Hill International, Inc.
Hill International, Inc. (Form: 10-K, Received: 03/31/2017 17:18:59)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K


 

 

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

For the fiscal year ended December 31, 2016

Commission file number 001-33961

HILL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

Delaware
State or other jurisdiction of
incorporation or organization
  20-0953973
(I.R.S. Employer
Identification No.)

One Commerce Square
2005 Market Street, 17th Floor
Philadelphia, PA

(Address of principal executive offices)

 

19103
(Zip Code)

        Registrant's telephone number, including area code: (215) 309-7700

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

Title of each class   Name of each exchange on which registered
Common Stock, $.0001 par value   New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Exchange Act: None



        Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o     No  ý

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o     No  ý

        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 a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý     No  o

        Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

Large Accelerated Filer  o   Accelerated Filer  ý   Non-Accelerated Filer  o
(Do not check if a
smaller reporting company)
  Smaller reporting company  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

        The aggregate market value of shares of common stock held by non-affiliates on June 30, 2016 was approximately $171,669,000. As of March 17, 2017, there were 51,859,479 shares of the Registrant's Common Stock outstanding.

Documents Incorporated by Reference

        Portions of the proxy statement for the 2017 Annual Meeting of Shareholders of Hill International, Inc. are incorporated by reference into Part III of this Form 10-K.

   


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

PART I .

 

Item 1.

 

Business

  4

Item 1A.

 

Risk Factors

  12

Item 1B.

 

Unresolved Staff Comments

  21

Item 2.

 

Properties

  21

Item 3.

 

Legal Proceedings

  22

Item 4.

 

Mine Safety Disclosures

  23

Part II .

 
 

Item 5.

 

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  24

Item 6.

 

Selected Financial Data

  26

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  28

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  44

Item 8.

 

Financial Statements and Supplementary Data

  46

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  95

Item 9A.

 

Controls and Procedures

  95

Item 9B.

 

Other Information

  98

Part III .

 
 

Item 10.

 

Directors, Executive Officers and Corporate Governance

  99

Item 11.

 

Executive Compensation

  99

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  99

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  100

Item 14.

 

Principal Accounting Fees and Services

  100

Part IV .

 
 

Item 15.

 

Exhibits, Financial Statement Schedules

  101

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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Certain statements contained in this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). We may also make forward-looking statements in other reports filed with the United States Securities and Exchange Commission (the "SEC"), in materials delivered to stockholders and in press releases. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Although we believe 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. You can identify forward-looking statements by the use of terminology such as "may," "will," "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," "could," "should," "potential" or "continue" or the negative or other variations thereof, as well as other statements regarding matters that are not historical fact.

        Those forward-looking statements may concern, among other things:

        Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements include:

        Other factors that may affect our business, financial position or results of operations include:

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        We assume no obligation to update or revise any forward-looking statements. In accordance with the Reform Act, Item 1A of this Report entitled "Risk Factors" contains cautionary statements that accompany those forward-looking statements. You should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-K, in our other filings with the SEC or in materials incorporated therein by reference.

Item 1.    Business.

General

        Hill International, Inc., with 4,300 professionals in 100 offices worldwide, provides program management, project management, construction management and other consulting services primarily to the buildings, transportation, environmental, energy and industrial markets. According to Engineering News-Record magazine Hill was recently ranked as the eighth largest construction management firm in the United States. The terms "Hill", the "Company", "we", "us" and "our" refer to Hill International, Inc.

        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 would be very 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.

Our Strategy

        Our strategy emphasizes the following key elements:

    Increase Revenues from Our Existing Clients. We have long-standing relationships with a number of public and private sector entities. Meeting our clients' diverse needs in managing construction risk and generating repeat business from our clients to expand our project base is one of our key growth strategies. We accomplish this objective by providing a broad range of project management consulting services in a wide range of geographic areas that support our clients during every phase of a project, from concept through completion. We believe that nurturing our existing client relationships expands our project base through repeat busin ess.

    Capitalize Upon the Continued Spend in the Markets We Serve.   We believe that the demand for project management services will grow with increasing construction and infrastructure spending in the markets we serve. We believe that our reputation and experience combined with our broad platform of service offerings will enable us to capitalize on increases in demand for our services. In addition, we strategically open new offices to expand into new geographic areas and we aggressively hire individuals with significant contacts to accelerate growth of these new offices and to strengthen our presence in existing markets.

    Strengthen Professional Resources.   Our biggest asset is the people that work for Hill. We intend to continue spending significant time recruiting and retaining the best and the brightest to improve our competitive position. Our independent status has attracted top project management

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      talent with varied industry experience. We believe maintaining and bolstering our team will enable us to continue to grow our business.

    Pursue Acquisitions Selectively.   We operate in a highly fragmented industry with many smaller, regional competitors. Our acquisition strategy has allowed us to manage risk by diversifying our markets, which has enabled us to compete better by integrating capabilities and obtaining new relationships. We have pursued acquisitions primarily for three reasons: to expand into new geographic markets, to improve capabilities, resources and critical mass in existing geographic markets, and to enhance our capabilities and resources in certain strategic market sectors. Selectively, we intend to focus primarily on U.S. acquisitions to expand our domestic presence and enhance capabilities in specific areas and secondarily on foreign acquisitions that bring new relationships as well as expand our geographic base.

Reporting Segments

        On December 20, 2016, we entered into a Stock Purchase Agreement to sell our Construction Claims Group, which is reported herein as discontinued operations. This transaction will permit us to strengthen our balance sheet and better focus on our Project Management business. See Note 2 to our consolidated financial statements for a description of the transaction.

        Our Project Management Group provides fee-based or "agency" 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.

        Our clients are typically billed a negotiated multiple of the actual direct cost of each professional assigned to a project and we are reimbursed for our out-of-pocket expenses. We believe our fee-based consulting has significant advantages over traditional general contractors. Specifically, because we do not assume project completion risk, our fee-based model eliminates many of the risks typically associated with providing "at risk" construction services.

        Our total revenue consists of two components: consulting fee revenue ("CFR") and reimbursable expenses. Reimbursable expenses are reflected in equal amounts in both total revenue and total direct expenses. Because these revenue/costs may be subject to significant fluctuation from year to year, we measure the performance of many of our key operating metrics as a percentage of CFR, as we believe that this is a better and more consistent measure of operating performance than total revenue. Throughout this report we have used CFR as the denominator in many of our ratios.

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Global Business

        We operate worldwide and currently have over 100 offices in over 40 countries. The following table sets forth the amount and percentage of our CFR by geographic region for each of the past three fiscal years (dollars in thousands):

Consulting Fee Revenue by Geographic Region

 
  2016   2015   2014  

United States

  $ 137,528     31.7 % $ 122,423     26.2 % $ 102,095     23.8 %

Latin America

    18,708     4.3     26,304     5.6     36,925     8.6  

Europe

    38,455     8.8     39,519     8.4     34,943     8.2  

Middle East

    204,780     47.2     245,985     52.6     222,754     51.9  

Africa

    20,815     4.8     20,461     4.4     18,402     4.3  

Asia/Pacific

    13,861     3.2     13,185     2.8     13,708     3.2  

Total

  $ 434,147     100.0 % $ 467,877     100.0 % $ 428,827     100.0 %

Grow Organically and Through Selective Acquisitions

        Over the years, our business has expanded through organic growth and the acquisition of a number of project management businesses. Over the past 18 years, we have completed 14 acquisitions of project management businesses.

        We believe that our industry includes a number of small regional companies in a highly fragmented market. We believe that we have significant experience and expertise in identifying, negotiating, completing and integrating acquisitions and view the acquisition of these smaller competitors as a key part of our growth strategy. Through our acquisitions, we gained entry into Spain, Mexico, Poland, Brazil and Turkey and expanded our presence in the United States. These transactions have enabled us to strengthen our geographic diversity and compete more effectively.

Clients

        Our clients consist primarily of the United States and other national governments, state and local governments, and the private sector. The following table sets forth our breakdown of CFR attributable to these categories of clients for each of the past three fiscal years (dollars in thousands):

Consulting Fee Revenue By Client Type

 
  2016   2015   2014  

U.S. federal government

  $ 9,600     2.2 % $ 8,569     1.8 % $ 9,792     2.3 %

U.S. state, regional and local governments

    94,459     21.8     82,181     17.6     70,036     16.3  

Foreign governments

    153,445     35.3     195,383     41.8     193,283     45.1  

Private sector

    176,643     40.7     181,744     38.8     155,716     36.3  

Total

  $ 434,147     100.0 % $ 467,877     100.0 % $ 428,827     100.0 %

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        The following table sets forth the percentage of our consulting fee revenue contributed by each of our five largest clients for the years ended December 31, 2016, 2015 and 2014:

 
  For the Years Ended
December 31,
 
 
  2016   2015   2014  

Largest client

    7.9 %   10.8 %   14.6 %

2nd largest client

    6.5 %   6.7 %   4.6 %

3rd largest client

    5.6 %   5.7 %   3.5 %

4th largest client

    4.9 %   4.3 %   3.4 %

5th largest client

    4.8 %   3.7 %   3.4 %

Top 5 largest clients

    29.7 %   31.2 %   29.5 %

Business Development

        The process for acquiring business from each of our categories of clients is principally the same, by participating in a competitive request-for-proposal ("RFP") process, with the primary difference among clients being that the process for public sector clients is significantly more formal and complex than for private sector clients as a result of government procurement rules and regulations that govern the public-sector process.

        Although a significant factor in our business development consists of our standing in our industry, including existing relationships and reputation based on performance on completed projects, our marketing department undertakes a variety of activities in order to expand our exposure to potential new clients. These activities include media relations, advertising, promotions, market sector initiatives and maintaining our website and related web marketing. Media relations include placing articles that feature us and our personnel in trade publications and other media outlets. Our promotions include arranging speaking engagements for our personnel, participation in trade shows and other promotional activities. Market sector initiatives are designed to broaden our exposure to specific sectors of the construction industry, such as, for example, participating in or organizing industry seminars.

        Doing business with governments is complex and requires the ability to comply with intricate regulations and satisfy periodic audits. We believe that the ability to understand these requirements and to successfully conduct business with government agencies is a barrier to entry for smaller, less experienced competitors. Most government contracts, including those with foreign governments, are subject to termination by the government, to government audits and to continued appropriations. For the year ended December 31, 2016, CFR from U.S. and foreign government contracts represented approximately 59.3% of our total CFR.

        We are required from time to time to obtain various permits, licenses and approvals in order to conduct our business in many of the jurisdictions where we operate. Our business of providing project management services is not subject to significant regulation by state, federal or foreign governments.

Contracts

        The price provisions of our Project Management related contracts can be grouped into three broad categories: cost-plus, time and materials, and fixed-price. Cost-plus contracts provide for reimbursement of our costs and overhead plus a predetermined fee. Under some cost-plus contracts, our fee may be based partially on quality, schedule and other performance factors. We also enter into contracts whereby we bill our clients monthly at hourly billing rates. The hourly billing rates are determined by contract terms. For governmental clients, the hourly rates are generally calculated as salary costs plus overhead costs plus a negotiated profit percentage. For commercial clients, the hourly rate can be taken from a standard fee schedule by staff classification or it can be at a discount from this schedule. In

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some cases, primarily for foreign work, a monthly rate is negotiated rather than an hourly rate. This monthly rate is a build-up of staffing costs plus overhead and profit. We account for these contracts on a time-and-materials method, recognizing revenue as costs are incurred. Fixed-price contracts are accounted for using the "percentage-of-completion" method, wherein revenue is recognized as costs are incurred.

Backlog

        We believe a strong indicator of our future performance is our backlog of uncompleted projects under contract or awarded. Our backlog represents management's estimate of the amount of contracts and awards in hand that we expect to result in future consulting fees. Our backlog is evaluated by management on a project-by-project basis and is reported for each period shown based upon the binding nature of the underlying contract, commitment or letter of intent, and other factors, including the economic, financial and regulatory viability of the project and the likelihood of the contract being extended, renewed or cancelled.

        Our backlog is important to us in anticipating and planning for our operational needs. Backlog is not a measure defined in U.S. generally accepted accounting principles, and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog.

        At December 31, 2016, our Project Management backlog was $831,000,000, compared to approximately $807,000,000 at December 31, 2015. Our net bookings during 2016 of $ 458,147,000, which equates to a book-to-bill ratio of 106% compared to our goal of at least 110%. While this is short of our expectations, it is consistent with the slowdown of project activity in the Middle East due to the economic impact caused by the drop in oil prices and political upheaval and civil unrest in certain parts of the region. This will continue to be a major area of focus for 2017. We estimate that approximately $334,000,000, or 40.2% of the backlog at December 31, 2016, will be recognized during our 2017 fiscal year.

        Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur. Further, substantially all of our contracts with our clients may be terminated at will, in which case the client would only be obligated to us for services provided through the termination date. Historically, the impact of terminations and modifications on our realization of revenue from our backlog has not been significant, however, in December 2016, the Company had two contracts, one in the Middle East and one in Africa, cancelled. As a result, approximately $73,000,000 was excluded from our backlog at December 31, 2016. Furthermore, reductions of our backlog as a result of contract terminations and modifications may be offset by additions to the backlog.

        We adjust backlog to reflect project cancellations, deferrals and revisions in scope and cost (both upward and downward) known at the reporting date. Future contract modifications or cancellations,

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however, may increase or reduce backlog and future revenue. The following tables show our backlog by geographic region (in thousands):

 
  Total Backlog   12-Month Backlog  

As of December 31, 2016:

                         

United States

  $ 459,000     55.2 %   141,000     42.2 %

Latin America

    10,000     1.2     8,000     2.4  

Europe

    38,000     4.6     26,000     7.8  

Middle East

    274,000     33.0     129,000     38.6  

Africa

    42,000     5.0     22,000     6.6  

Asia/Pacific

    8,000     1.0     8,000     2.4  

Total

  $ 831,000     100.0 % $ 334,000     100.0 %

As of September 30, 2016:

   
 
   
 
   
 
   
 
 

United States

  $ 421,000     47.4 %   142,000     39.7 %

Latin America

    11,000     1.2     9,000     2.5  

Europe

    43,000     4.8     24,000     6.7  

Middle East

    358,000     40.3     153,000     42.7  

Africa

    44,000     5.0     21,000     5.9  

Asia/Pacific

    11,000     1.3     9,000     2.5  

Total

  $ 888,000     100.0 % $ 358,000     100.0 %

As of December 31, 2015:

   
 
   
 
   
 
   
 
 

United States

  $ 372,000     46.1 %   112,000     32.9 %

Latin America

    23,000     2.9     16,000     4.7  

Europe

    44,000     5.5     25,000     7.4  

Middle East

    300,000     37.2     155,000     45.6  

Africa

    52,000     6.3     23,000     6.8  

Asia/Pacific

    16,000     2.0     9,000     2.6  

Total

  $ 807,000     100.0 % $ 340,000     100.0 %

Competition

        The project management industry is highly competitive. We compete for contracts, primarily on the basis of technical capability, with numerous entities, including design or engineering firms, general contractors, other "pure" construction management companies, management consulting firms and other entities. Compared to us, many of these competitors are larger, well-established companies that have broader geographic scope and greater financial and other resources. During 2016, some of our largest project management competitors included: AECOM, ARCADIS N.V., Jacobs Engineering Group, Inc., WSP Parsons Brinckerhoff, Inc., Parsons Corp. and Turner Construction Co.

Insurance

        We maintain insurance covering general and professional liability, involving bodily injury and property damage. We have historically enjoyed a favorable loss ratio in all lines of insurance and our management considers our present limits of liability, deductibles and reserves to be adequate. We endeavor to reduce or eliminate risk through the use of quality assurance/control, risk management, workplace safety and similar methods to eliminate or reduce the risk of losses on a project. Although our actual rates have decreased, we have experienced and expect to continue to experience increases in the dollar amount of our insurance premiums because of the increase in our revenue.

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Management

        We are led by an experienced management team with significant experience in the construction industry. Additional information about our executive officers follows.

Executive Officers

Name
  Age   Position

David L. Richter

    50   Chief Executive Officer

Raouf S. Ghali

    55   President and Chief Operating Officer

Mohammed Al Rais

    63   Regional President (Middle East), Project Management Group

John Fanelli III

    62   Executive Vice President and Chief Financial Officer

William H. Dengler, Jr. 

    50   Executive Vice President and General Counsel

Catherine H. Emma

    57   Senior Vice President and Chief Administrative Officer

Michael J. Petrisko

    52   Senior Vice President and Chief Information Officer

         DAVID L. RICHTER has been our Chief Executive Officer since December 2014 and he has been a member of our Board of Directors since 1998. Prior to his current position, he was our President and Chief Operating Officer from March 2004 to December 2014. Before that, Mr. Richter was President of our Project Management Group from 2001 to 2004, Senior Vice President and General Counsel from 1999 to 2001 and Vice President and General Counsel from 1995 to 1999. Prior to joining us, he was an attorney with the New York City law firm of Weil, Gotshal & Manges LLP from 1992 to 1995. Mr. Richter is a Fellow of both the Construction Management Association of America (CMAA) and the Chartered Institute of Building. He is a member of the Young Presidents' Organization, the Construction Industry Round Table and the American Society of Civil Engineers. He is a member of the Board of Directors of the Chamber of Commerce for Greater Philadelphia and the Board of Trustees of Princeton Day School. He is a former member of the Board of Directors of the CMAA and the Board of Trustees of the Southern New Jersey Development Council. Mr. Richter is also Chairman of the Oxford Alumni Society of Philadelphia. He earned his B.S. in management, his B.S.E. in civil engineering and his J.D. from the University of Pennsylvania and his M.Sc. in major program management from the University of Oxford.

         RAOUF S. GHALI has been our President and a member of our Board of Directors since August 2016 and our Chief Operating Officer since January 2015. Prior to that, he was President of our Project Management Group (International) from January 2005 to January 2015, Senior Vice President in charge of project management operations in Europe, North Africa and the Middle East from 2001 to 2004, and Vice President from 1993 to 2001. Prior to joining us, he worked for Walt Disney Imagineering from 1988 to 1993. Mr. Ghali earned both a B.S. in business administration and economics and an M.S. in business organizational management from the University of LaVerne.

         MOHAMMED AL RAIS has been Regional President (Middle East) with Hill's Project Management Group since January 2015. Prior to that, he was Senior Vice President and Managing Director (Middle East) of our Project Management Group from April 2010 to January 2015 and Vice President from 2006 to 2010. Mr. Al Rais has over 39 years of experience in the management of construction projects throughout the Middle East, North Africa, the United Kingdom and Canada. He earned his B.Sc. in city and regional planning from the University of Engineering and Technology in Pakistan and his M.Sc. in project management from the University of Reading in the United Kingdom. Mr. Al Rais is a member of the Association for Project Management in the U.K., the Canadian Business Council, the Society of Engineers in the U.A.E., the Chartered Management Institute, the Project Management Institute and the Chartered Institute of Building.

         JOHN FANELLI III has been our Executive Vice President and Chief Financial Officer since August 2016. Mr. Fanelli was previously Senior Vice President from 2006 to 2016. Before that,

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Mr. Fanelli was Vice President and Chief Accounting Officer of CDI Corp. from 2005 to 2006, and he was Vice President and Corporate Controller of CDI Corporation (a subsidiary of CDI Corp.) from 2003 to 2006. CDI Corp. is a New York Stock Exchange-traded professional services and outsourcing firm based in Philadelphia with expertise in engineering, technical services and information technology. During 2003, Mr. Fanelli was a financial consultant to Berwind Corporation, an investment management company based in Philadelphia which owns a diversified portfolio of manufacturing and service businesses and real estate. Before that, Mr. Fanelli was employed for 18 years by Hunt Corporation, then a New York Stock Exchange-traded manufacturer and marketer of office products. At Hunt, he served as Vice President and Chief Accounting Officer from 1995 until 2003, and before that as Director of Budgeting, Financial Analysis and Control, from 1985 to 1995. Before that, Mr. Fanelli was employed with Coopers & Lybrand for eight years in various accounting and auditing positions. Mr. Fanelli earned his B.S. in accounting from LaSalle University and he is a Certified Public Accountant in Pennsylvania.

         WILLIAM H. DENGLER, JR. has been our Executive Vice President and General Counsel since August 2016. Mr. Dengler was previously Senior Vice President from 2007 to 2016, Vice President and General Counsel from 2002 to 2007, and Corporate Counsel from 2001 to 2002. Mr. Dengler also serves as corporate secretary to Hill and its subsidiaries. Prior to joining Hill, Mr. Dengler served as Assistant Counsel to former New Jersey Governors Donald DiFrancesco and Christine Todd Whitman from 1999 to 2001. Mr. Dengler earned his B.A. in political science from McDaniel College and his J.D. from Rutgers University School of Law at Camden. He is licensed to practice law in New Jersey, as well as before the U.S. Court of Appeals for the Third Circuit and the U.S. Supreme Court.

         CATHERINE H. EMMA has been our Senior Vice President and Chief Administrative Officer since January 2007. Ms. Emma had been Vice President and Chief Administrative Officer from 2005 to 2007. Before that, she served as Vice President of Human Resources and Administration. Ms. Emma has been with Hill since 1982. She is certified by the HR Certification Institute (HRCI) as a Professional in Human Resources (PHR) and certified by Society of Human Resource Management (SHRM) as a Certified Professional (SHRM- CP) and holds professional memberships with Tri-State Human Resources, the Society for Human Resource Management and Risk and Insurance Management Society, Inc. Ms. Emma previously participated in BNA's Human Resources Personnel Policies Forum.

         MICHAEL J. PETRISKO has been our Senior Vice President and Chief Information Officer since June 2014. Prior to that, Mr. Petrisko was Vice President and Chief Information Officer for STV Group, an architecture, engineering and construction management firm, from June 2012 through June 2014. Before that, Mr. Petrisko was Hill's Senior Vice President and Chief Information Officer from January 2009 through June 2012, and Vice President and Chief Information Officer from 2007 to 2008. Before that, Mr. Petrisko was Director of Global IT Operations for AECOM Technology Corp. from 2005 to 2007 and Vice President and Chief Information Officer for DMJM Harris, Inc., a subsidiary of AECOM, a global architecture, engineering and construction management firm, from 2002 to 2005. From 1999 to 2002, he was Director of Technical Services for Foster Wheeler Corp., an engineering and construction services firm. Mr. Petrisko studied management information technology at Thomas Edison State College and he is a member of the New Jersey Society of Information Management and a member of the CMAA.

Employees

        At March 17, 2017, we had 3,330 professionals. Of these professionals, 3,202 worked in our Project Management Group and 128 worked in our Corporate office. Our personnel included 2,898 full-time employees, 102 part-time employees and 330 independent contractors. We are not a party to any collective bargaining agreements and we have not experienced any strikes or work stoppages. We

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consider our relationship with our employees to be satisfactory. In addition, we have 970 professionals working in our Construction Claims Group.

Access to Company Information

        We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the United States Securities and Exchange Commission (the "SEC"). The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains periodic reports, proxy statements, information statements and other information regarding issuers that file electronically.

        We make available, free of charge, through our website or by responding to requests addressed to our Legal Department, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed by us with the SEC pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act, as amended. These reports are available as soon as practicable after such material is filed with or furnished to the SEC. Our primary website is www.hillintl.com . We post the charters for our audit, compensation and governance and nominating committees, corporate governance principles and code of ethics in the "Investors" section of our website. The information contained on our website, or on other websites linked to our website, is not part of this document.

Item 1A.    Risk Factors.

        Our business involves a number of risks, some of which are beyond our control. The risks and uncertainties described below could individually or collectively have a material adverse effect on our business, financial condition, results of operations and cash flows. While these are not the only risks and uncertainties we face, we believe that the more significant risks and uncertainties are as follows:

Risks Affecting the Business

Acts of terrorism, political, governmental and social upheaval and threats of armed conflicts in or around various areas in which we operate could limit or disrupt markets and our operations, including disruptions resulting from the evacuation of personnel, cancellation of contracts or the loss of personnel.

        Acts of terrorism, political, governmental and social upheaval and threats of armed conflicts in or around various areas in which we operate could limit or disrupt markets and our operations, including disruptions resulting from the evacuation of personnel, cancellation of contracts or the loss of personnel, and may affect timing and collectability of our accounts receivable. Such events may cause further disruption to financial and commercial markets and may generate greater political and economic instability in some of the geographic areas in which we operate. In addition, any possible reprisals as a consequence of the wars and ongoing military action in the Middle East and Africa, such as acts of terrorism in the United States or elsewhere, could have a material adverse effect on our business, results of operations and financial position.

If our clients delay in paying or fail to pay amounts owed to us, it could have a material adverse effect on our liquidity, results of operations and financial condition.

        Accounts receivable represent the largest asset on our balance sheet. While we take steps to evaluate and manage the credit risks relating to our clients, economic downturns or other events can adversely affect the markets we serve and our clients ability to pay, which could reduce our ability to collect all amounts due from clients. In addition, political unrest in countries in which we operate and

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the effect of the decline of oil prices have impacted and may in the future impact our collections on accounts receivable. If our clients delay in paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, results of operations, and financial condition.

Our business is sensitive to oil and gas prices, and fluctuations in oil and gas prices may negatively affect our business.

        Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. Consulting fee revenue derived from our operations in major oil and gas producing countries in the Middle East and Africa is approximately 52.0% of CFR. Significant drops in oil or gas prices have led, and could lead to further slowdowns, in construction in these regions, which has had and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Unfavorable global economic conditions could adversely affect our business, liquidity and financial results.

        The markets that we serve are cyclical and subject to fluctuation based on general global economic conditions and other factors. Unfavorable global economic conditions, including disruption of financial markets in the United States, Europe, Brazil and elsewhere, could adversely affect our business and results of operations, primarily by limiting our access to credit and disrupting our clients' businesses. The reduction in financial institutions' willingness or ability to lend has increased the cost of capital and reduced the availability of credit. Although we currently believe that the financial institutions with which we do business will be able to fulfill their commitments to us, there is no assurance that those institutions will be able or willing to continue to do so, which could have a material adverse impact on our business. The current European debt crisis and Brazil economic crisis may cause the value of European and Brazilian currencies, including the Euro, British pound sterling and Brazilian real, to deteriorate, thus reducing the purchasing power of European and Brazilian clients and reducing the translated amounts of U.S. dollar revenues. For the year ended December 31, 2016, 8.8% and 4.3% of our consulting fee revenue was attributable to European and Brazilian clients, respectively. In addition, any negative change in general market conditions in the United States, Europe or other national economies important to our businesses may adversely affect our clients' level of spending, ability to obtain financing, and ability to make timely payments to us for our services, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding and adversely affect our results of operations and liquidity.

The sale of our Construction Claims Group is contingent upon the satisfaction of a number of conditions, may require significant time and attention of our management, and may have a material adverse effect on us whether or not the transaction is completed.

        On December 20, 2016, we announced the entrance into a Stock Purchase Agreement which would sell our Construction Claims Group. This transaction is subject to customary conditions. In addition, unanticipated developments or changes in our ability to satisfy closing conditions, in the buyer's willingness to waive unsatisfied closing conditions, or in certain litigation matters, as well as other developments, conditions, or changes may affect the closing of the sale. For these and other reasons, we may not complete the sale as expected or at all.

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        Our ongoing businesses may be adversely affected and we may be subject to certain risks and consequences as a result of pursuing the transaction, including, among others, the following:

    Execution of the proposed transaction will continue to require significant time and attention from management, which may distract them from the operation of our business and the execution of other initiatives that may have been beneficial to us;

    Our employees may be distracted due to uncertainty about their future roles with the Company or the Construction Claims Group pending the completion of the transaction;

    We will be required to pay significant costs and expenses relating to the transaction, such as legal, accounting and other professional fees, whether or not the transaction is completed; and

    We may experience negative reactions from the financial markets if we fail to complete the transaction.

        Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows or the price of our common stock.

We may be unable to win new contract awards if we cannot provide clients with letters of credit, bonds or other forms of guarantees.

        In certain international regions, primarily the Middle East, it is industry practice for clients to require letters of credit, bonds, bank guarantees or other forms of guarantees. These letters of credit, bonds or guarantees indemnify our clients if we fail to perform our obligations under our contracts. We currently have relationships with various domestic and international banking institutions to assist us in providing clients with letters of credit or guarantees. In the event there are limitations in worldwide banking capacity, we may find it difficult to find sufficient bonding capacity to meet our future bonding needs. Failure to provide credit enhancements on terms required by a client may result in our inability to compete or win a project.

International operations and doing business with foreign governments expose us to legal, political, operational and economic risks in different countries and currency exchange rate fluctuations could adversely affect our financial results.

        Our international operations contributed 68.3%, 73.8% and 76.2% of our consulting fee revenue for the years ended December 31, 2016, 2015 and 2014, respectively. There are risks inherent in doing business internationally, including:

    Lack of developed legal systems to enforce contractual rights;

    Foreign governments may assert sovereign or other immunity if we seek to assert our contractual rights thus depriving us of any ability to seek redress against them;

    Greater difficulties in managing and staffing foreign operations;

    Differences in employment laws and practices which could expose us to liabilities for payroll taxes, pensions and other expenses;

    Inadequate or failed internal controls, processes, people, and systems associated with foreign operations;

    Increased logistical complexity;

    Increased selling, general and administrative expenses associated with managing a larger and more global business;

    Greater risk of uncollectible accounts and longer collection cycles;

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    Currency exchange rate fluctuations;

    Restrictions on the transfer of cash from certain foreign countries;

    Imposition of governmental controls;

    Political and economic instability;

    Changes in U.S. and other national government policies affecting the markets for our services and our ability to do business with certain foreign governments or their political leaders;

    Conflict between U.S. and non-U.S. law;

    Changes in regulatory practices, tariffs and taxes;

    Less well established bankruptcy and insolvency procedures;

    Potential non-compliance with a wide variety of non-U.S. laws and regulations; and

    General economic, political and civil conditions in these foreign markets.

        Any of these factors could have a material adverse effect on our business, results of operations, financial condition or cash flows.

We operate in many different jurisdictions and we could be adversely affected by any violations of the U.S. Foreign Corrupt Practices Act or similar worldwide and local anti-corruption laws.

        The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar worldwide and local anti-corruption laws in other jurisdictions, generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. The policies also are applicable to agents through which we do business in certain non-U.S. jurisdictions. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, we cannot assure you that our internal control policies and procedures always will protect us from improper or criminal acts committed by our employees or agents. Our continued expansion outside the U.S., including in developing countries, could increase the risk of such violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business, subject us to fines, penalties and restrictions and otherwise result in a material adverse effect on our results of operations or financial condition. All of our recently acquired businesses are subject to our internal policies. However, because our internal policies are more restrictive than some local laws or customs where we operate, we may be at an increased risk for violations while we train our new employees to comply with our internal policies and procedures.

Our business sometimes requires our employees to travel to and work in high security risk countries, which may result in employee injury, repatriation costs or other unforeseen costs.

        Many of our employees often travel to and work in high security risk countries around the world that are undergoing or that may undergo political, social and economic upheavals resulting in war, civil unrest, criminal activity or acts of terrorism. For example, we have had and expect to have significant projects in the Middle East and Africa, including in Afghanistan, Iraq, Libya, Egypt, Saudi Arabia, Qatar and Oman. As a result, we may be subject to costs related to employee injury, repatriation or other unforeseen circumstances. Further, circumstances in these countries could make it difficult or impossible to attract and retain qualified employees. Our inability to attract and retain qualified employees to work in these countries could have a material adverse effect on our operations.

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We depend on government contracts for a significant portion of our consulting fee revenue. Our inability to win profitable government contracts could harm our operations and adversely affect our net earnings.

        In 2016, U.S. federal government contracts and U.S. state, regional and local government contracts contributed approximately 2.2% and 21.8%, respectively, of our consulting fee revenue, and foreign government contracts contributed approximately 35.3% of our consulting fee revenue. Our inability to win profitable government contracts could harm our operations and adversely affect our net earnings. Government contracts are typically awarded through a heavily regulated procurement process. Some government contracts are awarded to multiple competitors, causing increases in overall competition and pricing pressure. In turn, the competition and pricing pressure may require us to make sustained post-award efforts to reduce costs under these contracts. If we are not successful in reducing the amount of costs, our profitability on these contracts may be negatively impacted. Also, some of our federal government contracts require U.S. government security clearances. If we or certain of our personnel were to lose these security clearances, our ability to continue performance of these contracts or to win new contracts requiring such clearances may be negatively impacted.

We depend on long-term government contracts, many of which are funded on an annual basis. If appropriations are not made in subsequent years of a multiple-year contract, we will not realize all of our potential revenue and profit from that project.

        During the years ended December 31, 2016, 2015 and 2014, approximately 59.3%, 61.2% and 63.7%, respectively, of our consulting fee revenue was derived from contracts with federal, state, regional, local and foreign governments.

        Most government contracts are subject to the continuing availability of legislative appropriation. Legislatures typically appropriate funds for a given program on a year-by-year basis, even though contract performance may take more than one year. As a result, at the beginning of a program, the related contract is only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent fiscal year. These appropriations and the timing of payment of appropriated amounts may be influenced by, among other things, the state of the economy, budgetary and other political issues affecting the particular government and its appropriations process, competing priorities for appropriation, the timing and amount of tax receipts and the overall level of government expenditures. If appropriations are not made in subsequent years on government contracts, then we will not realize all of our potential revenue and profit from those contracts.

We depend on contracts that may be terminated by our clients on short notice, which may adversely impact our ability to recognize all of our potential revenue and profit from the projects.

        Substantially all of our contracts are subject to termination by the client either at its convenience or upon our default. If one of our clients terminates a contract at its convenience, then we typically are able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent us from recognizing all of our potential revenue and profit from that contract. If one of our clients terminates the contract due to our default, we could be liable for excess costs incurred by the client in re-procuring services from another source, as well as other costs.

Our contracts with governmental agencies are subject to audit, which could result in adjustments to reimbursable contract costs or, if we are charged with wrongdoing, possible temporary or permanent suspension from participating in government programs.

        Our books and records are subject to audit by the various governmental agencies we serve and by their representatives. These audits can result in adjustments to reimbursable contract costs and allocated overhead. In addition, if as a result of an audit, we or one of our subsidiaries is charged with

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wrongdoing or the government agency determines that we or one of our subsidiaries is otherwise no longer eligible for federal contracts, then we or, as applicable, that subsidiary, could be temporarily suspended or, in the event of convictions or civil judgments, could be prohibited from bidding on and receiving future government contracts for a period of time. Furthermore, as a U.S. government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities, the results of which could have a material adverse effect on our operations.

We submit change orders to our clients for work we perform beyond the scope of some of our contracts. If our clients do not approve these change orders, our net earnings could be adversely impacted.

        We typically submit change orders under some of our contracts for payment for work performed beyond the initial contractual requirements. The clients may not approve or may contest these change orders and we cannot assure you that these claims will be approved in whole, in part or at all. If these claims are not approved, our net earnings could be adversely impacted.

Because our backlog of uncompleted projects under contract or awarded is subject to unexpected adjustments and cancellations, including the amount, if any, of future appropriations by the applicable contracting governmental agency, it may not be indicative of our future revenue and profits.

        At December 31, 2016, our backlog of uncompleted projects under contract or awarded was approximately $831 million. The inability to obtain financing or governmental approvals, changes in economic or market conditions or other unforeseen events, such as terrorist acts or natural disasters, could lead to us not realizing any revenue under some or all of these contracts. We cannot assure you that the backlog attributed to any of our uncompleted projects under contract will be realized as revenue or, if realized, will result in profits.

        Many projects may remain in our backlog for an extended period of time because of the size or long-term nature of the contract. In addition, from time to time projects are scaled back or cancelled. These types of backlog reductions adversely affect the revenue and profit that we ultimately receive. Included in our backlog is the maximum amount of all indefinite delivery/indefinite quantity ("ID/IQ"), or task order, contracts, or a lesser amount if we do not reasonably expect to be issued task orders for the maximum amount of such contracts. A significant amount of our backlog is derived from ID/IQ contracts and we cannot provide any assurance that we will in fact be awarded the maximum amount of such contracts.

Our dependence on subcontractors, partners and specialists could adversely affect our business.

        We rely on third-party subcontractors as well as third-party strategic partners and specialists to complete our projects. To the extent that we cannot engage such subcontractors, partners or specialists or cannot engage them on a competitive basis, our ability to complete a project in a timely fashion or at a profit may be impaired. If we are unable to engage appropriate strategic partners or specialists in some instances, we could lose the ability to win some contracts. In addition, if a subcontractor or specialist is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition or over-commitment of its resources, we may be required to purchase the services from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services were needed.

If our partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation or reduced profits.

        We sometimes enter into joint venture agreements and other contractual arrangements with outside partners to jointly bid on and execute a particular project. The success of these joint projects

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depends on the satisfactory performance of the contractual obligations of our partners. If any of our partners fails to satisfactorily perform its contractual obligations, we may be required to make additional investments and provide additional services to complete the project. If we are unable to adequately address our partner's performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation or reduced profits.

The project management business is highly competitive and if we fail to compete effectively, we may miss new business opportunities or lose existing clients and our revenues may decline.

        The project management industry is highly competitive. We compete for contracts, primarily on the basis of technical capability, with numerous entities, including design or engineering firms, general contractors, other "pure" construction management companies, management consulting firms and other entities. Compared to us, many of these competitors are larger, well-established companies that have broader geographic scope and greater financial and other resources. If we cannot compete effectively with our competitors, or if the costs of competing, including the costs of retaining and hiring professionals, become too expensive, our revenue growth and financial results may differ materially from our expectations.

We have acquired and may continue to acquire businesses as strategic opportunities arise and may be unable to realize the anticipated benefits of those acquisitions, or if we are unable to take advantage of strategic acquisition situations, our ability to expand our business may be slowed or curtailed.

        Over the past 18 years, we have acquired 14 companies related to the Project Management business and our strategy is to continue to expand and diversify our operations with additional acquisitions as strategic opportunities arise. If the competition for acquisitions increases, or if the cost of acquiring businesses or assets becomes too expensive, the number of suitable acquisition opportunities may decline, the cost of making an acquisition may increase or we may be forced to agree to less advantageous acquisition terms for the companies that we are able to acquire. Alternatively, at the time an acquisition opportunity presents itself, internal and external pressures (including, but not limited to, borrowing capacity under our credit facilities or the availability of alternative financing), may cause us to be unable to pursue or complete an acquisition. Our ability to grow our business, particularly through acquisitions, may depend on our ability to raise capital by selling equity or debt securities or obtaining additional debt financing. There can be no assurance that we will be able to obtain financing when we need it or on terms acceptable to us.

        In addition, managing the growth of our operations will require us to continually increase and improve our operational, financial and human resources management and our internal systems and controls. If we are unable to manage growth effectively or to successfully integrate acquisitions or if we are unable to grow organically, that could have a material adverse effect on our business.

Systems and information technology interruption and breaches in data security could adversely impact our ability to operate and our operating results.

        As a global company, we are heavily reliant on computer, information and communications technology and related systems in order to properly operate. From time to time, we experience system interruptions and delays. In the event we are unable to regularly deploy software and hardware, effectively upgrade our systems and network infrastructure, and take other steps to improve the efficiency and effectiveness of our systems, the operation of such systems could be interrupted or delayed, or our data security could be breached. In addition, our computer and communications systems and operations could be damaged or interrupted by natural disasters, power loss, telecommunications failures, acts of war or terrorism, acts of God, computer viruses, physical or electronic security breaches. Any of these or other events could cause system interruptions, delays, and loss of critical data including private data. While we have taken steps to address these concerns by

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implementing sophisticated network security, training and internal control measures, there can be no assurance that a system failure or loss or data security breach will not materially adversely affect our business, financial condition and operating results.

Risks Related to Ownership of Our Common Stock

We have identified material weaknesses in our internal control over financial reporting and determined that our disclosure controls and procedures were not effective which could, if not remediated, result in additional material misstatements in our financial statements.

        Our management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over our financial reporting, as defined in Rules 13a-15(e) and 13a-15(f), respectively, under the Securities Exchange Act of 1934, as amended. As disclosed in Item 9A of this Form 10-K, management identified material weaknesses in our internal control over financial reporting and determined our disclosure controls and procedures were not effective based upon our identification of certain errors related to the estimation of potential losses on our accounts receivable and ineffective procedures related to the accounting close process, accounting estimates, and non-routine transactions in addition to a newly identified material weakness related to certain tax controls. A material weakness is defined as a deficiency, or combination of significant deficiencies, in internal control over financial reporting, such that there is a more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses, our management concluded that the Company did not maintain effective disclosure controls and procedures and internal control over financial reporting as of December 31, 2016.

        We have developed and implemented a remediation plan designed to address these material weaknesses in internal control over financial reporting and ineffective disclosure controls and procedures. If our remedial measures are insufficient, or if additional material weaknesses or significant deficiencies in our internal controls are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could materially and adversely affect our business and results of operations or financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the weaknesses or deficiencies, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in investor confidence.

Future sales of our common and preferred stock may depress the price of our common stock.

        As of March 17, 2017, there were 51,859,479 shares of our common stock outstanding. An additional 6,627,473 shares of our common stock may be issued upon the exercise of options held by employees, management and directors. We also have the authority to issue up to 1,000,000 shares of preferred stock upon terms that are determined by our Board of Directors and additional options to purchase 2,077,459 shares of our common stock without stockholder approval. In addition, we have a registration statement on file with the SEC for an aggregate issuance of 20,000,000 common shares (of which 10,453,371 shares remain available for issuance), which may be used for working capital and general corporate purposes, subject to the restrictions of our Secured Credit Facilities and another registration statement on file with the SEC for an aggregate issuance of 20,000,000 common shares, (of which 18,926,804 shares remain available for issuance), which may be used in future acquisitions. Sales of a substantial number of these shares in the public market, or factors relating to the terms we may determine for our preferred stock, options or warrants, could decrease the market price of our common stock. In addition, the perception that such sales might occur may cause the market price of our common stock to decline. Future issuances or sales of our common stock could have an adverse effect on the market price of our common stock.

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Because we have no current plans to pay cash dividends on our common stock, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

        We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants of our Secured Credit Facilities and may be limited by future indebtedness incurred by us or our subsidiaries. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

We are able to issue shares of preferred stock with greater rights than our common stock.

        Our Board of Directors is authorized to issue one or more series of preferred stock from time to time without any action on the part of our stockholders. Our Board of Directors also has the power, without stockholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights and preferences over our common stock with respect to dividends and other terms. If we issue preferred stock in the future that has a preference over our common stock with respect to the payment of dividends or other terms, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected.

Provisions in our organizational documents and Delaware law could discourage potential acquisition proposals, could delay or prevent a change in control of the Company that our stockholders may consider favorable and could adversely affect the market value of our common stock.

        Provisions in our organizational documents and Delaware law could discourage potential acquisition proposals, could delay or prevent a change in control of the Company that our stockholders may consider favorable and could adversely affect the market value of our common stock. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

    Our Board of Directors is expressly authorized to make, alter or repeal our bylaws;

    Our Board of Directors is divided into three classes of service with staggered three-year terms. This means that only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms;

    Our Board of Directors is authorized to issue preferred stock without stockholder approval;

    Only our Board of Directors, our Chairman of the Board, our Chief Executive Officer or the holders of not less than 25% of our outstanding common stock and entitled to vote may call a special meeting of stockholders;

    Our bylaws require advance notice for stockholder proposals and director nominations;

    Our bylaws limit the removal of directors and the filling of director vacancies; and

    We will indemnify officers and directors against losses that may incur in connection with investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures.

        These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in control of the Company.

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        In addition, Section 203 of the Delaware General Corporation Law imposes certain restrictions on mergers and other business combinations between the Company and any holder of 15% or more of our outstanding common stock. This provision is applicable to Hill and may have an anti-takeover effect that may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in the stockholder's best interest. In general, Section 203 could delay for three years and impose conditions upon "business combinations" between an "interested shareholder" and Hill, unless prior approval by our Board of Directors is given. The term "business combination" is defined broadly to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. An "interested shareholder," in general, would be a person who, together with affiliates and associates, owns or within three years did own, 15% or more of a corporation's voting stock.

A small group of stockholders own a large quantity of our common stock, thereby potentially exerting significant influence over the Company.

        As of December 31, 2016, Irvin E. Richter, David L. Richter and other members of the Richter family beneficially owned approximately 20.5% of our common stock. This concentration of ownership could significantly influence matters requiring stockholder approval and could delay, deter or prevent a change in control of the Company or other business combinations that might otherwise be beneficial to our other stockholders. Accordingly, this concentration of ownership may impact the market price of our common stock. In addition, the interest of our significant stockholders may not always coincide with the interest of the Company's other stockholders. In deciding how to vote on such matters, they may be influenced by interests that conflict with our other stockholders.

Item 1B.    Unresolved Staff Comments.

        None.

Item 2.    Properties.

        Our executive and certain operating offices are currently located at One Commerce Square, 2005 Market Street, 17th Floor, Philadelphia, Pennsylvania 19103. We lease all of our office space and do not own any real property. The telephone number at our executive office is (215) 309-7700. In addition to our executive offices, we have approximately 100 operating leases for office facilities throughout the world. Due to acquisition and growth we may have more than one operating lease in the cities in which we are located. Additional space may be required as our business expands geographically, but we believe we will be able to obtain suitable space as needed.

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        As of March 17, 2017, our principal worldwide office locations and the geographic regions in which we reflect their operations are:

U.S./Canada

Albuquerque, NM
Atlanta, GA
Austin, TX
Baltimore, MD
Bensalem, PA
Boston, MA
Broadview Heights, OH
Columbus, OH
East Hartford, CT
Fresno, CA
Granite Bay, CA
Houston, TX
Irvine, CA
Irving, TX
Jacksonville, FL
Las Vegas, NV
Lemont Furnace, PA
Los Angeles, CA
Miami, FL
Mission Viejo, CA
New York, NY
Ontario, CA
Orlando, FL
Perrysburg, OH
Philadelphia, PA (Headquarters)
Phoenix, AZ
Pittsburgh, PA
Providence, RI
San Diego, CA
San Francisco, CA
Seattle, WA
Spokane, WA
Tampa, FL
Toronto, Canada
Woodbridge, NJ
Washington, DC
  Europe

Amsterdam, Netherlands
Athens, Greece
Baku, Azerbaijan
Barcelona, Spain
Belgrade, Serbia
Birmingham, UK
Bucharest, Romania
Cumbria, UK
Daresbury, UK
Dundee, UK
Dusseldorf, Germany
Edinburgh, UK
Frankfurt, Germany
Geneva, Switzerland
Glasgow, UK
Hamburge, Germany
Istanbul, Turkey
Lisbon, Portugal
London, UK
Luxembourg
Madrid, Spain
Manchester, UK
Munich, Germany
Pristina, Kosovo
Riga, Latvia
Teesdale, UK
Warsaw, Poland

Latin America/
the Caribbean

Bogota, Colombia
Mexico City, Mexico
Rio de Janeiro, Brazil
Sao Paulo, Brazil
Trinidad and Tobago
  Middle East

Abu Dhabi, UAE
Amman, Jordan
Aqaba, Jordan
Baghdad, Iraq
Doha, Qatar
Dubai, UAE
Jeddah, Saudi Arabia
Kuwait City, Kuwait
Manama, Bahrain
Muscat, Oman
Riyadh, Saudi Arabia

Africa

Algiers, Algeria
Cairo, Egypt
Cape Town, South Africa
Casablanca, Morocco
Johannesburg, South Africa
Tripoli, Libya

Asia/Pacific
Almaty, Kazakhstan
Astana City, Kazakhstan
Beijing, China
Brisbane, Australia
Danang City, Vietnam
Gurgaon, India
Hong Kong, China
Jakarta, Indonesia
Kabul, Afghanistan
Kuala Lumpur, Malaysia
Manila, Philippines
Melbourne, Australia
Perth, Australia
Shanghai, China
Singapore
Sydney, Australia

Item 3.    Legal Proceedings .

General Litigation

        Knowles Limited ("Knowles"), a subsidiary of the Company's Construction Claims Group, 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

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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.

        From time to time, the Company is a defendant or plaintiff in various legal actions which arise in the normal course of business. As such the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. 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 matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Item 4.    Mine Safety Disclosures.

        Not applicable.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

        Our common stock is traded on the New York Stock Exchange ("NYSE") under the trading symbol "HIL." The following table includes the range of high and low trading prices for our common stock as reported on the NYSE for the periods presented.

 
  Price Range  
 
  High   Low  

2016

             

Fourth Quarter

  $ 4.62   $ 1.95  

Third Quarter

    4.64     3.96  

Second Quarter

    4.68     3.20  

First Quarter

    4.07     2.62  

2015

   
 
   
 
 

Fourth Quarter

  $ 4.02   $ 3.11  

Third Quarter

    5.38     3.20  

Second Quarter

    5.50     3.49  

First Quarter

    4.38     3.26  

Stockholders

        As of December 31, 2016, there were 90 holders of record of our common stock. However, a single record stockholder account may represent multiple beneficial owners, including owners of shares in street name accounts. We believe there are approximately 5,000 beneficial owners of our common stock.

Dividends

        We have not paid any dividends on our common stock. The payment of dividends in the future will be contingent upon our earnings, if any, capital requirements and general financial condition of our business. Our Secured Credit Facilities currently limit the payment of dividends.

Securities Authorized for Issuance under Equity Compensation Plans

        The table setting forth this information is included in Part III—Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Recent Sales of Unregistered Securities

        None.

Performance Graph

        The performance graph and table below compare the cumulative total return of our common stock for the period from December 31, 2011 to December 31, 2016 with the comparable cumulative total returns of the Russell 2000 Index (of which the Company is a component stock) and a peer group which consists of the following ten companies: AECOM (ACM), CDI Corp. (CDI), Fluor Corporation (FLR), Granite Construction Incorporated (GVA), Jacobs Engineering Group Inc. (JEC), KBR, Inc. (KBR), NV5 Global, Inc. (NVEE), TRC Companies Inc. (TRR), Tutor Perini Corporation (TPC), and

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Tetra Tech, Inc. (TTEK). For 2016, we changed our peer group to consist of only construction companies. In prior years, the peer group consisted of a blend of construction companies and consulting companies.

GRAPHIC

 
  2011   2012   2013   2014   2015   2016  

Hill International, Inc. 

  $ 100.00   $ 71.21   $ 76.85   $ 74.71   $ 75.49   $ 84.63  

Russell 2000 Index

    100.00     116.35     161.52     169.42     161.95     196.45  

Peer Group

    100.00     114.46     149.81     116.27     105.39     132.04  

Old Peer Group

    100.00     112.30     150.15     116.81     106.25     134.70  

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Item 6.    Selected Financial Data.

        The following is selected financial data from our audited consolidated financial statements for each of the last five years. This data should be read in conjunction with our consolidated financial statements (and related notes) appearing in Item 8 of this report and with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." On December 20, 2016, we entered into a definitive Stock Purchase Agreement to sell our Construction Claims Group, which is reported as discontinued operations for each year presented. See Note 3 to our consolidated financial statements for additional information. The data presented below is in thousands, except for (loss) earnings per share data.

 
  Years Ended December 31,  
 
  2016   2015   2014   2013   2012  

Income Statement Data:

                               

Consulting fee revenue

  $ 434,147   $ 467,877   $ 428,827   $ 392,602   $ 312,232  

Reimbursable expenses

    86,700     84,699     58,927     59,915     60,049  

Total revenue

    520,847     552,576     487,754     452,517     372,281  

Cost of services

    272,243     288,845     263,806     244,003     192,592  

Reimbursable expenses

    86,700     84,699     58,927     59,915     60,049  

Total direct expenses

    358,943     373,544     322,733     303,918     252,641  

Gross profit

    161,904     179,032     165,021     148,599     119,640  

Selling, general and administrative expenses

   
162,721
   
159,691
   
142,079
   
126,072
   
171,013
 

Share of loss of equity method affiliates

    37     237              

Operating (loss) profit

    (854 )   19,104     22,942     22,527     (51,373 )

Interest and related financing fees, net

    694     2,026     1,564     1,841     2,353  

(Loss) earnings before income taxes

    (1,548 )   17,078     21,378     20,686     (53,726 )

Income tax expense

    6,068     6,465     7,512     4,558     12,388  

(Loss) earnings from continuing operations

    (7,616 )   10,613     13,866     16,128     (66,114 )

Loss from discontinued operations

    (11,076 )   (2,874 )   (18,713 )   (10,644 )   (8,780 )

Net (loss) earnings

    (18,692 )   7,739     (4,847 )   5,484     (74,894 )

Less: net earnings—noncontrolling interests

    136     808     1,301     1,922     1,872  

Net (loss) earnings attributable to Hill International, Inc. 

  $ (18,828 ) $ 6,931   $ (6,148 ) $ 3,562   $ (76,766 )

Basic (loss) earnings per common share from continuing operations

  $ (0.15 ) $ 0.20   $ 0.28   $ 0.36   $ (1.76 )

Basic (loss) per common share from discontinued operations

    (0.21 )   (0.06 )   (0.42 )   (0.27 )   (0.23 )

Basic (loss) earnings per common share—Hill International, Inc. 

  $ (0.36 ) $ 0.14   $ (0.14 ) $ 0.09   $ (1.99 )

Basic weighted average common shares outstanding

    51,724     50,874     44,370     39,098     38,500  

Diluted (loss) earnings per common share from continuing operations

  $ (0.15 ) $ 0.20   $ 0.28   $ 0.36   $ (1.76 )

Diluted (loss) per common share from discontinued operations

    (0.21 )   (0.06 )   (0.42 )   (0.27 )   (0.23 )

Diluted (loss) earnings per common share—Hill International, Inc. 

  $ (0.36 ) $ 0.14   $ (0.14 ) $ 0.09   $ (1.99 )

Diluted weighted average common shares outstanding

    51,724     51,311     44,370     39,322     38,500  

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  Years Ended December 31,  
 
  2016   2015   2014   2013   2012  

Discontinued Operations Data(1):

                               

Consulting fee revenue

  $ 164,478   $ 163,074   $ 148,290   $ 119,483   $ 105,366  

Operating profit

    6,517 (2)   11,740     10,996     12,171     8,071  

Interest and related financing fees, net

    12,932     12,637     28,921     21,023     15,797  

(Loss) before income taxes

    (6,415 )   (897 )   (17,925 )   (8,852 )   (7,726 )

Loss from discontinued operations

    (11,076 )   (2,874 )   (18,713 )   (10,644 )   (8,780 )

(1)
See Note 3 to our consolidated financial statements for further information regarding this statement.

(2)
There were significant expenses totaling $5,150,000 that adversly affected discontinued operations for 2016. The expenses consisted of $3,044,000 of legal and other professional fees related to the pending sale and $2,106,000 related to certain tax matters in foreign jurisdictions.
 
  As of December 31,  
 
  2016   2015   2014   2013   2012  

Selected Balance Sheet Data:

                               

Cash and cash equivalents

  $ 25,637   $ 24,089   $ 30,124   $ 30,381   $ 16,716  

Accounts receivable, net

    164,554     187,553     145,330     128,241     109,440  

Current assets held for sale

    54,144     60,092     53,393     51,071     45,557  

Current assets

    266,171     291,591     256,589     238,298     194,582  

Noncurrent assets held for sale

    33,298     36,608     39,126     38,588     39,427  

Total assets

    401,208     428,746     412,897     393,476     363,905  

Current liabilities held for sale

    27,703     27,497     28,779     22,258     17,550  

Current liabilities

    140,104     143,048     139,244     139,124     138,082  

Noncurrent liabilities held for sale

    4,679     6,403     4,326     4,043     4,551  

Total debt

    144,103     144,983     121,524     131,235     106,704  

Stockholders' equity:

                               

Hill International, Inc. share of equity

  $ 88,370   $ 113,969   $ 113,288   $ 84,969   $ 78,997  

Noncontrolling interests

    2,016     4,070     8,712     11,887     13,557  

Total equity

  $ 90,386   $ 118,039   $ 122,000   $ 96,856   $ 92,554  

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

        On December 20, 2016, we entered into a definitive Stock Purchase Agreement to sell our Construction Claims Group, which is reported herein as discontinued operations. This transaction will permit us to better focus on our Project Management business. See Note 3 to our consolidated financial statements for a description of the transaction.

        Our revenue consists of two components: consulting fee revenue ("CFR") and reimbursable expenses. Reimbursable expenses are reflected in equal amounts in both total revenue and total direct expenses. Because these pass-through revenue/costs are subject to significant fluctuation from year to year, we measure the performance of many of our key operating metrics as a percentage of CFR, as we believe that this is a better and more consistent measure of operating performance than total revenue.

        Over the years, the amount of CFR attributable to operations in the Middle East and Africa has grown to approximately 52.0% of total consolidated CFR in 2016. There has been significant political upheaval and civil unrest in certain parts of this region, most notably in Libya and Iraq where we previously had substantial operations. In 2012, we reserved a $59,937,000 receivable from the Libyan Organization for Development of Administrative Centres ("ODAC"). Subsequently, we have received payments totaling approximately $9,511,000, but this situation with ODAC put a considerable strain on our liquidity. In 2016, we established reserves of $5,100,000 against accounts receivable from various projects in Iraq. As a result, we have had to rely heavily on debt and equity transactions to fund our operations.

        We have recently seen further slowing of collections from our clients in the Middle East, primarily in Oman. In 2012, we commenced operations on the Muscat International Airport (the "Oman Airport") project with the Ministry of Transport and Communications ("MOTC"). The original contract term was to expire in November 2014. In October 2014, we applied for a twelve-month extension of time ("first extension") (which was subsequently approved in March 2016) and we continued to work on the Oman Airport projects. The Company began to experience delays in payment during 2015. In December 2015, the Company began discussions with MOTC on a second extension of time amendment ("second extension") and has since commenced additional work. When MOTC resumed payments in 2016, the Company received approximately $42,000,000 during the year. At December 31, 2016, accounts receivable from Oman totaled approximately $27,132,000 and approximately $16,500,000 was past due based on contractual terms. We acknowledge that this client is a slow payer, however the MOTC intends to meet its obligations to us as Oman is a wealthy, stable and solvent country. In connection with the work performed there, our consolidated financial statements for the years ended December 31, 2016, 2015 and 2014 reflected the following (in thousands):

 
  2016   2015   2014  

Consulting fee revenue

  $ 34,245   $ 50,740   $ 62,585  

Accounts receivable, net

  $ 27,132 (1) $ 28,711   $ 11,571  

Collections received during the year

  $ 42,000   $ 29,958   $ 53,277  

(1)
We received payments of approximately $6,153,000 against this receivable in the first quarter of 2017.

        Going forward, we will continue to closely monitor this receivable as well as any other receivables where collections are not received in a timely manner. This may result in increases in the allowance for doubtful accounts which may have a significant negative impact on our financial position and results of operations.

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2016 Business Overview

Consolidated Results
(In thousands)

 
  Years Ended
December 31,
  Change  
 
  2016   2015   $   %  

Income Statement Data:

                         

Consulting fee revenue

  $ 434,147   $ 467,877     (33,730 )   (7.2 )%

Reimbursable expenses

    86,700     84,699     2,001     2.4 %

Total revenue

    520,847     552,576     (31,729 )   (5.7 )%

Cost of services

    272,243     288,845     (16,602 )   (5.7 )%

Reimbursable expenses

    86,700     84,699     2,001     2.4 %

Total direct expenses

    358,943     373,544     (14,601 )   (3.9 )%

Gross profit

    161,904     179,032     (17,128 )   (9.6 )%

Selling, general and administrative expenses

   
162,721
   
159,691
   
3,030
   
1.9

%

Equity in loss of affiliates

    37     237     (200 )      

Operating (loss) profit

    (854 )   19,104     (19,958 )   (104.5 )%

Interest and related financing fees, net

    694     2,026     (1,332 )   (65.7 )%

(Loss) earnings before income taxes

    (1,548 )   17,078     (18,626 )   (109.1 )%

Income tax expense

    6,068     6,465     (397 )   (6.1 )%

(Loss) earnings from continuing operations

    (7,616 )   10,613     (18,229 )   (171.8 )%

(Loss) from discontinued operations

    (11,076 )   (2,874 )   (8,202 )   285.4 %

Net (loss) earnings

    (18,692 )   7,739     (26,431 )   (341.5 )%

Less: net earnings—noncontrolling interests

    136     808     (672 )   (83.2 )%

Net (loss) earnings attributable to Hill International, Inc. 

  $ (18,828 ) $ 6,931     (25,759 )   (371.6 )%

        CFR decreased $33,730,000, or 7.2%, to $434,147,000 in 2016. The primary decrease in CFR occurred in the Middle East as economic conditions caused a decrease in project activity and a decrease in Oman as a major project began to wind down.

        Cost of services decreased $16,602,000, or 5.7%, to $272,243,000 in 2016 primarily due to decreases in the Middle East partially offset by increases in the United States.

        Gross profit decreased $17,128,000, or 9.6%, to $161,904,000 in 2016 due to lower margins, in both dollars and percentages, primarily in the Middle East.

        Selling, general and administrative ("SG&A") expenses increased $3,030,000, or 1.9%, primarily due to increased bad debt expense of $8,193,000, partially offset by a decrease in unapplied and indirect labor cost in Brazil and Spain.

        Operating loss was ($854,000) in 2016 compared to an operating profit of $19,104,000 in 2015. The decrease in operating profit was primarily due to the decrease in CFR and the increase in bad debt expense in the Middle East, partially offset by an increase in operating profit in the United States.

        Income tax expense was $6,068,000 for 2016 compared to $6,465,000 for 2015. The increase in expense results from increased pretax profits from foreign operations, the mix of tax rates in those jurisdictions and no offsetting tax benefits arising from the Company's U.S. net operating losses which management believes the Company will not be able to utilize.

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        Net loss attributable to Hill was ($18,828,000) in 2016 compared to net earnings of $6,931,000 in 2015. Diluted loss per common share was ($0.36) in 2016 based upon 51,724,000 diluted common shares outstanding compared to net earnings per diluted common share of $0.13 in 2015 based upon 51,311,000 diluted common shares outstanding. Diluted loss per common share from continuing operations in 2016 was ($0.15) compared to diluted earnings per share from continuing operations in 2015 of $0.19.

        Despite the drop in global oil prices and its negative impact on the construction industry, particularly in the Middle East, we remain optimistic about maintaining our current growth strategy to pursue new business development opportunities, continue to take advantage of organic growth opportunities, continue to pursue selective acquisitions and strengthen our professional resources. In addition, in the latter part of 2016, we initiated a review of our corporate and operational overhead cost structure. The areas that will be most affected will be overhead personnel and related benefits and expenses. We believe these efforts combined with the sale of the pending sale of the Construction Claims Group and deleveraging of our balance sheet should significantly improve profitability and shareholder value.

Critical Accounting Policies and Estimates

        Our consolidated financial statements contained in this Annual Report on Form 10-K were prepared in accordance with U.S. generally accepted accounting principles. While there are a number of accounting policies, methods and estimates that affect the consolidated financial statements as described in Note 4 to the consolidated financial statements, areas that are particularly significant are discussed below. We believe our assumptions are reasonable and appropriate, however actual results may be materially different than estimated.

    Revenue Recognition

        We generate revenue primarily from providing professional services to our clients. Revenue is generally recognized upon the performance of services. In providing these services, we may incur reimbursable expenses, which consist of amounts paid to subcontractors and other third parties as well as travel and other job related expenses that are contractually reimbursable from clients. We will include reimbursable expenses in computing and reporting our total contract revenue as long as we remain responsible to the client for the fulfillment of the contract and for the overall acceptability of all services provided.

        We earn our revenue from cost-plus, fixed-price and time-and-materials contracts. If estimated total costs on any contract indicate a loss, we charge 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 other effects are recorded in the accounting period in which the events indicating a loss are known and the loss can be reasonably estimated. Such revisions could occur at any time and the effects may be material. The majority of our contracts are for work where we bill the client monthly at hourly billing rates. The hourly billing rates are determined by contract terms. For governmental clients, the hourly rates are generally calculated as either (i) a negotiated multiplier of our direct labor costs or (ii) as direct labor costs plus overhead costs plus a negotiated profit percentage. For commercial clients, the hourly rates are generally taken from a standard fee schedule by staff classification or they can be at a negotiated discount from this schedule. In some cases, primarily for foreign work, a fixed monthly staff rate is negotiated rather than an hourly rate. This monthly rate is determined based upon a buildup of direct labor costs plus overhead and profit. We account for these contracts on a time-and-expenses method, recognizing revenue as costs are incurred.

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        We account for fixed-price contracts on the "percentage-of-completion" method, wherein revenue is recognized as costs are incurred. Under the percentage-of-completion method for revenue recognition, we estimate the progress towards completion to determine the amount of revenue and profit to be recognized. We generally utilize a cost-to-cost approach in applying the percentage-of-completion method, where revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred.

        Under the percentage-of-completion method, recognition of profit is dependent upon the accuracy of estimates. We have a history of making reasonably dependable estimates of contract revenue, the extent of progress towards completion and contract completion costs on our long-term construction management contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.

    Allowance for Doubtful Accounts

        We make ongoing estimates relating to the collectability of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our clients to make required payments. Estimates used in determining accounts receivable allowances are based on our evaluation of specific client accounts and contracts involved and the financial condition of our clients. The factors we consider in our evaluations include, but are not limited to, client type (U.S. federal and other national governments, state and local governments or private sector), historical contract performance, historical collection and delinquency trends, client credit worthiness, and general economic and political conditions. At December 31, 2016 and 2015, the allowance for doubtful accounts was $71,081,700 and $60,535,000, respectively.

    Goodwill and Acquired Intangible Assets

        Goodwill is tested annually for impairment in our third fiscal quarter or more frequently if events or circumstances indicate that there may be impairment. We have determined that, with the pending sale of our Construction Claims Group, we now operate one reporting unit, the Project Management unit. We made that determination based on the similarity of the services provided, the methodologies in delivering our services and the similarity of the client base. To determine the fair value of our reporting unit, we use the market approach and the income approach, weighting the results of each approach.

        Under the market approach, we determine fair value using the public company method and the quoted price method. We utilized a control premium of 30% to arrive at the preliminary fair value, and we applied a weighting of 20% to the preliminary fair value determined by using the public company method. The quoted price method is based upon the market value of the transactions of minority interests in the publicly-traded shares of the Company. We utilized a control premium of 30% to arrive at the preliminary fair value, and we applied a weighting of 50% to the preliminary fair value determined using the quoted price method.

        Our calculation under the income approach utilizes our internal forecasts. In the income approach (that is, the discounted cash flow method), the projected cash flows reflect the cash flows subsequent to the sale of the reporting unit pursuant to the guidance in ASC 350 and ASC 820. Consistent with applicable literature, we include in projected cash flows any expected improvements in cash flows or other changes that, in our view, a market participant would consider and be willing to pay for (but we exclude any buyer- or entity-specific synergies). The projections are developed by us and are based upon cash flows that maximize reporting unit value by taking into account improvements that controlling-interest holders can make, but minority interest holders cannot make. These improvements include: increasing revenues, reducing operating costs, or reducing non-operating costs such as taxes. The owners of the enterprise may also increase enterprise value by reducing risk; for example, by

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diversifying the business, improving access to capital, increasing the certainty of cash flows, or optimizing the capital structure.

        We considered the factors listed above when developing the cash flows to support the income approach. Recognizing that due to elements of control incorporated into our reporting unit's forecast, we applied no control premium to our conclusion of value indicated by the discounted cash flows. In determining fair value, we applied a weighting of 30% to the preliminary fair value determined using the income approach.

        With regard to weighting the conclusions rendered by the approaches utilized, we believe that the quoted price method provides the most reliable indication of value (that is, a Level 1 input); therefore, we placed the greatest emphasis upon this method assigning a 50% weighting. We also determined that the value using the discounted cash flow method (to which we assigned a 30% weighting) provided a more reliable indication of value than the public company method (to which we assigned a 20% weighting) with the relative levels of reliability contributing to the weighting accorded to each approach.

        Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth, the period over which cash flows will occur, and determination of the weighted average cost of capital, among other things. Based on the valuation as of July 1, 2016, the fair value of the Project Management unit substantially exceeded its carrying value. Changes in these estimates and assumptions could materially affect our determination of fair value and/or goodwill impairment. Changes in future market conditions, our business strategy, or other factors could impact upon the future value of our Project Management operations, which could result in future impairment charges.

        At the time of the annual impairment test, the Construction Claims unit was still part of our continuing operations. Based on the valuation as of July 1, 2016, which utilized the same processes noted above, the fair value of the Construction Claims unit substantially exceeded its carrying value.

        We amortize acquired intangible assets over their estimated useful lives and review the long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset's residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate.

    Income Taxes

        We make judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings. These judgments and interpretations affect the provision for income taxes, deferred tax assets and liabilities and the valuation allowance. We evaluate the deferred tax assets to determine on the basis of objective factors whether the net assets will be realized through future years' taxable income. In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required.

        We will recognize 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" (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. 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.

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    Stock Options

        We recognize compensation expense for all stock-based awards. These awards have included awards of common stock, deferred stock units and stock options. While fair value may be readily determinable for awards of stock and deferred stock units, market quotes are not available for long-term, nontransferable stock options because these instruments are not traded. We currently use the Black-Scholes option pricing model to estimate the fair value of options. Option valuation models require the input of highly subjective assumptions, including but not limited to stock price volatility, expected life and stock option exercise behavior.

    Contingencies

        Estimates are inherent in the assessment of our exposure to insurance claims that fall below policy deductibles and to litigation and other legal claims and contingencies, as well as in determining our liabilities for incurred but not reported insurance claims. Significant judgments by us and reliance on third-party experts are utilized in determining probable and/or reasonably estimable amounts to be recorded or disclosed in our financial statements. The results of any changes in accounting estimates are reflected in the financial statements of the period in which the changes are determined. We do not believe that material changes to these estimates are reasonably likely to occur.

Results of Operations

Year Ended December 31, 2016 Compared to
Year Ended December 31, 2015

Consulting Fee Revenue ("CFR") (dollars in thousands)

 
  2016   2015   Change  

United States

  $ 137,528     31.7 % $ 122,423     26.2 % $ 15,105     12.3 %

Latin America

    18,708     4.3     26,304     5.6     (7,596 )   (28.9 )

Europe

    38,455     8.8     39,519     8.4     (1,064 )   (2.7 )

Middle East

    204,780     47.2     245,985     52.6     (41,205 )   (16.8 )

Africa

    20,815     4.8     20,461     4.4     354     1.7  

Asia/Pacific

    13,861     3.2     13,185     2.8     676     5.1  

Total

  $ 434,147     100.0 % $ 467,877     100.0 % $ (33,730 )   (7.2 )%

        The primary decrease in CFR occurred in the Middle East with decreases of $15,493,000 in the United Arab Emirates and $5,565,000 in Saudi Arabia as economic conditions caused a decrease in funding for projects and a decrease of $14,962,000 in Oman with the beginning of a wind down of a major project. The increase in CFR in the United States occurred throughout all regions. In Latin America, the decrease was primarily in Brazil where CFR decreased by $6,774,000 as the economic conditions in the region continue to reduce available work. In Europe, decreases in Romania, Azerbaijan and Luxembourg were partially offset by increases in Turkey, Germany, Serbia and Poland. In Africa, CFR was up slightly where increases in Algeria and Morocco were partially offset by a decrease in Egypt. The increase in Asia/Pacific occurred primarily in India.

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Reimbursable Expenses (dollars in thousands)

 
  2016   2015   Change  

United States

  $ 66,508     76.7 %   64,976     76.7 % $ 1,532     2.4 %

Latin America

    66     0.1     47     0.1     19     40.4  

Europe

    2,787     3.2     3,394     4.0     (607 )   (17.9 )

Middle East

    13,095     15.1     9,912     11.7     3,183     32.1  

Africa

    3,222     3.7     3,474     4.1     (252 )   (7.3 )

Asia/Pacific

    1,022     1.2     2,896     3.4     (1,874 )   (64.7 )

Total

  $ 86,700     100.0 % $ 84,699     100.0 % $ 2,001     2.4 %

        Reimbursable expenses consist of amounts paid to subcontractors and other third parties, and travel and other job-related expenses that are contractually reimbursable from clients. These items are reflected as separate line items in both our revenue and cost of services captions in our consolidated statements of operations. The increase in reimbursable expenses is primarily due to increased use of subcontractors in our Mid-Atlantic region and Qatar.

Cost of Services (dollars in thousands)

 
  2016   2015   Change  
 
   
   
  % of
CFR
   
   
  % of
CFR
   
   
 

United States

  $ 77,065     28.3 %   56.0 % $ 67,060     23.2 %   54.8 % $ 10,005     14.9 %

Latin America

    11,405     4.2     61.0     15,230     5.3     57.9     (3,825 )   (25.1 )

Europe

    24,809     9.1     64.5     25,578     8.9     64.7     (769 )   (3.0 )

Middle East

    140,438     51.6     68.6     161,464     55.9     65.6     (21,026 )   (13.0 )

Africa

    12,045     4.4     57.9     13,292     4.6     65.0     (1,247 )   (9.4 )

Asia/Pacific

    6,481     2.4     46.8     6,221     2.1     47.2     260     4.2  

Total

  $ 272,243     100.0 %   62.7 % $ 288,845     100.0 %   61.7 % $ (16,602 )   (5.7 )%

        Cost of services consists of labor expenses for time charged directly to contracts and non-reimbursable job-related travel and out-of-pocket expenses. The decrease in cost of services is primarily due to decreases in the Middle East direct labor due to lower CFR partially offset by increased direct labor in the United States supporting increased CFR.

Gross Profit (dollars in thousands)

 
  2016   2015   Change  
 
   
   
  % of
CFR
   
   
  % of
CFR
   
   
 

United States

  $ 60,463     37.3 %   44.0 % $ 55,363     30.9 %   45.2 % $ 5,100     9.2 %

Latin America

    7,303     4.5     39.0     11,074     6.2     42.1     (3,771 )   (34.1 )

Europe

    13,646     8.4     35.5     13,941     7.8     35.3     (295 )   (2.1 )

Middle East

    64,342     39.7     31.4     84,521     47.2     34.4     (20,179 )   (23.9 )

Africa

    8,770     5.4     42.1     7,169     4.0     35.0     1,601     22.3  

Asia/Pacific

    7,380     4.6     53.2     6,964     3.9     52.8     416     6.0  

Total

  $ 161,904     100.0 %   37.3 % $ 179,032     100.0 %   38.3 % $ (17,128 )   (9.6 )%

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        The decrease in gross profit included decreases in the Middle East and Latin America due to the decreases in CFR partially offset by increases in the United States. The overall gross profit percentage decreased due to lower margins primarily in the United Arab Emirates, Oman and Qatar.

Selling, General and Administrative ("SG&A") Expenses (dollars in thousands)

 
  2016   2015   Change  
 
   
   
  % of
CFR
   
   
  % of
CFR
   
   
 

United States

  $ 42,482     26.1 %   9.8 % $ 40,904     25.6 %   8.7 % $ 1,578     3.9 %

Latin America

    8,990     5.5     2.1     9,765     6.1     2.1     (775 )   (7.9 )

Europe

    18,292     11.2     4.2     20,253     12.7     4.3     (1,961 )   (9.7 )

Middle East

    44,233     27.2     10.2     40,729     25.5     8.7     3,504     8.6  

Africa

    6,807     4.2     1.6     6,347     4.0     1.4     460     7.2  

Asia/Pacific

    5,666     3.5     1.3     4,877     3.1     1.0     789     16.2  

Corporate Expenses

    36,251     22.3     8.3     36,816     23.1     7.9     (565 )   (1.5 )

Total

  $ 162,721     100.0 %   37.5 % $ 159,691     100.0 %   34.1 % $ 3,030     1.9 %

        The increase in selling, general and administrative expenses was primarily due to the following:

    A net increase of $8,193,000 in bad debt expense for increased reserves for certain accounts receivable due primarily to Middle East and Asia Pacific regions, partially offset by reduction in the United States; and

    A decrease of $4,969,000 in unapplied and indirect labor due primarily to reductions in staff in Brazil and Spain during 2015 and early 2016.

Operating Profit (Loss) (dollars in thousands)

 
  2016   2015    
   
 
 
   
  % of
CFR
   
  % of
CFR
  Change  

United States

  $ 17,981     13.1 % $ 14,459     11.8 % $ 3,522     24.4 %

Latin America

    (1,687 )   (9.0 )   1,309     5.0     (2,996 )   N.M  

Europe

    (4,646 )   (12.1 )   (6,312 )   (16.0 )   1,666     (26.4 )

Middle East

    20,109     9.8     43,792     17.8     (23,683 )   (54.1 )

Africa

    1,963     9.4     822     4.0     1,141     138.8  

Asia/Pacific

    1,677     12.1     1,850     14.0     (173 )   (9.4 )

Corporate

    (36,251 )   8.3     (36,816 )   7.9     565     (1.5 )

Total

  $ (854 )   (0.2 )% $ 19,104     4.1 % $ (19,958 )   (104.5 )%

        The decrease in operating profit was primarily due to the decrease in CFR and the increase in bad debt expense in the Middle East partially offset by an increase in the United States. Corporate expenses decreased by $565,000, but represented 8.3% of CFR in 2016 compared to 7.9% of CFR in 2015.

Interest and related financing fees, net

        Net interest and related financing fees decreased $1,332,000 to $694,000 in 2016 as compared with $2,026,000 in 2015. The decrease was primarily due to interest of $1,056,000 paid to a subcontractor as a result of a legal settlement in 2015.

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Income Taxes

        In 2016, income tax expense was $6,068,000 compared to $6,465,000 in 2015. The effective income tax expense rates for 2016 and 2015 were (392.0%) and 37.9%, respectively. The decrease in expense in 2016 compared to 2015 results from the mix of income and tax rates in various foreign jurisdictions. The difference in the Company's 2016 effective tax rate compared to the 2015 rate is primarily related to a significant decrease in the Company's foreign pretax earnings of approximately $24,000,000, primarily related to the Middle East operations without a significant related income tax benefit. In addition, the Company recognized an income tax expense of $689,000 in 2016 resulting from adjustments to agree the 2015 book amount to the actual amounts reported on the tax returns in foreign jurisdictions. In both years, the Company's effective tax rate is significantly higher than the U.S. federal statutory rate primarily as a result of increases caused by various foreign withholding taxes and the inability to record an income tax benefit related to the U.S. net operating loss.

        In 2015, several items materially affected the Company's effective tax rate. An income tax benefit of $205,000 resulted from adjustments to agree the 2014 book amount to the actual amounts reported on the tax returns in foreign jurisdictions. The benefit was offset by increased foreign withholding taxes.

Net (Loss) Earnings Attributable to Hill

        Net loss attributable to Hill International, Inc. for 2016 was ($18,828,000), or ($0.36) per diluted common share based on 51,724,000 diluted common shares outstanding, as compared to net earnings for 2015 of $6,931,000, or $0.13 per diluted common share based upon 51,311,000 diluted common shares outstanding. Net loss from continuing operations for 2016 was ($7,752,000), or ($0.15) per diluted share, compared to net earnings from continuing operations of $9,805,000, or $0.20 per diluted share, in 2015.


Year Ended December 31, 2015 Compared to
Year Ended December 31, 2014

Consulting Fee Revenue ("CFR") (dollars in thousands)

 
  2015   2014   Change  

United States

  $ 122,423     26.2 % $ 102,095     23.8 % $ 20,328     19.9 %

Latin America

    26,304     5.6     36,925     8.6     (10,621 )   (28.8 )

Europe

    39,519     8.4     34,943     8.2     4,576     13.1  

Middle East

    245,985     52.6     222,754     51.9     23,231     10.4  

Africa

    20,461     4.4     18,402     4.3     2,059     11.2  

Asia/Pacific

    13,185     2.8     13,708     3.2     (523 )   (3.8 )

Total

  $ 467,877     100.0 % $ 428,827     100.0 % $ 39,050     9.1 %

        The primary increases in CFR occurred in the Middle East and the United States. In the Middle East, there was an increase of $37,614,000 in the United Arab Emirates and $6,400,000 in Saudi Arabia where several new projects started partially offset by decreases of $13,883,000 in Iraq due to the cessation of projects caused by the political turmoil and $8,093,000 in Oman where a major project continued at a lower volume. The increase of $20,328,000 in CFR in the United States occurred throughout all regions. In Latin America, the decrease of $10,621,000 was primarily in Brazil where CFR decreased by $8,914,000 as the economic conditions continue to cause reduced work. In Europe, there were increases of $4,898,000 in Kazakhstan and $3,683,000 in Turkey due to the acquisition of IMS Proje Yonetimi ve Dansmanlik A.S. ("IMS") in April 2015. This was partially offset by decreases in Spain and Latvia. In Africa, CFR was up with increases in Egypt and Algeria partially offset by a decrease in Morocco. The decrease in Asia/Pacific occurred primarily in Afghanistan partially offset by an increase in India.

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Table of Contents

Reimbursable Expenses (dollars in thousands)

 
  2015   2014   Change  

United States

  $ 64,976     76.7 % $ 44,129     74.9 % $ 20,847     47.2 %

Latin America

    47     0.1     23         24     104.3  

Europe

    3,394     4.0     2,415     4.1     979     40.5  

Middle East

    9,912     11.7     8,124     13.8     1,788     22.0  

Africa

    3,474     4.1     3,255     5.5     219     6.7  

Asia/Pacific

    2,896     3.4     981     1.7     1,915     195.2  

Total

  $ 84,699     100.0 % $ 58,927     100.0 % $ 25,772     43.7 %

        Reimbursable expenses consist of amounts paid to subcontractors and other third parties, and travel and other job-related expenses that are contractually reimbursable from clients. These items are reflected as separate line items in both our total revenue and total direct expenses captions in our consolidated statements of operations. The increase in reimbursable expenses is primarily due to increased use of subcontractors throughout the United States, primarily in our Northeast and Mid-Atlantic regions.

Cost of Services (dollars in thousands)

 
  2015   2014   Change  
 
   
   
  % of
CFR
   
   
  % of
CFR
   
   
 

United States

  $ 67,060     23.2 %   54.8 % $ 56,474     21.4 %   55.3 % $ 10,586     18.7 %

Latin America

    15,230     5.3     57.9     22,444     8.5     60.8     (7,214 )   (32.1 )

Europe

    25,578     8.9     64.7     22,079     8.4     63.2     3,499     15.8  

Middle East

    161,464     55.9     65.6     145,210     55.0     65.2     16,254     11.2  

Africa

    13,292     4.6     65.0     11,300     4.3     61.4     1,992     17.6  

Asia/Pacific

    6,221     2.1     47.2     6,299     2.4     46.0     (78 )   (1.2 )

Total

  $ 288,845     100.0 %   61.7 % $ 263,806     100.0 %   61.5 % $ 25,039     9.5 %

        Cost of services consists of labor expenses for time charged directly to contracts and non-reimbursable job-related travel and out-of-pocket expenses. The increase in cost of services is primarily due to increases in direct labor in the Middle East and the United States due to higher CFR partially offset by decreased direct labor in Latin America due to decreased CFR.

Gross Profit (dollars in thousands)

 
  2015   2014   Change  
 
   
   
  % of
CFR
   
   
  % of
CFR
   
   
 

United States

  $ 55,363     30.9 %   45.2 % $ 45,621     27.6 %   44.7 % $ 9,742     21.4 %

Latin America

    11,074     6.2     42.1     14,481     8.8     39.2     (3,407 )   (23.5 )

Europe

    13,941     7.8     35.3     12,864     7.8     36.8     1,077     8.4  

Middle East

    84,521     47.2     34.4     77,544     47.0     34.8     6,977     9.0  

Africa

    7,169     4.0     35.0     7,102     4.3     38.6     67     0.9  

Asia/Pacific

    6,964     3.9     52.8     7,409     4.5     54.0     (445 )   (6.0 )

Total

  $ 179,032     100.0 %   38.3 % $ 165,021     100.0 %   38.5 % $ 14,011     8.5 %

        The increase in gross profit included increases in the United States and the Middle East due to increased CFR partially offset by a decrease in Latin America due to the decreases in CFR. The overall gross profit percentage remained relatively constant at 38.3% in 2015 compared to 38.5% in 2014.

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Selling, General and Administrative ("SG&A") Expenses (dollars in thousands)

 
  2015   2014   Change  
 
   
   
  % of
CFR
   
   
  % of
CFR
   
   
 

United States

  $ 40,904     25.6 %   8.7 % $ 38,197     26.9 %   8.9 % $ 2,707     7.1 %

Latin America

    9,765     6.1     2.1     13,063     9.2     3.0     (3,298 )   (25.2 )

Europe

    20,253     12.7     4.3     18,009     12.7     4.2     2,244     12.5  

Middle East

    40,729     25.5     8.7     35,176     24.8     8.2     5,553     15.8  

Africa

    6,347     4.0     1.4     2,286     1.6     0.5     4,061     177.6  

Asia/Pacific

    4,877     3.1     1.0     5,116     3.6     1.2     (239 )   (4.7 )

Corporate Expenses

    36,816     23.0     7.9     30,232     21.2     7.0     6,584     21.8  

  $ 159,691     100.0 %   34.1 % $ 142,079     100.0 %   33.1 % $ 17,612     12.4 %