 
9.2
%
 
Middle East
 
28,311

 
28.7
%
 
40,298

 
35.4
%
 
Africa
 
6,949

 
7.0
%
 
6,703

 
5.9
%
 
Asia/Pacific
 
1,553

 
1.6
%
 
2,055

 
1.8
%
 
Total
 
$
98,683

 
100.0
%
 
$
113,897

 
100.0
%
 
 
For the three months ended March 31, 2019, the United States and United Arab Emirates were the only countries to account for 10% or more of consolidated total revenue. For the three months ended March 31, 2018, the United States was the only country to account for 10% or more of consolidated total revenue.


22


Operating Profit (Loss):
 
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
 
 
 
 
 
 
United States
 
$
4,033

 
$
7,333

 
Latin America
 
(96
)
 
(304
)
 
Europe *
 
(1,935
)
 
2,158

 
Middle East *
 
3,377

 
(4,226
)
 
Africa
 
2,412

 
669

 
Asia/Pacific *
 
(285
)
 
(337
)
 
Corporate
 
(6,967
)
 
(10,533
)
 
Total
 
$
539

 
$
(5,240
)
 
* includes Hill's share of loss (profit) of equity method affiliates on the Consolidated Statements of Operations.
 
Depreciation and Amortization Expense:
 
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
 
 
 
 
 
 
Project Management
 
$
774

 
$
1,059

 
Corporate
 
17

 
232

 
Total
 
$
791

 
$
1,291

 
 
Revenue By Client Type:
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
 
 
 
 
 
 
U.S. federal government
 
$
4,692

 
4.8
%
 
$
3,872

 
3.4
%
 
U.S. state, regional and local governments
 
30,895

 
31.3
%
 
33,551

 
29.5
%
 
Foreign governments
 
25,679

 
26.0
%
 
33,806

 
29.7
%
 
Private sector
 
37,417

 
37.9
%
 
42,668

 
37.4
%
 
Total
 
$
98,683

 
100.0
%
 
$
113,897

 
100.0
%
 

Property, Plant and Equipment, Net, by Geographic Location:
 
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
United States
 
$
8,700

 
$
8,416

Latin America
 
662

 
692

Europe
 
506

 
503

Middle East
 
913

 
962

Africa
 
102

 
105

Asia/Pacific
 
101

 
109

Total
 
$
10,984

 
$
10,787


23



Note 13 — Commitments and Contingencies
 
Legal Proceedings

From time to time, the Company is a defendant or plaintiff in various legal proceedings which arise in the normal course of business. As such the Company is required to assess the likelihood of any adverse outcomes to these proceedings as well as potential ranges of probable losses. A determination of the amount of the provision required for commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each proceeding. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease the Company’s earnings in the period the changes are made. It is the opinion of management, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
 
Knowles Limited (“Knowles”), a subsidiary of the Company, is a party to an arbitration proceeding instituted on July 8, 2014 in which Knowles claimed that it was entitled to payment for services rendered to Celtic Bioenergy Limited (“Celtic”).  The arbitrator decided in favor of Knowles. The arbitrator’s award was appealed by Celtic to the U.K. High Court of Justice, Queen’s Bench Division, Technology and Construction Court (“Court”).  On March 16, 2017, the Court (1) determined that certain relevant facts had been deliberately withheld from the arbitrator by an employee of Knowles and (2) remitted the challenged parts of the arbitrator’s award back to the arbitrator to consider the award in possession of the full facts. The Company is evaluating the impact of the judgment of the Court.

In September 2017, the Board appointed a special committee of independent directors (the “Special Committee”) to conduct a review of the need for, and causes of, the restatement of the Company’s financial statements. The review was performed with the assistance of independent outside counsel and was completed in April 2018. The review discovered facts that indicated certain former employees of the Company violated Company policies related to accounting for foreign currency exchange transactions. The Company self-reported these facts to the SEC in April 2018 and received a subpoena from the SEC in June 2018. The Company has cooperated and continues to cooperate with the SEC with respect to the SEC’s investigation.

Loss on Performance Bond

On February 8, 2018, the Company received notice from the First Abu Dhabi Bank ("FAB", formerly known as the National Bank of Abu Dhabi) that Public Authority of Housing Welfare of Kuwait submitted a claim for payment on a Performance Guarantee issued by the Company for approximately $7,938 for a project located in Kuwait. FAB subsequently issued, on behalf of the Company, a payment on February 15, 2018. The Company is taking legal action to recover the full Performance Guarantee amount. On September 20, 2018 the Kuwait First Instance Court dismissed the Company's case. The Company filed an appeal before the Kuwait Court of Appeals seeking referral of the matter to a panel of experts for determination. On April 21, 2019, the Court of Appeals ruled to refer the matter to the Kuwait Experts Department. As a result of the First Instance Court decision, the Company fully reserved the performance guarantee payment above in the first quarter of 2018 and it is presented as "Loss on Performance Bond" on the consolidated statements of operations.

Other
 
The Company has identified a potential tax liability related to certain foreign subsidiaries’ failure to comply with laws and regulations of the jurisdictions, outside of their home country, in which their employees provided services. The Company has estimated the potential liability to be approximately $630 and is included in other liabilities in the consolidated balance sheet at March 31, 2019.

Note 14 — Operating Leases

The Company leases office space, equipment and vehicles throughout the world. Leases with an initial term of 12 months or less are not recorded in the consolidated balance sheet as of . Many of the Company's operating leases include one or more options to renew at the Company's sole discretion. The lease renewal option terms generally range from 1 month to 5 years for office leases. The determination of whether to include any renewal options is made by the Company at lease inception when establishing the term of the lease.


24


Rent expense for operating leases is recognized on a straight-line basis over the lease term from the lease commencement date through the scheduled expiration date. Rent expense of approximately $1,986 and $2,239 for the three months ended March 31, 2019 and 2018, respectively, is included in selling, general and administrative and direct expenses in the consolidated statements of operations. Of the $1,986 in operating lease expense for the three months ended March 31, 2019, $292 was associated with leases with an initial term of 12 months or less and variable costs.

Some of the Company's lease arrangements require periodic increases in the Company's base rent that may be subject to certain economic indexes, among other items. In addition, these leases may require the Company to pay property taxes, utilities and other costs related to several of its leased office facilities.

The Company subleases certain real estate to third parties. The sublease income recognized for the three month ended March 31, 2019 was $143.

The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2019:
 
 
Total Operating Lease Payments
2019 (excluding the three months ended March 31, 2019)
 
$
5,205

2020
 
6,157

2021
 
4,564

2022
 
3,497

2023
 
2,725

Thereafter
 
6,933

Total minimum lease payments (1) (2)
 
29,081

Less amount representing imputed interest
 
5,072

Present value of lease obligations
 
$
24,009

Weighted average remaining lease term (years)
 
5.51

Weighted average discount rate
 
6.87
%
(1) Partially includes rent expense amounts payable in various foreign currencies and and are based on the spot foreign currency exchange rate for the month ended March 31, 2019, where applicable.
(2) Includes leases and renewals that were executed and have yet to commence as of March 31, 2019.


25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands).
 

Introduction

The following discussion should be read in conjunction with the information contained in Hill International, Inc.’s (collectively referred to as “Hill”, “we”, “us”, “our” and “the Company”) unaudited consolidated financial statements, including the notes thereto. Statements regarding future economic performance, management's plans and objectives and any statements concerning assumptions related to the foregoing contained in Management's Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements. See our Annual Report on Form 10-K, for the fiscal year ended December 31, 2018 filed with the Securities and Exchange Commission on April 1, 2019, including the factors disclosed therein, as well as "Disclosure Regarding Forward-looking Statements" for certain factors that may cause actual results to vary materially from these forward-looking statements. We assume no obligation to update any of these forward-looking statements.

Overview

We earn revenue by deploying professionals to provide services to our clients, including project management, construction management and related consulting. These services are primarily delivered on a “cost plus” or “time and materials” basis in which we bill negotiated hourly or monthly rates or a negotiated multiple of the direct cost of these professionals, plus actual out-of-pocket expenses. Our direct expenses are the actual cost of these professionals, including payroll and benefits. We also provide services under fixed price contracts and time and materials contracts with a cap.

The professionals we deploy are occasionally subcontractors. We generally bill the actual cost of these subcontractors and recognize this cost as both revenue and direct expense. Consulting fee revenue ("CFR") refers to our revenue excluding amounts paid or due to subcontractors. We believe CFR is an important measure because it represents the revenue on which we earn gross profit, whereas total revenue includes subcontractors on which we generally pass through the cost and earn minimal or no gross profit.

We compete for business based on a variety of factors such as technical capability, global resources, price, reputation and past experience, including client requirements for substantial experience in similar projects. We have developed significant long-standing relationships, which bring us repeat business and may be difficult to replicate. We believe we have an excellent reputation for attracting and retaining professionals. In addition, we believe there are high barriers to entry for new competitors especially in the project management market.

Selling, general and administrative expenses (“SG&A”) consist primarily of personnel costs that are not billable and corporate or regional costs such as sales, business development, proposals, operations, finance, human resources, legal, marketing, management and administration.

Discontinued operations includes the results of our former Construction Claims Group, which was sold on May 5, 2017.

The Company operates as a single reporting segment, known as the Project Management Group which provides fee-based construction management services to our clients, leveraging our construction expertise to identify potential trouble, difficulties and sources of delay on a construction project before they develop into costly problems. Our experienced professionals are capable of managing all phases of the construction process from concept through completion, including cost and budget controls, scheduling, estimating, expediting, inspection, contract administration and management of contractors, subcontractors and suppliers.

26



Results of Operations

Consolidated Results
(In thousands)
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2019
 
2018
 
Change
Income Statement Data:
 
 

 
 

 
 

 
 
Revenue
 
$
98,683

 
$
113,897

 
$
(15,214
)
 
(13.4
)%
Direct expenses
 
67,247

 
77,635

 
(10,388
)
 
(13.4
)%
Gross profit
 
31,436

 
36,262

 
(4,826
)
 
(13.3
)%
Selling, general and administrative expenses
 
31,311

 
34,364

 
(3,053
)
 
(8.9
)%
Plus: Share of profit of equity method affiliates
 
414

 
800

 
(386
)
 
(48.3
)%
Less: Loss on performance bond
 

 
7,938

 
(7,938
)
 
(100.0
)%
Operating profit (loss)
 
539

 
(5,240
)
 
5,779

 
 
Interest and related financing fees, net
 
1,512

 
1,334

 
178

 
13.3
 %
Loss before income taxes
 
(973
)
 
(6,574
)
 
5,601

 
(85.2
)%
Income tax expense
 
1,095

 
1,095

 

 
 %
Loss from continuing operations
 
(2,068
)
 
(7,669
)
 
5,601

 
(73.0
)%
Discontinued operations:
 
 
 
 
 
 
 
 
Loss from discontinued operations
 

 
(482
)
 
482

 
(100.0
)%
Total loss from discontinued operations
 

 
(482
)
 
482

 
(100.0
)%
Net Loss
 
(2,068
)
 
(8,151
)
 
6,083

 
(74.6
)%
Less: net earnings - noncontrolling interests
 
67

 
(2
)
 
69

 
 
Net loss attributable to Hill International, Inc.
 
$
(2,135
)
 
$
(8,149
)
 
$
6,014

 
(73.8
)%


Three Months Ended March 31, 2019 Compared to
Three Months Ended March 31, 2018
 
Revenue by geographic region:
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
 
 
United States
 
$
48,092

 
48.7
%
 
$
51,572

 
45.2
%
 
$
(3,480
)
 
(6.7
)%
Latin America
 
2,434

 
2.5
%
 
2,812

 
2.5
%
 
(378
)
 
(13.4
)%
Europe
 
11,344

 
11.5
%
 
10,457

 
9.2
%
 
887

 
8.5
 %
Middle East
 
28,311

 
28.7
%
 
40,298

 
35.4
%
 
(11,987
)
 
(29.7
)%
Africa
 
6,949

 
7.0
%
 
6,703

 
5.9
%
 
246

 
3.7
 %
Asia/Pacific
 
1,553

 
1.6
%
 
2,055

 
1.8
%
 
(502
)
 
(24.4
)%
Total
 
$
98,683

 
100.0
%
 
$
113,897

 
100.0
%
 
$
(15,214
)
 
(13.4
)%
     
Consulting Fee Revenue (CFR) was $78,999 and $93,027 of the total revenue for the three months ended March 31, 2019 and 2018, respectively, which was approximately 80% and 82% of total revenues, respectively.

The decrease in revenue and the corresponding decrease in CFR for the three months ended March 31, 2019 compared to the same period in 2018 was primarily due to the following:

United States:

The revenue decline in the Untied States was primarily due to the closeout of a project in the Northeast region related to recovery efforts from Super Storm Sandy and the closeout of several other projects in the Western region. We also experienced smaller project closeouts in other areas of the country.

27



Middle East:

The revenue decline in the Middle East was primarily due to the closeout of large projects in Saudi Arabia and Qatar, along with the closeout of several other projects in the region.

Gross Profit:
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of
Revenue
 
 
 
 
 
% of
Revenue
 
 
 
 
United States
 
$
13,346

 
42.4
%
 
27.8
%
 
$
15,468

 
42.7
%
 
30.0
%
 
$
(2,122
)
 
(13.7
)%
Latin America
 
874

 
2.8
%
 
35.9
%
 
1,142

 
3.1
%
 
40.6
%
 
(268
)
 
(23.5
)%
Europe
 
4,247

 
13.5
%
 
37.4
%
 
3,727

 
10.3
%
 
35.6
%
 
520

 
14.0
 %
Middle East
 
9,491

 
30.2
%
 
33.5
%
 
12,350

 
34.1
%
 
30.6
%
 
(2,859
)
 
(23.1
)%
Africa
 
2,858

 
9.1
%
 
41.1
%
 
2,723

 
7.5
%
 
40.6
%
 
135

 
5.0
 %
Asia/Pacific
 
620

 
2.0
%
 
39.9
%
 
852

 
2.3
%
 
41.5
%
 
(232
)
 
(27.2
)%
Total
 
$
31,436

 
100.0
%
 
31.9
%
 
$
36,262

 
100.0
%
 
31.8
%
 
$
(4,826
)
 
(13.3
)%

The change in gross margin as a percentage of revenue for the three months ended March 31, 2019 compared to the same period in 2018 was primarily due to the following:

United States:

Gross margin as a percentage of revenue decreased primarily as a result of the closeouts of the Super Storm Sandy, the Seven Line Extension and the New Jersey Turnpike Authority Facilities projects.

Middle East:

The gross margin as a percentage of revenue increased as a result of the margin mix of the remaining projects being more favorable than those that were closed out. In addition there was approximately $400 less in accrued vacation costs during the current year.

SG&A Expense:

The first quarter of 2018 contained significant costs related to our profit improvement plan of approximately $4,100. These costs were approximately $1,200 in the first quarter of 2019 and we expect approximately $500 in the second quarter of 2019 and no further cost related to the profit improvement plan after that. Our selling, general and administrative expense for the first quarter of 2019 excluding these items, would have been approximately $30 million. This excludes any gain or loss on foreign exchange activity. We believe this level of selling, general and administrative costs is sustainable going forward.

These reductions in SG&A in the first quarter of 2019 compared to the same quarter in 2018 were partially offset by a bad debt expense increase of approximately $1,000 due to an increase in account receivable items aged over 90 days and deemed at risk for collection.

Interest and Related Financing Fees, net
 
Interest and related financing fees, net, included interest expense of $1,644, net of $(133) in interest income, and interest expense of $1,496, net of $(162) in interest income for the three months ended March 31, 2019 and 2018, respectively. The three months ended March 31, 2019 included higher interest expense primarily related to our U.S. dollar-denominated revolving credit facility with Société Générale (the “Agent”) and other U.S. Loan Parties (the “U.S. Lenders”) due to higher loan balances throughout the three months ended March 31, 2019, when compared to the three months ended March 31, 2018.
 

28


Income Taxes

The effective income tax rate for the three months ended March 31, 2019 and 2018 were (112.5)% and (16.7)%, respectively. The change in the Company’s effective tax rate for the three months ended March 31, 2019 was primarily a result of the mix of income among various foreign jurisdictions with different statutory tax rates.

Liquidity and Capital Resources

Our primary cash obligations are our payroll and our project subcontractors. Our primary source of cash is receipts from clients. We generally pay our employees semi-monthly in arrears and invoice our clients monthly in arrears. Our clients generally remit payment approximately three months, on average, after invoice date. This creates a lag between the time we pay our employees and the time we receive payment from our clients. We bill our clients for any subcontractors used and pay those subcontractors after receiving payment from our clients, so no such timing lag exists for the payments we make to subcontractors.

Concurrent with the 2017 sale of the Company’s claims business, management recognized the need to significantly reduce its selling, general and administrative costs given the reduced scale of the remaining business. Management developed and announced a Profit Improvement Plan (“PIP”) to address this need. Management recognized that the Company would incur costs during 2017 and 2018 to execute this plan, including consulting fees, severance and retention costs. The Company also experienced significantly higher costs in both years due to the financial restatement and in 2018 due to a performance bond being called. The combination of these events resulted in over $25 million of expenses in 2018 in excess of what management would consider typical. The operating loss and cash used in 2018 were primarily due to these expenses.

As of the date of these financial statements the PIP has been fully implemented and the associated expenses are substantially completed. The financial restatement was completed in 2018. With significantly reduced selling, general and administrative expenses already implemented, the financial restatement completed and the absence of expenses related to these items, as well as management’s expectation that performance bonds will not be called.

We utilize cash on hand and our revolving credit facilities to fund the working capital requirement caused by the lag discussed above and other operating needs. We believe our expected cash receipts from clients, together with current cash on hand and revolving credit facilities, are sufficient to support the reasonably anticipated cash needs of our operations over the next twelve months from the date of this report.

At March 31, 2019, our primary sources of liquidity consisted of $25,746 of cash and cash equivalents, of which $18,453 was on deposit in foreign locations, and $957 of available borrowing capacity under our various credit facilities. We also have relationships with other foreign banks for the issuance of letters of credit, letters of guarantee and performance bonds in a variety of foreign currencies. At March 31, 2019, we had approximately $61,932 of availability under these arrangements.

Sources of Additional Capital

A significant increase in our current backlog may require us to obtain additional financing. If additional financing is required in the future due to an increase in backlog or changes in strategic or operating plans, we cannot provide any assurance that any other sources of financing will be available, or if available, that the financing will be on terms acceptable to us.


29


Cash Flows
 
 
Three months ended March 31,
 
 
2019
 
Change
 
2018
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
$
8,458

 
$
14,484

 
$
(6,026
)
 
Net cash used in investing activities
 
(873
)
 
235

 
(1,108
)
 
Net cash provided by financing activities
 
960

 
(3,370
)
 
4,330

 
Effect of exchange rate changes on cash
 
(1,033
)