Hill International, Inc.
Hill International, Inc. (Form: 10-Q, Received: 11/16/2015 10:13:19)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended September 30, 2015

 

or

 

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

 

For the transition period from                                          to                                        

 

Commission File Number: 001-33961

 

HILL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-0953973

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

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

 

19103

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   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 (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o

 

Accelerated Filer x

 

 

 

Non-Accelerated Filer o

 

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  x

 

There were 51,559,671 shares of the Registrant’s Common Stock outstanding at November 11, 2015.

 

 

 



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBDISIARIES

 

Index to Form 10 -Q

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

 

 

 

 

Consolidated Balance Sheets at September 30, 2015 (unaudited) and December 31, 2014

3

 

 

 

 

Consolidated Statements of Operations for the three months ended September 30, 2015 and 2014 (unaudited) and for the nine months ended September 30, 2015 and 2014 (Restated) (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Earnings for the three months ended September 30, 2015 and 2014 (unaudited) and for the nine months ended September 30, 2015 and 2014 (Restated) (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (Restated) (unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements (as amended and restated)

7

 

 

 

Item 2

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

27

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

Item 4

Controls and Procedures

41

 

 

 

Part II

OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

43

 

 

 

Item 1A

Risk Factors

43

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 3

Defaults Upon Senior Securities

43

 

 

 

Item 4

Mine Safety Disclosures

43

 

 

 

Item 5

Other Information

43

 

 

 

Item 6

Exhibits

43

 

 

 

Signatures

 

44

 



Table of Contents

 

PART I — FINANCIAL INFORMAT ION

 

Item 1.          Financial Statemen ts.

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEE TS

(In thousands, except per share data)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

23,901

 

$

30,124

 

Cash - restricted

 

4,191

 

8,851

 

Accounts receivable, less allowance for doubtful accounts of $59,282 and $60,801

 

236,824

 

195,098

 

Accounts receivable - affiliate

 

8,201

 

3,993

 

Prepaid expenses and other current assets

 

17,769

 

14,277

 

Income taxes receivable

 

3,891

 

4,246

 

Deferred income tax assets

 

6,668

 

6,575

 

Total current assets

 

301,445

 

263,164

 

Property and equipment, net

 

22,565

 

11,643

 

Cash - restricted, net of current portion

 

739

 

7,156

 

Retainage receivable

 

3,150

 

3,300

 

Acquired intangibles, net

 

16,081

 

19,282

 

Goodwill

 

75,212

 

80,437

 

Investments

 

3,804

 

5,083

 

Deferred income tax assets

 

12,496

 

13,645

 

Other assets

 

14,064

 

15,899

 

Total assets

 

$

449,556

 

$

419,609

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current maturities of notes payable

 

$

2,982

 

$

6,361

 

Accounts payable and accrued expenses

 

103,310

 

93,637

 

Income taxes payable

 

11,173

 

9,306

 

Deferred revenue

 

16,194

 

19,896

 

Deferred income taxes

 

2,326

 

2,456

 

Other current liabilities

 

13,733

 

10,044

 

Total current liabilities

 

149,718

 

141,700

 

Notes payable, net of current maturities

 

140,492

 

121,875

 

Retainage payable

 

2,916

 

2,448

 

Deferred income taxes

 

13,419

 

15,661

 

Deferred revenue

 

14,384

 

12,193

 

Other liabilities

 

10,946

 

3,732

 

Total liabilities

 

331,875

 

297,609

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.0001 par value; 1,000 shares authorized, none issued

 

 

 

Common stock, $.0001 par value; 100,000 shares authorized, 58,171 shares and 56,920 shares issued at September 30, 2015 and December 31, 2014, respectively

 

6

 

6

 

Additional paid-in capital

 

187,731

 

179,912

 

Retained earnings (deficit)

 

2,319

 

(5,726

)

Accumulated other comprehensive loss

 

(45,694

)

(32,600

)

 

 

144,362

 

141,592

 

Less treasury stock of 6,614 shares and 6,546 shares at September 30, 2015 and December 31, 2014, respectively, at cost

 

(28,665

)

(28,304

)

Hill International, Inc. share of equity

 

115,697

 

113,288

 

Noncontrolling interests

 

1,984

 

8,712

 

Total equity

 

117,681

 

122,000

 

Total liabilities and stockholders’ equity

 

$

449,556

 

$

419,609

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERA TIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

(Restated)

 

Consulting fee revenue

 

$

158,579

 

$

145,324

 

$

469,458

 

$

427,088

 

Reimbursable expenses

 

20,356

 

16,167

 

61,393

 

44,055

 

Total revenue

 

178,935

 

161,491

 

530,851

 

471,143

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

89,345

 

82,675

 

268,174

 

244,511

 

Reimbursable expenses

 

20,356

 

16,167

 

61,393

 

44,055

 

Total direct expenses

 

109,701

 

98,842

 

329,567

 

288,566

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

69,234

 

62,649

 

201,284

 

182,577

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

57,527

 

51,352

 

173,101

 

151,677

 

Equity in losses of affiliate

 

14

 

 

231

 

 

Operating profit

 

11,693

 

11,297

 

27,952

 

30,900

 

 

 

 

 

 

 

 

 

 

 

Interest expense and related financing fees, net

 

4,147

 

16,112

 

11,252

 

26,834

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income taxes

 

7,546

 

(4,815

)

16,700

 

4,066

 

Income tax expense

 

4,210

 

3,800

 

7,980

 

5,117

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

3,336

 

(8,615

)

8,720

 

(1,051

)

 

 

 

 

 

 

 

 

 

 

Less: net earnings - noncontrolling interests

 

388

 

351

 

675

 

1,089

 

 

 

 

 

 

 

 

 

 

 

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

 

$

2,948

 

$

(8,966

)

$

8,045

 

$

(2,140

)

 

 

 

 

 

 

 

 

 

 

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

 

$

0.06

 

$

(0.19

)

$

0.16

 

$

(0.05

)

Basic weighted average common shares outstanding

 

51,119

 

46,606

 

50,661

 

42,348

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.06

 

$

(0.19

)

$

0.16

 

$

(0.05

)

Diluted weighted average common shares outstanding

 

51,803

 

46,606

 

51,274

 

42,348

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LO SS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

(Restated)

 

Consolidated net earnings (loss)

 

$

3,336

 

$

(8,615

)

$

8,720

 

$

(1,051

)

Foreign currency translation adjustment, net of tax

 

(8,630

)

(2,759

)

(15,910

)

(210

)

Other, net

 

(78

)

(238

)

(213

)

184

 

Comprehensive loss

 

(5,372

)

(11,612

)

(7,403

)

(1,077

)

Comprehensive (loss) earnings attributable to noncontrolling interests

 

(2,992

)

(598

)

(6,728

)

327

 

Comprehensive loss attributable to Hill International, Inc.

 

$

(2,380

)

$

(11,014

)

$

(675

)

$

(1,404

)

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW S

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

(Restated)

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings (loss)

 

$

8,720

 

$

(1,051

)

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

8,286

 

7,276

 

Provision for bad debts

 

2,540

 

1,501

 

Interest accretion on term loan

 

 

15,526

 

Deferred tax expense

 

(1,585

)

(2,623

)

Share based compensation

 

2,360

 

2,712

 

Changes in operating assets and liabilities, net:

 

 

 

 

 

Restricted cash

 

10,658

 

3,716

 

Accounts receivable

 

(57,690

)

(15,779

)

Accounts receivable - affiliate

 

(2,830

)

(1,648

)

Prepaid expenses and other current assets

 

(4,556

)

2,381

 

Income taxes receivable

 

25

 

589

 

Retainage receivable

 

150

 

(1,132

)

Other assets

 

2,342

 

1,065

 

Accounts payable and accrued expenses

 

15,194

 

(3,524

)

Income taxes payable

 

1,455

 

(2,603

)

Deferred revenue

 

589

 

(7,610

)

Other current liabilities

 

7,398

 

(2,711

)

Retainage payable

 

474

 

1,166

 

Other liabilities

 

2,878

 

(3,599

)

Net cash used in operating activities

 

(3,592

)

(6,348

)

Cash flows from investing activities:

 

 

 

 

 

Purchase of business, net of cash acquired

 

(4,384

)

(2,393

)

Payments for purchase of property and equipment

 

(11,447

)

 

Net cash used in investing activities

 

(15,831

)

(2,393

)

Cash flows from financing activities:

 

 

 

 

 

Due to bank

 

 

(2

)

Net borrowings on revolving loans

 

14,252

 

(14,793

)

Proceeds from Philadelphia Industrial Development Corporation loan

 

750

 

 

Payments on Philadelphia Industrial Development Corporation loan

 

(27

)

 

Net proceeds from secondary public offering of common stock

 

 

38,078

 

Net proceeds from new term loan and revolving credit facilities

 

 

120,000

 

Pay off and termination of term loan

 

 

(100,000

)

Pay off and termination of revolving credit facility

 

 

(25,500

)

Payment of financing fees

 

 

(9,484

)

Dividends paid to noncontrolling interest

 

(130

)

(173

)

Proceeds from stock issued under employee stock purchase plan

 

57

 

158

 

Proceeds from exercise of stock options

 

137

 

1,032

 

Net cash provided by financing activities

 

15,039

 

9,316

 

Effect of exchange rate changes on cash

 

(1,839

)

(2,431

)

Net increase (decrease) in cash and cash equivalents

 

(6,223

)

(1,856

)

Cash and cash equivalents — beginning of period

 

30,124

 

30,381

 

Cash and cash equivalents — end of period

 

$

23,901

 

$

28,525

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 — Restatement and Revision of Previously Reported Consolidated Financial Statements

 

Due to the civil and political unrest which commenced in Libya in February 2011, the Company suspended its operations in and demobilized substantially all of its personnel from Libya. At December 31, 2012, the Libya Receivable was approximately $59,937,000, however, because of the political instability and economic uncertainty within Libya and because a promised payment of $31,600,000 in 2011 never materialized, the Company determined that its previous accounting treatment for the Libya Receivable was no longer appropriate as of and for the year ended December 31, 2012.  The Company has established a reserve against the entire Libya Receivable amounting to $59,937,000 and eliminated $11,388,000 of certain assets and net liabilities related to that receivable, consisting of sub-consultants and other contingent expenses in 2012, which are contractually owed only upon receipt of payment. These adjustments resulted in a net charge to selling, general and administrative expenses of $48,549,000 for the year ended December 31, 2012. We received approximately $2,880,000 and $6,631,000 in 2013 and 2014, respectively and have paid agency fees and certain taxes amounting to $640,000 and $1,638,000 in 2013 and 2014, respectively. We have accounted for these transactions as a net reduction of selling, general and administrative expenses of $2,240,000 and $4,948,000 in 2013 and 2014, respectively. In addition the Company recorded certain unrelated adjustments to consulting fee revenue, cost of services, selling, general and administrative expenses and income taxes for the year ended December 31, 2014 which also affected the three-month period ended March 31, 2015. In the aggregate, these unrelated adjustments decreased the net earnings by approximately $307,000 for the nine months ended September 30, 2015.  These unrelated adjustments were the direct result of the restatement because previous immaterial variances in certain accounts that were not recorded during the December 31, 2014 year end closing process became material when aggregated and assessed against the restated 2014 financial statements. The impact of correcting the misstatement on the Company’s consolidated statements of earnings, comprehensive (loss) earnings and cash flows for the period ended September 30, 2014 is as follows:

 

 

 

Nine Months Ended September 30, 2014

 

 

 

As Previously
Reported

 

Adjustment

 

As Restated

 

Consolidated Statement of Operations

 

 

 

 

 

 

 

Consulting fee revenue

 

$

427,088

 

$

 

$

427,088

 

Reimbursable expenses

 

44,055

 

 

44,055

 

Total revenue

 

471,143

 

 

471,143

 

Cost of Services

 

244,511

 

 

244,511

 

Reimbursable expenses

 

44,055

 

 

44,055

 

Total direct costs

 

288,566

 

 

288,566

 

Gross profit

 

182,577

 

 

182,577

 

Selling, general and administrative expenses

 

156,625

 

(4,948

)

151,677

 

Operating profit

 

25,952

 

4,948

 

30,900

 

Interest and related financing fees, net

 

26,834

 

 

26,834

 

Earnings (loss) before income taxes

 

(882

)

4,948

 

4,066

 

Income tax expense

 

5,424

 

(307

)

5,117

 

Net loss

 

(6,306

)

5,255

 

(1,051

)

Less: net earnings - noncontrolling interests

 

1,089

 

 

1,089

 

Net loss attributable to Hill International, Inc.

 

$

(7,395

)

$

5,255

 

$

(2,140

)

 

 

 

 

 

 

 

 

Basic loss per common share - Hill International, Inc.

 

$

(0.17

)

$

0.12

 

$

(0.05

)

 

 

 

 

 

 

 

 

Diluted loss per common share _ Hill International, Inc.

 

$

(0.17

)

$

0.12

 

$

(0.05

)

 

7



Table of Contents

 

 

 

Nine Months Ended September 30, 2014

 

Consolidated Statement of Comprehensive Loss

 

 

 

 

 

 

 

Net loss

 

$

(6,306

)

$

5,255

 

$

(1,051

)

Foreign currency translation adjustment, net

 

(1,651

)

1,441

 

(210

)

Other, net

 

184

 

 

184

 

Comprehensive loss

 

(7,773

)

6,696

 

(1,077

)

Comprehensive loss attributable to noncontrolling interests

 

327

 

 

327

 

Comprehensive loss attributable to Hill International, Inc.

 

$

(8,100

)

$

6,696

 

$

(1,404

)

 

 

 

Nine Months Ended September 30, 2014

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

Net Loss

 

$

(6,306

)

$

5,255

 

$

(1,051

)

Depreciation and amortization

 

7,276

 

 

7,276

 

Provision for bad debts

 

1,501

 

 

1,501

 

Interest accretion on term loan

 

15,526

 

 

15,526

 

Deferred tax expense

 

(2,316

)

(307

)

(2,623

)

Share based compensation

 

2,712

 

 

2,712

 

Restricted cash

 

3,716

 

 

3,716

 

Accounts receivable

 

(9,148

)

(6,631

)

(15,779

)

Accounts receivable - affiliate

 

(1,648

)

 

(1,648

)

Prepaid expenses and other current assets

 

2,381

 

 

2,381

 

Income taxes receivable

 

589

 

 

589

 

Retainage receivable

 

(1,132

)

 

(1,132

)

Other assets

 

1,065

 

 

1,065

 

Accounts payable and accrued expenses

 

(5,207

)

1,683

 

(3,524

)

Income taxes payable

 

(2,603

)

 

(2,603

)

Deferred revenue

 

(7,610

)

 

(7,610

)

Other current liabilities

 

(2,711

)

 

(2,711

)

Retainage payable

 

1,166

 

 

1,166

 

Other liabilities

 

(3,599

)

 

(3,599

)

Net cash used in operations

 

(6,348

)

 

(6,348

)

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Net cash used in investing activities

 

(2,393

)

 

(2,393

)

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Net cash provided by financing activities

 

9,316

 

 

9,316

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(2,431

)

 

(2,431

)

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(1,856

)

 

(1,856

)

Cash and cash equivalents - beginning of period

 

30,381

 

 

30,381

 

Cash and cash equivalents - end of period

 

$

28,525

 

$

 

$

28,525

 

 

8



Table of Contents

 

Note 2 - The Company

 

Hill International, Inc. (“Hill” or the “Company”) is a professional services firm that provides program management, project management, construction management, construction claims and other consulting services primarily to the buildings, transportation, environmental, energy and industrial markets worldwide.  Hill’s clients include the U.S. federal government, U.S. state and local governments, foreign governments and the private sector.  The Company is organized into two key operating divisions: the Project Management Group and the Construction Claims Group.

 

Note 3 — Basis of Presentation and Significant Accounting Policy

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2014.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.  In the opinion of management, these statements include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the consolidated financial statements.  The consolidated financial statements include the accounts of Hill and its wholly- and majority-owned subsidiaries.  All intercompany balances and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The interim operating results are not necessarily indicative of the results for a full year.

 

Fair Value Measurements

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it would transact, and the Company considers assumptions that market participants would use when pricing the asset or liability. It measures certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.

 

Nonfinancial assets and liabilities include items such as goodwill and long lived assets that are measured at fair value resulting from impairment, if deemed necessary.  During the nine months ended September 30, 2015 and 2014, the Company did not record any fair value adjustments to those financial and nonfinancial assets and liabilities measured at fair value on a recurring or nonrecurring basis.

 

Note 4 — Acquisitions

 

Our recent acquisition activity is detailed below. The Company’s consolidated financial statements include the operating results of these businesses from their respective dates of acquisition. Pro forma results of operations have not been presented because they are not material to the Company’s consolidated results of operations, either individually or in the aggregate.

 

Engineering S.A. (“ESA”)

 

In April 2015, two shareholders who owned approximately 19% of ESA exercised their ESA Put Options claiming an aggregate value of BRL 10,645,000 (approximately $3,416,000 at September 30, 2015).  As an incentive to the sellers to receive Hill’s common stock as payment, the Company offered the sellers a 25% premium.  The sellers countered the Company’s offer by requesting payment in common stock at the U.S. dollar value on April 4, 2015 (approximately $4,374,000) as well as a price guarantee upon the sale of the stock during a 30-day period after closing.  The Company agreed to the counter offer and paid the liability with 924,736 shares of its common stock in August 2015.  On October 6, 2015, the sellers offered 129,648 shares of Hill’s common stock to the Company for a price of approximately $580,000.  The Company agreed to acquire the shares which will be placed in treasury.  Settlement is expected to occur in late November 2015.  The Company now owns approximately 91% of ESA.

 

IMS Proje Yonetimi ve Danismanlik A.S.

 

On April 15, 2015, the Company acquired all of the equity interests of IMS Proje Yonetimi ve Danismanlik A.S. (“IMS”), a firm that provides project management services for international developers, institutional investors and major retailers.  IMS had approximately 80 professionals and is headquartered in Istanbul, Turkey.  Consideration consisted of an Initial Purchase Price of 12,411,000 Turkish Lira (“TRY”) (approximately $4,640,000 as of the closing date) comprised of TRY 4,139,000 (approximately $1,547,000) paid in cash on the closing date plus a second payment of TRY 8,272,000 (approximately $3,145,000) which was paid on May 12, 2015; a Holdback Purchase Price of TRY 4,400,000 (approximately $1,626,000) payable in cash on April 15, 2016, less any set off related to certain indemnification obligations; and a potential Additional Purchase Price of (i) TRY 1,700,000 (approximately $628,000) if earnings before

 

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interest, income taxes, depreciation and amortization for the twelve month period subsequent to the closing date (“EBITDA”) exceeds TRY 3,500,000 (approximately $1,294,000) or (ii) TRY 1,500,000 ($554,000) if EBITDA is less than TRY 3,500,000 but not less than TRY 3,200,000 ($1,183000).  The Company accrued the Holdback Purchase Price and the potential Additional Purchase Price of TRY 6,100,000 ($2,255,000), of which TRY 4,400,000 ($1,627,000) is included in other current liabilities and TRY 1,700,000 ($628,000) is included in other liabilities in the consolidated balance sheet at September 30, 2015.  The Company acquired intangible assets and goodwill amounting to TRY 10,575,000 (approximately $3,953,000 on the date of acquisition) and TRY 9,421,000 (approximately $3,522,000), respectively.  The acquired intangible assets have a weighted average life of seven years.  The acquired intangible assets consist of a client relationship intangible of TRY 6,235,000 ($2,331,000) with a ten-year life, a trade name intangible of TRY 434,000 ($162,000) with a two-year life and a contract intangible of TRY 3,906,000 ($1,460,000) with a 2.6 year life.  Goodwill, which is not deductible for income tax purposes, has been allocated to the Project Management operating segment.

 

Angus Octan Scotland Ltd.

 

On October 31, 2014, our subsidiary Hill International (UK) Ltd. acquired all of the outstanding common stock of Angus Octan Scotland Ltd., which included its subsidiary companies Cadogan Consultants Ltd., Cadogan Consult Ltd. and Cadogan International Ltd. (collectively, “Cadogans”).  Cadogans, which had 27 professionals, has offices in Glasgow and Dundee.  The acquisition expanded Hill’s construction claims business and provided additional resources in the energy and industrial sectors.  Total consideration for the acquisition was £2,719,000 (approximately $4,350,000 at the date of acquisition).  The consideration consists of cash payments of £1,000,000 ($1,600,000) at closing, £600,000 ($960,000) on November 25, 2014,  £400,000 ($640,000) on December 23, 2014, £519,000 ($830,000) to be paid on October 31, 2015 and an earn-out based upon the average earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the two-year period ending on October 31, 2016 (which amount shall not be less than £0 nor more than £200,000).  The Company accrued the potential additional consideration of £719,000 ($1,090,000), of which £519,000 (approximately $787,000 at September 30, 2015) is included in other current liabilities and £200,000 (approximately $303,000 at September 30, 2015) is included in other liabilities in the consolidated balance sheet at September 30, 2015.  Two of the selling shareholders may receive an earn-out in five annual installments of up to £100,000 ($152,000 at September 30, 2015), which will be charged to earnings, provided that Cadogans’ EBITDA for each of the years ending October 31, 2015, 2016, 2017, 2018 and 2019 is equal to or greater than £396,000 ($600,000).

 

Note 5 — Accounts Receivable

 

The components of accounts receivable are as follows (in thousands):

 

 

 

September 30, 2015

 

December 31, 2014

 

Billed

 

$

240,589

 

$

210,460

 

Retainage, current portion

 

14,802

 

12,700

 

Unbilled

 

40,715

 

32,739

 

 

 

296,106

 

255,899

 

Allowance for doubtful accounts

 

(59,282

)

(60,801

)

 

 

$

236,824

 

$

195,098

 

 

Libya Receivable

 

The Company has open but inactive contracts with the Libyan Organization for the Development of Administrative Centres (“ODAC”).  Due to the civil unrest which commenced in Libya in February 2011, the Company suspended its operations in and demobilized substantially all of its personnel from Libya.  At December 31, 2012, the balance of the Libya Receivable was approximately $59,937,000.  Because of the continuing political instability in Libya, the Company established a reserve for the full amount of the receivable at December 31, 2012.  During 2013, the Company received payments on the Libya Receivable of approximately $2,880,000. In the first quarter of 2014, the Company received an additional payment of approximately $6,631,000 against the Libya Receivable which has been reflected as a reduction of selling, general and administrative (“SG&A”) expenses for the nine-months ended September 30, 2014.  At September 30, 2015, after a decrease of approximately $1,151,000 due to the effect of foreign exchange translation losses, the Libya

 

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Receivable was approximately $49,275,000 which continues to be fully reserved.  It is management’s intention to continue to pursue collection of monies owed to the Company by ODAC and, if subsequent payments are received, the Company will reflect such receipts, net of any third party obligations related to the collections, as reductions of SG&A expenses.

 

Note 6 — Intangible Assets

 

The following table summarizes the Company’s acquired intangible assets (in thousands):

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

 

 

 

 

 

 

 

Client relationships

 

$

34,966

 

$

21,906

 

$

36,412

 

$

20,758

 

Acquired contract rights

 

12,370

 

10,912

 

11,387

 

9,717

 

Trade names

 

2,735

 

1,172

 

3,023

 

1,065

 

Total

 

$

50,071

 

$

33,990

 

$

50,822

 

$

31,540

 

Intangible assets, net

 

$

16,081

 

 

 

$

19,282

 

 

 

 

Amortization expense related to intangible assets was as follows (in thousands):

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2015 

 

2014 

 

2015 

 

2014 

 

$

1,578 

 

$

1,518 

 

$

4,609 

 

$

4,650 

 

 

The following table presents the estimated amortization expense based on our present intangible assets for the next five years (in thousands):

 

 

 

Estimated

 

 

 

Amortization

 

Year Ending December 31,

 

Expense

 

 

 

 

 

2015 (remaining 3 months)

 

$

1,455 

 

2016 

 

4,339 

 

2017 

 

3,055 

 

2018 

 

1,953 

 

2019 

 

1,679 

 

 

Note 7 — Goodwill

 

The Company performs its annual goodwill impairment testing, by reporting unit, in the third quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. 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 for the businesses, the useful life over which cash flows will occur, and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company performed its annual impairment test effective July 1, 2015. Based on a preliminary valuation, the fair value of the Project Management unit and the Construction Claims unit significantly exceeded their carrying.

 

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The following table summarizes the changes in the Company’s carrying value of goodwill during 2015 (in thousands):

 

 

 

Project

 

Construction

 

 

 

 

 

Management

 

Claims

 

Total

 

Balance, December 31, 2014

 

$

53,669

 

$

26,768

 

$

80,437

 

Additions

 

3,783

 

 

3,783

 

Translation adjustments

 

(7,657

)

(1,351

)

(9,008

)

Balance, September 30, 2015

 

$

49,795

 

$

25,417

 

$

75,212

 

 

Note 8 — Accounts Payable and Accrued Expenses

 

Below are the components of accounts payable and accrued expenses (in thousands):

 

 

 

September 30, 2015

 

December 31, 2014

 

Accounts payable

 

$

33,640

 

$

32,701

 

Accrued payroll

 

47,450

 

41,205

 

Accrued subcontractor fees

 

7,642

 

3,930

 

Accrued agency fees

 

5,875

 

6,920

 

Accrued legal and professional fees

 

2,934

 

1,099

 

Other accrued expenses

 

5,769

 

7,782

 

 

 

$

103,310

 

$

93,637

 

 

Note 9 — Notes Payable and Long-Term Debt

 

Outstanding debt obligations are as follows (in thousands):

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Term Loan Facility

 

$

118,800

 

$

119,700

 

Domestic Revolving Credit Facility

 

8,500

 

200

 

International Revolving Credit Facility

 

10,466

 

2,554

 

Borrowings under revolving credit facilities with a consortium of banks in Spain

 

4,621

 

5,037

 

Borrowing under unsecured credit facility with Ibercaja Bank in Spain

 

197

 

745

 

Borrowing from Philadelphia Industrial Development Corporation

 

723

 

 

Other notes payable

 

167

 

 

 

 

143,474

 

128,236

 

Less current maturities

 

2,982

 

6,361

 

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

 

$

140,492

 

$

121,875

 

 

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Refinancing

 

Effective as of September 26, 2014 (the “Closing Date”), the Company, entered into a credit agreement with Société Générale, as administrative agent (the “Agent”) and collateral agent, TD Bank, N.A., as syndication agent and HSBC Bank USA, N.A., as documentation agent, (collectively, the “U.S. Lenders”) consisting of a term loan facility of $120,000,000 (the “Term Loan Facility”) and a $30,000,000 U.S. dollar-denominated facility available to the Company (the “U.S. Revolver,” together with the Term Loan Facility, the “U.S. Credit Facilities”) and a credit agreement with the Agent, as administrative agent and collateral agent, (the “International Lender”) providing a facility of approximately €11,765,000 ($15,000,000 at the closing date and $13,240,000 at September 30, 2015) which is available to the Subsidiary (the “International Revolver” and together with the U.S. Revolver, the “Revolving Credit Facilities” and, together with the U.S. Credit Facilities, the “Secured Credit Facilities”).  The U.S. Revolver and the International Revolver include sub-limits for letters of credit amounting to $25,000,000 and €8,000,000, respectively.

 

The Secured Credit Facilities contain customary default provisions, representations and warranties, and affirmative and negative covenants, and require the Company to comply with certain financial and reporting covenants (see Note 19).  The financial covenants consist of a Maximum Consolidated Net Leverage Ratio and an Excess Account Concentration requirement.  The Consolidated Net Leverage Ratio is the ratio of (a) consolidated total debt (minus cash of up to $10,000,000 held in the aggregate) to consolidated earnings before interest, taxes, depreciation, amortization and share-based compensation for the trailing twelve months.  The Excess Account Concentration covenant  permits the U.S. Lenders and the International Lender to increase the interest rates by 2.0% if, as of the last day of any fiscal quarter, either (a) the total of accounts receivable from all clients within any country not listed as a Permitted Country as defined in the Secured Credit Facilities (other than the United Arab Emirates) that are more than 120 days old (relative to the invoice date) constitute more than 10% of the total outstanding accounts receivable or (b) accounts receivable from any individual client located in the United Arab Emirates that are more than 120 days old (relative to the invoice date) constitute more than 14% of the total outstanding accounts receivable; provided that, in each case, the accounts receivable due from clients located in Libya that exist as of the Closing Date shall be excluded for all purposes of this covenant. The interest rate will be reset as soon as the accounts receivable over 120 days decline below the 10% or 14% levels.  At September 30, 2015, non-permitted accounts receivable did not exceed the limits set forth above.

 

The following compares the Maximum Consolidated Net Leverage Ratio to the actual consolidated net leverage ratio at September 30, 2015:

 

Not to exceed

 

Actual

 

3.25 to 1.00

 

3.03 to 1.00

 

 

The U.S. Credit Facilities are guaranteed by certain U.S. subsidiaries of the Company, and the International Revolver is guaranteed by the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.

 

Term Loan Facility

 

The interest rate on the Term Loan Facility will be, at the Company’s option, either:

 

·                   the London Inter-Bank Offered Rate (“LIBOR”) for the relevant interest period plus 6.75% per annum, provided that such LIBOR shall not be lower than 1.00% per annum; or

·                   the Base Rate (as described below) plus 5.75% per annum.

 

The “Base Rate” is a per annum rate equal to the highest of (A) the prime rate, (B) the federal funds effective rate plus 0.50%, or (C) the LIBOR for an interest period of one month plus 1.0% per annum.  Upon a default, the applicable rate of interest under the Secured Credit Facilities may increase by 2.0%.  The LIBOR on the Term Loan Facilities (including when determining the Base Rate) shall in no event be less than 1.0% per annum.

 

The Company has the right to prepay the Term Loan Facility in full or in part at any time without premium or penalty.  The Company is required to make mandatory prepayments of the Term Loan Facility, without premium or penalty, (i) with net proceeds of any issuance or incurrence of indebtedness (other than that permitted under the Term Loan Facility)

 

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by the Company, (ii) with net proceeds from certain asset sales outside the ordinary course of business, and (iii) with 50% of the excess cash flow (as defined in the agreement) for each fiscal year of the Borrowers commencing with the year ending December 31, 2015 (which percentage would be reduced to 25% if the Consolidated Net Leverage Ratio is equal to or less than 2.25 to 1.00 or reduced to 0% if the Consolidated Net Leverage Ratio is equal to or less than 1.50 to 1.00).

 

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

 

The Term Loan Facility has a term of six years, requires repayment of 0.25% of the original principal amount on a quarterly basis through September 30, 2020, the maturity date.  Any amounts repaid on the Term Loan Facility will not be available to be re-borrowed.

 

The Company incurred fees and expenses related to the Term Loan Facility aggregating $7,066,000 which were deferred.   The deferred fees are being amortized on a straight-line basis, which approximates the effective interest method, to interest and related financing fees, net over a six-year period which ends on September 30, 2020.  Unamortized balances of $5,888,000 and $6,772,000 are included in other assets in the consolidated balance sheets at September 30, 2015 and December 31, 2014, respectively.

 

Revolving Credit Facilities

 

The interest rate on borrowings under the U.S. Revolver will be, at the Company’s option from time to time, either the LIBOR for the relevant interest period plus 3.75% per annum or the Base Rate plus 2.75% per annum.

 

The interest rate on borrowings under the International Revolver will be the European Inter-Bank Offered Rate, or “EURIBOR,” for the relevant interest period (or at a substitute rate to be determined to the extent EURIBOR is not available) plus 4.00% per annum.

 

The Company will pay a commitment fee calculated at 0.50% annually on the average daily unused portion of the U.S. Revolver, and the Subsidiary will pay a commitment fee calculated at 0.75% annually on the average daily unused portion of the International Revolver.

 

The ability to borrow under each of the U.S. Revolver and the International Revolver is subject to a “borrowing base,” calculated using a formula based upon approximately 85% of receivables that meet or satisfy certain criteria (“Eligible Receivables”) and that are subject to a perfected security interest held by either the U.S. Lenders or the International Lender, plus, in the case of the International Revolver only, 10% of Eligible Receivables that are not subject to a perfected security interest held by the International Lender, subject to certain exceptions and restrictions.

 

The Company or the Subsidiary, as applicable, will be required to make mandatory prepayments under their respective Revolving Credit Facilities to the extent that the aggregate outstanding amount thereunder exceeds the then-applicable borrowing base, which payments will be made without penalty or premium.  At September 30, 2015, the domestic borrowing base was $30,000,000 and the international borrowing base was €11,795,000 (approximately $13,240,000 at September 30, 2015).

 

Generally, the obligations of the Company under the U.S. Revolver are secured by a first-priority security interest in the above-referenced accounts receivable, cash proceeds and bank accounts of the Company and certain of the Company’s U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and such subsidiaries.  The obligations of the Subsidiary under the International Revolver would generally be secured by a first-priority security interest in substantially all accounts receivable, cash proceeds thereof and certain bank accounts of the Subsidiary and certain of the Company’s non-U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.

 

The Revolving Credit Facilities have a term of five years and require payment of interest only during the term.  Under the Revolving Credit Facilities, outstanding loans may be repaid in whole or in part at any time, without premium or penalty,

 

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subject to certain customary limitations, and will be available to be re-borrowed from time to time through expiration on September 30, 2019.

 

The Company incurred fees and expenses related to the Revolving Credit Facilities aggregating $3,000,000 which was deferred. The deferred fees are being amortized on a straight-line basis, which approximates the effective interest method, to interest expense and related financing fees, net over a five-year period which ends on September 30, 2019.  Unamortized balances of $2,400,000 and $2,850,000 are included in other assets in the consolidated balance sheet at September 30, 2015 and December 31, 2014, respectively.

 

At September 30, 2015, the Company had $9,286,000 of outstanding letters of credit and $12,214,000 of available borrowing capacity under the U.S. Revolver.

 

At September 30, 2015, the Company had $1,881,000 of outstanding letters of credit and $893,000 of available borrowing capacity under the International Revolver and its other foreign credit agreements (See “Other Debt Arrangements” below for more information).

 

Other Debt Arrangements

 

In connection with the move of its corporate headquarters to Philadelphia, Pennsylvania, the Company received a loan from the Philadelphia Industrial Development Corporation in the amount of $750,000 which bears interest at 2.75%, is repayable in 144 equal monthly installments of $6,121 and matures on May 1, 2027.

 

The Company’s subsidiary, Hill International (Spain) S.A. (“Hill Spain”), maintains a revolving credit facility with six banks (the “Financing Entities”) in Spain which initially provided for total borrowings of up to €5,340,000 with interest at 6.50% on outstanding borrowings. Total availability under this facility was reduced to 75.0% of the initial limit at December 31, 2014 and will be reduced to 50.0% at December 31, 2015.  At September 30, 2015, the total facility was approximately €4,005,000 (approximately $4,507,000) and borrowings outstanding were €3,986,000 (approximately $4,486,000).  The amount being financed (“Credit Contracts”) by each Financing Entity is between €284,000 (approximately $320,000) and €1,154,000 (approximately $1,299,000).  To guarantee Hill Spain’s obligations resulting from the Credit Contracts, Hill Spain provided a guarantee in favor of each one of the Financing Entities, which, additionally, and solely in the case of unremedied failure to make payment, and at the request of each of the Financing Entities, shall grant a first ranking pledge over a given percentage of corporate shares of Hill International Brasil Participacoes Ltda. for the principal, interest, fees, expenses or any other amount owed by virtue of the Credit Contracts, coinciding with the percentage of credit of each Financing Entity with respect to the total outstanding borrowings under this facility. The facility expires on December 17, 2016.

 

Hill Spain also maintains an ICO (Official Credit Institute) loan with Bankia Bank in Spain for €120,000 (approximately $135,000) at September 30, 2015.  The availability is reduced by €15,000 on a quarterly basis.  At September 30, 2015, total borrowings outstanding were €120,000.  The interest rate at September 30, 2015 was 5.91%. The ICO loan expires on August 10, 2017.

 

Hill Spain maintains an unsecured credit facility with the Ibercaja Bank in Spain for €175,000 (approximately $197,000) at September 30, 2015.  The availability is being reduced by €175,000 at the end of each calendar quarter.  At September 30, 2015, total borrowings outstanding were €175,000.  The interest rate at September 30, 2015 was 6.75%. The facility expires on December 31, 2015.

 

The Company maintains a credit facility with the National Bank of Abu Dhabi which provides for total borrowings of up to AED 11,500,000 (approximately $3,131,000 at September 30, 2015) collateralized by certain overseas receivables.  At September 30, 2015, there were no borrowings outstanding.  The interest rate is the one-month Emirates InterBank Offer Rate plus 3.00% (or 4.41% at September 30, 2015) but no less than 5.50%.  This facility was modified in June 2015 to increase availability under Letters of Guarantee to allow for up to AED 200,000,000 (approximately $54,500,000 at September 30, 2015) of which AED 95,221,000 (approximately $25,900,000) was outstanding at September 30, 2015.  The credit facility will expire on May 7, 2016.

 

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Engineering S.A. maintains four unsecured revolving credit facilities with two banks in Brazil aggregating 2,220,000 Brazilian Reais (BRL) (approximately $542,000 at September 30, 2015), with a weighted average interest rate of 3.69% per month at September 30, 2015.  There were no borrowings outstanding on any of these facilities which are renewed automatically every three months.

 

The Company also maintains relationships with other foreign banks for the issuance of letters of credit, letters of guarantee and performance bonds in a variety of foreign currencies.  At September 30, 2015, the maximum U.S. dollar equivalent of the commitments was $80,163,000 of which $42,042,000 is outstanding.

 

Note 10 — Supplemental Cash Flow Information

 

The following table provides additional cash flow information (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

Interest and related financing fees paid

 

$

9,067

 

$

19,662

 

 

 

 

 

 

 

Income taxes paid

 

$

4,242

 

$

5,375

 

 

 

 

 

 

 

Increase in property and equipment from a tenant improvement allowance related to the relocation of the corporate headquarters

 

$

3,894

 

$

 

 

 

 

 

 

 

Reduction of noncontrolling interest in connection with acquisition of an additional interest in Engineering S.A.

 

$

(4,374

)

$

(2,649

)

 

 

 

 

 

 

Increase in additional paid in capital from issuance of shares of common stock related to purchase of CPI

 

$

530

 

$

618

 

 

 

 

 

 

 

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

 

$

361

 

$

538

 

 

Note 11 — Earnings per Share

 

Basic earnings per common share has been computed using the weighted-average number of shares of common stock outstanding during the period.  Diluted loss per common share incorporates the incremental shares issuable upon the assumed exercise of stock options, if dilutive.   Dilutive stock options increased the average common shares outstanding by approximately 684,000 shares for the three months ended September 30, 2015 and by approximately 613,000 shares for the nine months ended September 30, 2015.  Options to purchase 3,208,000 shares and 3,773,000 shares were excluded from the calculation of diluted earnings per common share for the three- and nine-month periods ended September 30, 2015 because they were antidilutive.  Dilutive stock options increased the average common shares outstanding by approximately 144,000 shares for the three months ended September 30, 2014 and by approximately 186,000 shares for the nine months ended September 30, 2014.  Options to purchase 7,437,000 shares and 7,460,000 shares were excluded from the calculation of diluted (loss) earnings per common share for the three- and nine-month periods ended September 30, 2014 because they were antidilutive.

 

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Note 12 — Share-Based Compensation

 

At September 30, 2015, the Company had approximately 7,908,000 options outstanding with a weighted average exercise price of $4.40.  During the nine months ended September 30, 2015, the Company granted 1,035,000 options which vest over a five-year period and 63,000 options which vested immediately.  The options have a weighted-average exercise price of $4.03 and a weighted average contractual life of 6.9 years.  The aggregate fair value of the options was $2,221,000 calculated using the Black-Scholes valuation model.  The weighted average assumptions used to calculate fair value were: expected life — 4.9 years; volatility — 59.1% and risk-free interest rate — 1.45%.  During the nine months ended September 30, 2015, options for 139,000 shares with a weighted average exercise price of $3.59 were exercised, options for approximately 383,000 shares with a weighted average exercise price of $6.90 lapsed and options for 28,000 shares with a weighted average exercise price of $4.40 were forfeited.

 

During the nine months ended September 30, 2015, employees purchased approximately 18,000 common shares, for an aggregate purchase price of $57,000, pursuant to the Company’s 2008 Employee Stock Purchase Plan.

 

The Company recognized share-based compensation expense in selling, general and administrative expenses in the consolidated statement of operations totaling $899,000 and $785,000 for the three months ended September 30, 2015 and 2014, respectively, and $2,360,000 and $2,712,000 for the nine months ended September 30, 2015 and 2014, respectively.

 

Note 13 — Stockholders’ Equity

 

The following table summarizes the changes in stockholders’ equity during the nine months ended September 30, 2015 (in thousands):

 

 

 

 

 

Hill International,

 

Noncontrolling

 

 

 

Total

 

Inc. Stockholders

 

Interests

 

Stockholders’ equity, December 31, 2014

 

$

122,000

 

$

113,288

 

$

8,712

 

Net earnings

 

8,720 

 

8,045

 

675

 

Other comprehensive (loss)

 

(16,123

)

(13,094

)

(3,029

)

Comprehensive earnings (loss)

 

(7,403

)

(5,049

)

(2,354

)

Additional paid in capital

 

2,915 

 

2,915

 

 

Acquisition of treasury stock

 

(361

)

(361

)

 

Adjustment related to ESA put options

 

 

4,374

 

(4,374

)

Stock issued for acquisition of CPI

 

530 

 

530

 

 

Stockholders’ equity, September 30, 2015

 

$

117,681

 

$

115,697

 

$

1,984

 

 

During May 2015, four of the Company’s directors exercised an aggregate of 84,868 options with an exercise price of $4.25 through the Company on a cashless basis.  The Company withheld 67,400 shares as payment for the options and placed those shares in treasury.  The directors received a total of 17,468 shares from this transaction.

 

During the nine months ended September 30, 2015, the Company received cash proceeds of $137,000 from the exercise of stock options.

 

In April 2015, two shareholders who own approximately 19% of ESA exercised their ESA Put Options.  On August 12, 2015, the Company paid the liability in shares of its common stock.  See Note 4 for further information.

 

On May 4, 2015, the Company’s Board of Directors approved the adoption of a stockholder rights plan and, on June 9, 2015, they rescinded that plan.

 

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Note 14 — Income Taxes

 

The effective tax rates for the three months ended September 30, 2015 and 2014 were 55.8% and (78.9%), respectively, and 47.8% and 125.8% for the nine months ended September 30, 2015 and 2014, respectively.  The Company’s effective tax rate represents the Company’s effective tax rate for the year based on projected income and mix of income among the various foreign tax jurisdictions, adjusted for discrete transactions occurring during the period.  There was no change in the reserve for uncertain tax positions for the three months ended September 30, 2015 and 2014.  For the nine months ended September 30, 2015 and 2014, the Company recognized an income tax expense (benefit) related to an increase (decrease) in the reserve for uncertain tax positions of $245,000 and ($2,514,000), respectively. In addition, the Company recognized an income tax (benefit) expense resulting from adjustments to agree the prior year’s book amounts to the actual amounts per the tax returns totaling ($37,000) and $206,000 for the three months ended September 30, 2015 and 2014, respectively, and ($37,000) and $250,000 for the nine months ended September 30, 2015 and 2014, respectively. For both years, the Company’s effective tax rate is significantly higher than it otherwise would be primarily as a result of various foreign withholding taxes and not being able to record an income tax benefit related to the U.S. net operating loss.

 

The components of earnings (loss) before income taxes and the related income tax expense by United States and foreign jurisdictions were as follows (in thousands):

 

 

 

Three Months Ended September 30, 2015

 

Three Months Ended September 30, 2014

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

Earnings (loss) before income taxes

 

$

(2,541

)

$

10,087

 

$

7,546

 

$

(16,640

)

$

11,825

 

$

(4,815

)

Income tax expense, net

 

$

 

$

4,210

 

$

4,210

 

$

 

$

3,800

 

$

3,800

 

 

 

 

Nine Months Ended September 30, 2015

 

Nine Months Ended September 30, 2014

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

 

 

 

 

 

 

 

 

 

 

(Restated)

 

(Restated)

 

Earnings (loss) before income taxes

 

$

(22,529

)

$

39,229

 

$

16,700

 

$

(32,137

)

$

36,203

 

$

4,066

 

Income tax expense, net

 

$

 

$

7,980

 

$

7,980

 

$

 

$

5,117

 

$

5,117

 

 

The reserve for uncertain tax positions amounted to $1,220,000 and $975,000 at September 30, 2015 and December 31, 2014, respectively, and is included in “Other liabilities” in the consolidated balance sheet at those dates. During the three and nine months ended September 30, 2015, the reserve for uncertain tax positions was increased by $0 and $245,000, respectively,  and was due to certain tax positions taken in foreign jurisdictions. During the three months ended September 30, 2014, the reserve for uncertain tax positions was reduced by $2,514,000 based on management’s assessment that these items were effectively settled with the appropriate foreign tax authorities. During the nine months ended September 30, 2014, the Company also reclassified $420,000 from “Income taxes payable” to the reserve for uncertain tax positions primarily taken in foreign jurisdictions.

 

The Company’s policy is to record income tax related interest and penalties in income tax expense. At September 30, 2015 and December 31, 2014, potential interest and penalties related to uncertain tax positions amounting to $520,000 and $592,000 was included in the balance above.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC740,  Income Taxes. They consider both positive and negative evidence. In making this determination, management assesses all of the evidence available at the time including recent earnings, internally-prepared income projections, and historical financial performance.

 

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Table of Contents

 

Note 15 — Business Segment Information

 

The Company’s business segments reflect how executive management makes resource decisions and assesses its performance. The Company bases these decisions on the type of services provided (Project Management and Construction Claims) and secondarily by their geography (U.S./Canada, Latin America, Europe, the Middle East, Africa and Asia/Pacific).

 

The Project Management business segment provides extensive construction and project management services to construction owners worldwide. Such services include program management, project management, construction management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, labor compliance and facilities management services.

 

The Construction Claims business segment provides such services as claims consulting, management consulting, litigation support, expert witness testimony, cost/damages assessment, delay/disruption analysis, adjudication, lender advisory, risk management, forensic accounting, fraud investigation, Project Neutral and international arbitration services.

 

The Company evaluates the performance of its segments primarily on operating profit before corporate overhead allocations and income taxes.

 

The following tables reflect the required disclosures for the Company’s reportable segments (in thousands):

 

Consulting Fee Revenue (“CFR”)

 

 

 

Three Months Ended September 30,

 

 

 

2015 

 

2014 

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

116,541

 

73.5

%

$

106,969

 

73.6

%

Construction Claims

 

42,038

 

26.5

 

38,355

 

26.4

 

Total

 

$

158,579

 

100.0

%

$

145,324

 

100.0

%

 

Total Revenue

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

135,539

 

75.7

%

$

121,746

 

75.4

%

Construction Claims

 

43,396

 

24.3

 

39,745

 

24.6

 

Total

 

$

178,935

 

100.0

%

$

161,491

 

100.0

%

 

Operating Profit

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Project Management before equity in loss of affiliate

 

$

15,438

 

$

12,960

 

Equity in loss of affiliate

 

(14

)

 

Total Project Management

 

15,424

 

12,960

 

Construction Claims

 

4,582

 

5,269

 

Corporate

 

(8,313

)

(6,932

)

Total

 

$

11,693

 

$

11,297

 

 

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Table of Contents

 

Depreciation and Amortization Expense

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Project Management

 

$

1,924

 

$

1,718

 

Construction Claims

 

787

 

640

 

Subtotal segments

 

2,711

 

2,358

 

Corporate

 

152

 

54

 

Total

 

$

2,863

 

$

2,412

 

 

Consulting Fee Revenue by Geographic Region

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

38,569

 

24.3

%

$

32,228

 

22.2

%

Latin America

 

8,347

 

5.3

 

10,503

 

7.2

 

Europe

 

23,476

 

14.8

 

18,950

 

13.0

 

Middle East

 

72,441

 

45.7

 

68,043

 

46.8

 

Africa

 

7,225

 

4.5

 

5,580

 

3.8

 

Asia/Pacific

 

8,521

 

5.4

 

10,020

 

7.0

 

Total

 

$

158,579

 

100.0

%

$

145,324

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

37,854

 

23.9

%

$

31,309

 

21.5

%

Non-U.S.

 

120,725

 

76.1

 

114,015

 

78.5

 

Total

 

$

158,579

 

100.0

%

$

145,324

 

100.0

%

 

During the third quarter ended September 30, 2015, consulting fee revenue for the United Arab Emirates amounted to $29,642,000 representing 18.7% of the total.  No other country other than the United States accounted for 10% or more of consolidated consulting fee revenue.

 

During the third quarter ended September 30, 2014, consulting fee revenue for the United Arab Emirates amounted to $18,666,000 representing 12.8% of the total and Oman’s consulting fee revenue amounted to $16,098,000 representing 11.1% of the total.  No other country other than the United States accounted for 10% or more of consolidated consulting fee revenue.

 

Total Revenue by Geographic Region

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

53,554

 

29.9

%

$

43,804

 

27.1

%

Latin America

 

8,398

 

4.7

 

10,535

 

6.5

 

Europe

 

24,814

 

13.9

 

20,266

 

12.5

 

Middle East

 

75,320

 

42.1

 

70,218

 

43.5

 

Africa

 

8,205

 

4.6

 

6,480

 

4.0

 

Asia/Pacific

 

8,644

 

4.8

 

10,188

 

6.4

 

Total

 

$

178,935

 

100.0

%

$

161,491

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

52,774

 

29.5

%

$

42,876

 

26.6

%

Non-U.S.

 

126,161

 

70.5

 

118,615

 

73.4

 

Total

 

$

178,935

 

100.0

%

$

161,491

 

100.0

%

 

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Table of Contents

 

During the third quarter ended September 30, 2015, total revenue for the United Arab Emirates amounted to $30,910,000 representing 17.3% of the total. No other country except for the United States accounted for 10% or more of consolidated total revenue.

 

During the third quarter ended September 30, 2014, total revenue for the United Arab Emirates amounted to $19,112,000 representing 11.8% of the total and Oman’s total revenue amounted to $16,960,000 representing 10.5% of the total.  No other country except for the United States accounted for 10% or more of consolidated total revenue.

 

Consulting Fee Revenue By Client Type

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

2,295

 

1.4

%

$

4,562

 

3.1

%

U.S. state, regional and local governments

 

21,630

 

13.6

 

19,989

 

13.8

 

Foreign governments

 

51,136

 

32.3

 

54,361

 

37.4

 

Private sector

 

83,518

 

52.7

 

66,412

 

45.7

 

Total

 

$

158,579

 

100.0

%

$

145,324

 

100.0

%

 

Total Revenue By Client Type

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

2,802

 

1.6

%

$

5,894

 

3.6

%

U.S. state, regional and local governments

 

34,793

 

19.4

 

28,627

 

17.7

 

Foreign governments

 

54,578

 

30.5

 

57,825

 

35.8

 

Private sector

 

86,762

 

48.5

 

69,145

 

42.9

 

Total

 

$

178,935

 

100.0

%

$

161,491

 

100.0

%

 

Property, Plant and Equipment, Net by Geographic Location

 

 

 

September 30, 2015

 

December 31, 2014

 

U.S./Canada

 

$

12,476

 

$

3,358

 

Latin America

 

971

 

1,101

 

Europe

 

2,850

 

2,191

 

Middle East

 

4,440

 

3,428

 

Africa

 

988

 

901

 

Asia/Pacific

 

840

 

664

 

Total

 

$

22,565

 

$

11,643

 

 

 

 

 

 

 

U.S.

 

$

12,476

 

$

3,358

 

Non-U.S.

 

10,089

 

8,285

 

Total

 

$

22,565

 

$

11,643

 

 

21



Table of Contents

 

Consulting Fee Revenue (“CFR”)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

345,122

 

73.5

%

$

317,278

 

74.3

%

Construction Claims

 

124,336

 

26.5

 

109,810

 

25.7

 

Total

 

$

469,458

 

100.0

%

$

427,088

 

100.0

%

 

Total Revenue

 

 

 

Nine Months Ended September 30,

 

 

 

2015 

 

2014 

 

 

 

 

 

 

 

 

 

 

 

Project Management

 

$

402,586

 

75.8

%

$

356,959

 

75.8

%

Construction Claims

 

128,265

 

24.2

 

114,184

 

24.2

 

Total

 

$

530,851

 

100.0

%

$

471,143

 

100.0

%

 

Operating Profit

 

 

 

Nine Months Ended September 30,

 

 

 

2015 

 

2014 

 

 

 

 

 

(Restated)

 

Project Management

 

$

43,268

 

$

42,069

 

Equity in loss of affiliate

 

(231

)

 

Total Project Management

 

43,037

 

42,069

 

Construction Claims

 

11,687

 

10,941

 

Corporate

 

(26,772

)

(22,110

)

Total

 

$

27,952

 

$

30,900

 

 

Depreciation and Amortization Expense

 

 

 

Nine Months Ended September 30,

 

 

 

2015 

 

2014 

 

 

 

 

 

 

 

Project Management

 

$

5,637

 

$

5,137

 

Construction Claims

 

2,349

 

1,977

 

Subtotal segments

 

7,986

 

7,114

 

Corporate

 

300

 

162

 

Total

 

$

8,286

 

$

7,276

 

 

Consulting Fee Revenue by Geographic Region

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

U.S./Canada

 

$

113,735

 

24.2

%

$

93,227

 

21.8

%

Latin America

 

23,011

 

4.9

 

32,315

 

7.6

 

Europe

 

64,905

 

13.8

 

58,337

 

13.7

 

Middle East

 

222,572

 

47.5

 

200,045

 

46.8

 

Africa

 

21,329

 

4.5

 

17,864

 

4.2

 

Asia/Pacific

 

23,906

 

5.1

 

25,300

 

5.9

 

Total

 

$

469,458

 

100.0

%

$

427,088

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

111,436

 

23.7

%

$

90,533

 

21.2

%

Non-U.S.

 

358,022

 

76.3

 

336,555

 

78.8

 

Total

 

$

469,