Hill International, Inc.
Hill International, Inc. (Form: 10-Q, Received: 11/14/2016 17:51:13)

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, 2016

 

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 51,767,114 shares of the Registrant’s Common Stock outstanding at November 1, 2016.

 

 

 



Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance.

 

The Company’s forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Company’s actual results may vary materially from those expressed or implied in its forward-looking statements.

 

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:

 

·                                           The risks set forth in Item 1A, “Risk Factors,” of our most recent Annual Report on Form 10-K;

 

·                                           Modifications and termination of client contracts;

 

·                                           Control and operational issues pertaining to business activities that we conduct pursuant to joint ventures with other parties;

 

·                                           Difficulties we may incur in implementing our acquisition strategy;

 

·                                           The need to retain and recruit key technical and management personnel; and

 

·                                           Unexpected adjustments and cancellations related to our backlog.

 

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

 

·                                           Unexpected further delays in collections from clients located in the Middle East;

 

·                                           Special risks of our ability to obtain debt financing or otherwise raise capital to meet required working capital needs and to support potential future acquisition activities;

 

·                                           Special risks of international operations, including uncertain political and economic environments, acts of terrorism or war, potential incompatibilities with foreign joint venture partners, foreign currency fluctuations, civil disturbances and labor issues; and

 

·                                           Special risks of contracts with governmental entities, including the failure of applicable governing authorities to take necessary actions to secure or maintain funding for particular projects with us, the unilateral termination of contracts by the government and reimbursement obligations to the government for funds previously received.

 

We assume no obligation to update or revise any forward-looking statements.

 



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBDISIARIES

 

Index to Form 10-Q

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

4

 

 

 

 

Consolidated Balance Sheets at September 30, 2016 (unaudited) and December 31, 2015

4

 

 

 

 

Consolidated Statements of Earnings for the three and nine months ended September 30, 2016 and 2015 (unaudited)

5

 

 

 

 

Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2

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

24

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4

Controls and Procedures

37

 

 

 

Part II

OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

39

 

 

 

Item 1A

Risk Factors

39

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 3

Defaults Upon Senior Securities

39

 

 

 

Item 4

Mine Safety Disclosures

39

 

 

 

Item 5

Other Information

39

 

 

 

Item 6

Exhibits

39

 

 

 

Signatures

 

40

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

21,219

 

$

24,089

 

Cash - restricted

 

3,710

 

4,435

 

Accounts receivable, less allowance for doubtful accounts of $72,262 and $63,748

 

229,892

 

243,417

 

Accounts receivable - affiliate

 

10,870

 

5,205

 

Prepaid expenses and other current assets

 

11,507

 

10,299

 

Income taxes receivable

 

5,035

 

4,146

 

Total current assets

 

282,233

 

291,591

 

Property and equipment, net

 

22,307

 

23,751

 

Cash - restricted, net of current portion

 

1,175

 

259

 

Retainage receivable

 

17,221

 

2,638

 

Acquired intangibles, net

 

11,560

 

14,659

 

Goodwill

 

75,899

 

74,893

 

Investments

 

4,738

 

8,386

 

Deferred income tax assets

 

19,274

 

19,724

 

Other assets

 

5,136

 

6,662

 

Total assets

 

$

439,543

 

$

442,563

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current maturities of notes payable

 

$

7,316

 

$

4,357

 

Accounts payable and accrued expenses

 

105,825

 

112,457

 

Income taxes payable

 

5,287

 

9,064

 

Deferred revenue

 

8,697

 

11,310

 

Other current liabilities

 

9,665

 

5,860

 

Total current liabilities

 

136,790

 

143,048

 

Notes payable, net of current maturities

 

146,639

 

140,626

 

Retainage payable

 

870

 

1,929

 

Deferred income taxes

 

16,472

 

16,341

 

Deferred revenue

 

15,254

 

11,919

 

Other liabilities

 

11,084

 

10,661

 

Total liabilities

 

327,109

 

324,524

 

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, 58,726 shares and 58,335 shares issued at September 30, 2016 and December 31, 2015, respectively

 

6

 

6

 

Additional paid-in capital

 

189,049

 

188,869

 

Retained earnings (deficit)

 

(2,721

)

1,205

 

Accumulated other comprehensive loss

 

(46,662

)

(46,866

)

 

 

139,672

 

143,214

 

Less treasury stock of 6,959 shares and 6,743 shares at September 30, 2016 and December 31, 2015, at cost

 

(29,974

)

(29,245

)

Hill International, Inc. share of equity

 

109,698

 

113,969

 

Noncontrolling interests

 

2,736

 

4,070

 

Total equity

 

112,434

 

118,039

 

Total liabilities and stockholders’ equity

 

$

439,543

 

$

442,563

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Consulting fee revenue

 

$

147,993

 

$

158,579

 

$

457,912

 

$

469,458

 

Reimbursable expenses

 

19,960

 

20,356

 

61,851

 

61,393

 

Total revenue

 

167,953

 

178,935

 

519,763

 

530,851

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

81,241

 

89,345

 

265,052

 

268,174

 

Reimbursable expenses

 

19,960

 

20,356

 

61,851

 

61,393

 

Total direct expenses

 

101,201

 

109,701

 

326,903

 

329,567

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

66,752

 

69,234

 

192,860

 

201,284

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

67,247

 

57,527

 

179,614

 

173,101

 

Share of loss of equity method affiliates

 

12

 

14

 

28

 

231

 

Operating profit

 

(507

)

11,693

 

13,218

 

27,952

 

 

 

 

 

 

 

 

 

 

 

Interest expense and related financing fees, net

 

3,368

 

4,147

 

10,103

 

11,252

 

(Loss) earnings before income tax expense

 

(3,875

)

7,546

 

3,115

 

16,700

 

Income tax expense

 

2,880

 

4,210

 

6,939

 

7,980

 

Net (loss) earnings

 

(6,755

)

3,336

 

(3,824

)

8,720

 

 

 

 

 

 

 

 

 

 

 

Less: net earnings — noncontrolling interests

 

111

 

388

 

102

 

675

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings attributable to Hill International

 

$

(6,866

)

$

2,948

 

$

(3,926

)

$

8,045

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.13

)

$

0.06

 

$

(0.08

)

$

0.16

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

51,753

 

51,119

 

51,704

 

50,661

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.13

)

$

0.06

 

$

(0.08

)

$

0.16

 

Diluted weighted average common shares outstanding

 

51,753

 

51,803

 

51,704

 

51,274

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net (loss) earnings

 

$

(6,755

)

$

3,336

 

$

(3,824

)

$

8,720

 

Foreign currency translation adjustment, net of tax

 

(1,638

)

(8,630

)

(1,257

)

(15,910

)

Other, net

 

79

 

(78

)

135

 

(213

)

Comprehensive loss

 

(8,314

)

(5,372

)

(4,946

)

(7,403

)

Comprehensive earnings (loss) attributable to noncontrolling interests

 

132

 

(2,992

)

(1,223

)

(6,728

)

Comprehensive loss attributable to Hill International, Inc.

 

$

(8,446

)

$

(2,380

)

$

(3,723

)

$

(675

)

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) earnings

 

$

(3,824

)

$

8,720

 

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

 

 

 

 

 

Depreciation and amortization

 

7,705

 

8,286

 

Provision for bad debts

 

11,879

 

2,540

 

Amortization of deferred loan fees

 

1,334

 

1,333

 

Deferred tax expense (benefit)

 

663

 

(1,585

)

Share based compensation

 

1,838

 

2,360

 

Changes in operating assets and liabilities, net:

 

 

 

 

 

Restricted cash

 

(69

)

10,658

 

Accounts receivable

 

2,652

 

(57,690

)

Accounts receivable - affiliate

 

(5,665

)

(2,830

)

Prepaid expenses and other current assets

 

(1,001

)

(4,556

)

Income taxes receivable

 

(756

)

25

 

Retainage receivable

 

(14,583

)

150

 

Other assets

 

5,191

 

1,009

 

Accounts payable and accrued expenses

 

(8,582

)

15,194

 

Income taxes payable

 

(3,951

)

1,455

 

Deferred revenue

 

124

 

589

 

Other current liabilities

 

2,639

 

7,398

 

Retainage payable

 

(1,308

)

474

 

Other liabilities

 

385

 

2,878

 

Net cash used in operating activities

 

(5,329

)

(3,592

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of business, net of cash acquired

 

 

(4,384

)

Payments for purchase of property and equipment

 

(2,584

)

(11,447

)

Net cash used in investing activities

 

(2,584

)

(15,831

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on term loans

 

(900

)

(900

)

Net borrowings on revolving loans

 

8,950

 

15,152

 

Proceeds from Philadelphia Industrial Development Corporation loan

 

 

750

 

Payments on Philadelphia Industrial Development Corporation loan

 

(41

)

(27

)

Deferred acquisition price payments

 

(1,531

)

 

Dividends paid to noncontrolling interest

 

(111

)

(130

)

Proceeds from stock issued under employee stock purchase plan

 

65

 

57

 

Proceeds from exercise of stock options

 

220

 

137

 

Net cash provided by financing activities

 

6,652

 

15,039

 

Effect of exchange rate changes on cash

 

(1,609

)

(1,839

)

Net decrease in cash and cash equivalents

 

(2,870

)

(6,223

)

Cash and cash equivalents — beginning of period

 

24,089

 

30,124

 

Cash and cash equivalents — end of period

 

$

21,219

 

$

23,901

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 - 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 2 — 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 for the year ended December 31, 2015.  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.

 

Note 3 — Liquidity

 

The amount of consulting fee revenue (“CFR”) attributable to operations in the Middle East and Africa has grown from approximately 32% in 2011 to approximately 49% of total consolidated CFR during the first nine months of 2016.  There has been significant political upheaval and civil unrest in these regions during this period.  The Company continues to experience a slowdown in its collections from its clients in the Middle East primarily due to the recent drop in oil prices.  This has put a considerable strain on the Company’s liquidity.   As a result, the Company has had to rely heavily on debt and equity transactions to fund its operations.  See Note 4 for a further discussion of issues related to our liquidity.

 

Note 4 — Accounts Receivable

 

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

 

 

 

September 30, 2016

 

December 31, 2015

 

Billed

 

$

256,840

 

$

267,592

 

Retainage, current portion

 

9,763

 

13,660

 

Unbilled

 

35,551

 

25,913

 

 

 

302,154

 

307,165

 

Allowance for doubtful accounts

 

(72,262

)

(63,748

)

 

 

$

229,892

 

$

243,417

 

 

Included in billed and unbilled accounts receivable are $14,926,000 and $4,827,000, respectively, related to change orders, claims and disputes at September 30, 2016.

 

8



Table of Contents

 

In 2012, the Company commenced operations on the Muscat International Airport (the “Oman Airport”) project with the Ministry of Transportation and Communications (the “MOTC”) in Oman. The original contract term expired in November 2014.  In October 2014, the Company applied for a twelve-month extension of time amendment (the “first extension”) which was subsequently approved in March 2016 and the Company continued to work on the Oman Airport project.  The Company began to experience some delays in payment during the second quarter of 2015 when MOTC commenced its formal review and certification of the Company’s invoices. In December 2015, the Company began discussions with the MOTC on a second extension of time amendment (the “second extension”) and has since commenced additional work, which management expects to last approximately 18 months.  When the MOTC resumed payments in 2016, the Company received approximately $15,000,000 in March, approximately $1,800,000 in April, approximately $14,100,000 in June, approximately $3,200,000 in October and approximately $7,900,000 in November.  At September 30, 2016, accounts receivable from Oman totaled approximately $29,500,000.  After receipt of the October and November payments, approximately $7,900,000 was past due based on contractual terms.

 

In addition, there is approximately $16,100,000 included in non-current Retainage Receivable in the consolidated balance sheet at September 30, 2016.  Of that amount, approximately $8,000,000 relates to retention and approximately $8,100,000 relates to a Defect and Liability Period (“DLP”).  Retention represents five percent of each monthly invoice which is retained by MOTC.  Fifty percent of the retention will be released one year from the commencement of the DLP and the balance will be release upon the issuance of final Completion Certificates.  DLP represents the period by which the contractor must address any defect issues. This period commences upon the issuance of a “Taking Over Certificate” (by MOTC) to contractors for up to a period of 24 months and then final certificate closing the project.

 

The delays in payments from MOTC and other foreign governments have had a negative impact on the Company’s liquidity, financial covenants, financial position and results of operations.

 

Note 5 — Intangible Assets

 

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

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

Client relationships

 

$

34,116

 

$

24,147

 

$

34,891

 

22,668

 

Acquired contract rights

 

2,278

 

2,011

 

12,256

 

11,287

 

Trade names

 

2,774

 

1,450

 

2,704

 

1,237

 

Total

 

$

39,168

 

$

27,608

 

$

49,851

 

$

35,192

 

Intangible assets, net

 

$

11,560

 

 

 

$

14,659

 

 

 

 

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

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2016

 

2015

 

2016

 

2015

 

$

1,013

 

$

1,578

 

$

3,450

 

$

4,609

 

 

9



Table of Contents

 

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

 

2016 (remaining 3 months)

 

$

903

 

2017

 

3,144

 

2018

 

2,051

 

2019

 

1,782

 

2020

 

1,286

 

 

 

Note 6 — 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, 2016. Based on a preliminary valuation, the fair value of the Project Management unit and the Construction Claims unit significantly exceeded their carrying values.

 

The following table summarizes the changes in the Company’s carrying value of goodwill during 2016 (in thousands):

 

 

 

Project

 

Construction

 

Total

 

 

 

Management

 

Claims

 

Goodwill

 

Balance, December 31, 2015

 

$

49,739

 

$

25,154

 

$

74,893

 

Additions

 

 

 

 

Translation adjustments

 

2,578

 

(1,572

)

1,006

 

Balance, September 30, 2016

 

$

52,317

 

$

23,582

 

$

75,899

 

 

Note 7 — Accounts Payable and Accrued Expenses

 

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

 

 

 

September 30, 2016

 

December 31, 2015

 

Accounts payable

 

$

36,884

 

$

44,200

 

Accrued payroll

 

48,379

 

50,724

 

Accrued subcontractor fees

 

7,831

 

5,905

 

Accrued agency fees

 

2,285

 

6,564

 

Accrued legal and professional fees

 

5,336

 

1,186

 

Other accrued expenses

 

5,110

 

3,878

 

 

 

$

105,825

 

$

112,457

 

 

10



Table of Contents

 

Note 8 — Notes Payable and Long-Term Debt

 

Outstanding debt obligations are as follows (in thousands):

 

 

 

September 30, 2016

 

December 31, 2015

 

Term Loan Facility

 

$

112,890

 

$

112,906

 

U.S. Revolving Credit Facility

 

22,500

 

17,500

 

International Revolving Credit Facility

 

11,836

 

10,715

 

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

 

3,062

 

3,013

 

Borrowing under revolving credit facility with the National Bank of Abu Dhabi

 

2,998

 

 

Borrowing from Philadelphia Industrial Development Corporation

 

669

 

710

 

Other notes payable

 

 

139

 

 

 

153,955

 

144,983

 

Less current maturities

 

7,316

 

4,357

 

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

 

$

146,639

 

$

140,626

 

 

The Company and its subsidiary Hill International N.V. (the “Subsidiary”) are parties to a credit agreement with Société Générale (the “Agent”), TD Bank, N.A. and HSBC Bank USA, N.A. (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 (the “International Lender”) providing a €11,765,000 ($15,000,000 at closing and $13,199,000 at September 30, 2016) credit facility 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 $10,000,000, 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.  The financial covenants consist of a 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, share-based compensation and other non-cash charges, including bad debt expense, for the trailing twelve months.  In the event of a default, the U.S. Lenders and the International Lender may increase the interest rates by 2.0%.  At September 30, 2016, the Company’s Consolidated Net Leverage Ratio was 3.19 to 1.00 which exceeded the 2.75 to 1.00 limit imposed by the Secured Credit Facilities and constituted a default.

 

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) the total of accounts receivable from all clients 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. The interest rate would be reset as soon as the accounts receivable over 120 days decline below the 10% or 14% levels.  At September 30, 2016, the accounts receivable from Oman exceeded the limit described above, however, due to a payment received on October 6, 2016, the accounts receivable declined below the established limit.

 

In anticipation of the event of default upon delivery of the quarterly compliance certificate, the Company requested a waiver from the Agent.   On November 1, 2016, the Company obtained the waiver of the Excess Account Concentration covenant violation, the Consolidated Net Leverage Ratio default and the contractual 2% increase in the interest rate.  In connection with the waiver, the Company incurred a consent fee amounting to approximately $168,000 which will be charged to interest expense in the fourth quarter of 2016.

 

11



Table of Contents

 

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.

 

At September 30, 2016, the interest rate on the Term Loan was 7.75%.

 

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) 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 (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 have been 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 $4,710,000 and $5,594,000 are included as an offset against the Term Loan balances in the consolidated balance sheets at September 30, 2016 and December 31, 2015, 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.   At September 30, 2016, the interest rate was 6.25%.

 

The interest rate on borrowings under the International Revolver will be the European Inter-Bank Offered Rate (“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.  At September 30, 2016, the interest rate was 3.63%.

 

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.

 

12



Table of Contents

 

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, 2016, the domestic borrowing base was $30,000,000 and the international borrowing base was €11,765,000 (approximately $13,199,000 at September 30, 2016).

 

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, 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 has been deferred. The deferred fees are being amortized on a straight-line basis, which approximates the effective interest method, to interest expense and related financing fees, net over a five-year period which ends on September 30, 2019.  Unamortized balances of $1,800,000 and $2,250,000 are included in other assets in the consolidated balance sheet at September 30, 2016 and December 31, 2015, respectively.

 

At September 30, 2016 the Company had $5,006,000 of outstanding letters of credit under the U.S. Revolver.   Due to the default, the Company was precluded from utilizing any of the $2,494,000 of available borrowing capacity under the U.S. Revolver until the waiver was received on November 1, 2016, at which time the entire amount was available to be borrowed without violating the Consolidated Net Leverage Ratio.

 

At September 30, 2016, the Company had $1,008,000 of outstanding letters of credit and $1,218,000 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 €5,640,000 with interest at 6.50% on outstanding borrowings. At December 31, 2015, total availability under this facility was reduced to 50.0% of the initial limit.  At September 30, 2016, the total facility was approximately €2,670,000 (approximately $2,996,000) and borrowings outstanding were €2,669,000 (approximately $2,995,000).  The amount being financed (“Credit Contracts”) by each Financing Entity is between €189,000 (approximately $213,000) and €769,000 (approximately $863,000).  To guarantee Hill Spain’s obligations resulting from the Credit Contracts, Hill Spain provided a guarantee in favor of each

13



Table of Contents

 

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 at which time the Company expects to pay off and terminate the facility.

 

Hill Spain also maintains an Instituto de Credito Oficial (“ICO”) loan with Bankia Bank in Spain for €60,000 (approximately $67,000) at September 30, 2016.  The availability is reduced by €15,000 on a quarterly basis. At September 30, 2016, total borrowings outstanding were €60,000 (approximately $67,000).  The interest rate at September 30, 2016 was 6.50%.  The ICO loan expires on August 10, 2017.

 

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, 2016) collateralized by certain overseas receivables.  Borrowings outstanding were AED 11,012,000 (approximately $2,998,000 at September 30, 2016).  The interest rate is the one-month Emirate Interbank Offered Rate plus 3.00% (which would be 4.41% at September 30, 2016) but, in any event, no less than 5.50%.  This facility also allows for Letters of Guarantee of up to AED 200,000,000 (approximately $54,452,000 at September 30, 2016) of which AED 135,080,000 (approximately $36,777,000) was outstanding at September 30, 2016.  The credit facility is subject to periodic review by the bank.

 

Engineering S.A. maintains four unsecured revolving credit facilities with two banks in Brazil aggregating 2,380,000 Brazilian Reais (BRL) (approximately $730,000 at September 30, 2016), with a weighted average interest rate of 5.09% per month at September 30, 2016.  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, 2016, the maximum U.S. dollar equivalent of the commitments was $89,237,000 of which $40,362,000 is outstanding.

 

Note 9 — Supplemental Cash Flow Information

 

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

 

 

 

Nine Months Ended September 30,

 

 

 

2016 

 

2015 

 

Interest and related financing fees paid

 

$

8,915

 

$

9,067

 

 

 

 

 

 

 

Income taxes paid

 

$

9,435

 

$

4,242

 

 

 

 

 

 

 

Increase in other current liabilities and decrease in additional paid-in capital related to ESA Put Options

 

$

2,670

 

 

 

 

 

 

 

 

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

 

$

 

$

(4,374

)

 

 

 

 

 

 

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

 

$

 

$

3,894

 

 

 

 

 

 

 

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

 

$

 

$

530

 

 

 

 

 

 

 

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

 

$

729

 

$

361

 

 

14



Table of Contents

 

Note 10 — 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 earnings per common share incorporates the incremental shares issuable upon the assumed exercise of stock options using the treasury stock method, if dilutive.   Options to purchase 6,480,000 shares and 6,478,000 shares were excluded from the calculation of diluted earnings per common share for the three and nine months ended September 30, 2016, respectively, because they were antidilutive.  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 months ended September 30, 2015 because they were antidilutive.

 

Note 11 — Share-Based Compensation

 

At September 30, 2016, the Company had approximately 6,932,000 options outstanding with a weighted average exercise price of $4.10.  During the nine months ended September 30, 2016, the Company granted 765,000 options which vest over a five-year period and 10,101 options which vested immediately. The options have a weighted-average exercise price of $4.30 and a weighted average contractual life of 6.97 years. The aggregate fair value of the options was $1,075,000 calculated using the Black-Scholes valuation model.  The weighted average assumptions used to calculate fair value were: expected life — 4.97 years; volatility — 57.4% and risk-free interest rate — 1.24%.  During the first nine months of 2016, options for approximately 369,000 shares with a weighted average exercise price of $2.62 were exercised, options for approximately 1,104,000 shares with a weighted average exercise price of $6.86 lapsed and options for 82,000 shares with a weighted average exercise price of $4.24 were forfeited.

 

During the nine months ended September 30, 2016, employees purchased approximately 19,000 common shares, for an aggregate purchase price of $65,000, 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 $581,000 and $899,000 for the three months ended September 30, 2016 and 2015, respectively, and $1,838,000 and $2,360,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

Note 12 — Stockholders’ Equity

 

The following table summarizes the changes in stockholders’ equity during the nine months ended September 30, 2016 (in thousands):

 

 

 

 

 

Hill International,

 

Noncontrolling

 

 

 

Total

 

Inc. Stockholders

 

Interests

 

Stockholders’ equity, December 31, 2015

 

$

118,039

 

$

113,969

 

$

4,070

 

Net (loss) earnings

 

(3,824

)

(3,926

)

102

 

Other comprehensive (loss)

 

(1,122

)

203

 

(1,325

)

Comprehensive earnings (loss)

 

(4,946

)

(3,723

)

(1,223

)

Additional paid in capital

 

2,851

 

2,851

 

 

Cashless exercise of stock options

 

(729

)

(729

)

 

Adjustment related to ESA Put Options

 

(2,670

)

(2,670

)

 

 

Dividends paid to noncontrolling interest

 

(111

)

 

(111

)

Stockholders’ equity, September 30, 2016

 

$

112,434

 

$

109,698

 

$

2,736

 

 

During March 2016, certain officers exercised an aggregate of 297,489 options with an exercise price of $2.45 through the Company on a cashless basis.  The Company withheld 215,158 shares as payment for the options and placed those shares in treasury.  The officers received a total of 112,331 shares from this transaction.

 

15



Table of Contents

 

During the nine months ended September 30, 2016, the Company received $220,000 in cash from the exercise of stock options.

 

Note 13 — Income Taxes

 

The effective tax rates for the three months ended September 30, 2016 and 2015 were (74.3)% and 55.8%, respectively, and 222.8% and 47.8% for the nine months ended September 30, 2016 and 2015, respectively.  The Company’s effective tax rate represents the Company’s estimated tax rate for the year based on projected income and mix of income among the various foreign tax jurisdictions, adjusted for discrete transactions occurring during the period. There was no change in the reserve for uncertain tax positions for the three months ended September 30, 2016 and 2015.  For the nine months ended September 30, 2016 and 2015, the Company recognized an income tax (benefit) expense related to an increase in the reserve for uncertain tax positions amounting to $(14,000) and $245,000, respectively.  In addition, the Company recognized an income tax expense (benefit) resulting from adjustments to agree the prior year’s book amounts to the actual amounts per the tax returns totaling $0 and ($37,000) for the three months ended September 30, 2016 and 2015, respectively, and $535,000 and ($37,000) for the nine months ended September 30, 2016 and 2015, respectively. The Company’s effective tax rate in both years is higher than it otherwise would be primarily as a result of not recording an income tax benefit related to the U.S. net operating loss and various foreign withholding taxes.

 

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, 2016

 

Three Months Ended September 30, 2015

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

Earnings (loss) before income taxes

 

$

(7,316

)

$

3,441 

 

$

(3,875

)

$

(2,541

)

$

10,087

 

$

7,546

 

Income tax expense, net

 

$

 

$

2,880 

 

$

2,880

 

$

 

$

4,210

 

$

4,210

 

 

 

 

Nine Months Ended September 30, 2016

 

Nine Months Ended September 30, 2015

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

Earnings (loss) before income taxes

 

$

(20,805

)

$

23,920

 

$

3,115

 

$

(22,529

)

$

39,229

 

$

16,700

 

Income tax expense, net

 

$

 

$

6,939

 

$

6,939

 

$

 

$

7,980

 

$

7,980

 

 

The reserve for uncertain tax positions amounted to $ 939,000 and $1,220,000 at September 30, 2016 and December 31, 2015, respectively, and is included in “Other liabilities” in the consolidated balance sheets at those dates.

 

The Company’s policy is to record income tax related interest and penalties in income tax expense. At both September 30, 2016 and December 31, 2015, potential interest and penalties related to uncertain tax positions amounted to $500,000 and 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.

 

16



Table of Contents

 

Note 14 — 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 to clients worldwide.

 

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,

 

 

 

2016 

 

2015 

 

Project Management

 

$

106,868

 

72.2

%

$

116,541

 

73.5

%

Construction Claims

 

41,125

 

27.8

 

42,038

 

26.5

 

Total

 

$

147,993

 

100.0

%

$

158,579

 

100.0

%

 

Total Revenue

 

 

 

Three Months Ended September 30,

 

 

 

2016 

 

2015 

 

Project Management

 

$

125,872

 

74.9

%

$

135,539

 

75.7

%

Construction Claims

 

42,081

 

25.1

 

43,396

 

24.3

 

Total

 

$

167,953

 

100.0

%

$

178,935

 

100.0

%

 

Operating Profit (Loss) by Geographic Region:

 

 

 

Three Months Ended September 30,

 

 

 

2016 

 

2015 

 

U.S./Canada

 

$

6,546

 

$

5,939

 

Latin America

 

(238

)

531

 

Europe

 

13

 

2,105

 

Middle East

 

4,165

 

11,935

 

Africa

 

1,023

 

(398

)

Asia/Pacific

 

(1,466

)

(105

)

Corporate

 

(10,550

)

(8,314

)

Total

 

$

(507

)

$

11,693

 

 

 

 

 

 

 

U.S

 

$

6,297

 

$

5,686

 

Non - U.S.

 

3,746

 

14,321

 

Corporate

 

(10,550

)

(8,314

)

Total

 

$

(507

)

$

11,693

 

 

17



Table of Contents

 

Depreciation and Amortization Expense:

 

 

 

Three Months Ended September 30,

 

 

 

2016

 

2015 

 

Project Management

 

$

1,646

 

$

1,924

 

Construction Claims

 

705

 

787

 

Subtotal segments

 

2,351

 

2,711

 

Corporate

 

154

 

152

 

Total

 

$

2,505

 

$

2,863

 

 

Consulting Fee Revenue by Geographic Region:

 

 

 

Three Months Ended September 30,

 

 

 

2016

 

2015

 

U.S./Canada

 

$

42,756

 

28.9

%

$

38,569

 

24.3

%

Latin America

 

5,832

 

3.9

 

8,347

 

5.3

 

Europe

 

20,953

 

14.2

 

23,476

 

14.8

 

Middle East

 

62,609

 

42.3

 

72,441

 

45.7

 

Africa

 

7,201

 

4.9

 

7,225

 

4.5

 

Asia/Pacific

 

8,642

 

5.8

 

8,521

 

5.4

 

Total

 

$

147,993

 

100.0

%

$

158,579

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

42,000

 

28.4

%

$

37,854

 

23.9

%

Non-U.S.

 

105,993

 

71.6

 

120,725

 

76.1

 

Total

 

$

147,993

 

100.0

%

$

158,579

 

100.0

%

 

During the third quarter ended September 30, 2016, consulting fee revenue for the United Arab Emirates amounted to $25,016,000 representing 16.9% 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, 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.

 

Total Revenue by Geographic Region:

 

 

 

Three Months Ended September 30,

 

 

 

2016

 

2015

 

U.S./Canada

 

$

57,687

 

34.3

%

$

53,554

 

29.9

%

Latin America

 

5,867

 

3.5

 

8,398

 

4.7

 

Europe

 

21,978

 

13.1

 

24,814

 

13.9

 

Middle East

 

65,617

 

39.1

 

75,320

 

42.1

 

Africa

 

8,076

 

4.8

 

8,205

 

4.6

 

Asia/Pacific

 

8,728

 

5.2

 

8,644

 

4.8

 

Total

 

$

167,953

 

100.0

%

$

178,935

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

56,920

 

33.9

%

$

52,774

 

29.5

%

Non-U.S.

 

111,033

 

66.1

 

126,161

 

70.5

 

Total

 

$

167,953

 

100.0

%

$

178,935

 

100.0

%

 

During the third quarter ended September 30, 2016, total revenue for the United Arab Emirates amounted to $26,359,000 representing 15.7% of the total. No other country except for the United States accounted for 10% or more of consolidated total revenue.

 

18



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.

 

Consulting Fee Revenue By Client Type:

 

 

 

Three Months Ended September 30,

 

 

 

2016

 

2015

 

U.S. federal government

 

$

2,382

 

1.6

%

$

2,295

 

1.4

%

U.S. state, regional and local governments

 

26,540

 

17.9

 

21,630

 

13.6

 

Foreign governments

 

41,971

 

28.4

 

51,136

 

32.3

 

Private sector

 

77,100

 

52.1

 

83,518

 

52.7

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

147,993

 

100.0

%

$

158,579

 

100.0

%

 

Total Revenue By Client Type:

 

 

 

Three Months Ended September 30,

 

 

 

2016

 

2015

 

U.S. federal government

 

$

3,088

 

1.8

%

$

2,802

 

1.6

%

U.S. state, regional and local governments

 

41,553

 

24.7

 

34,793

 

19.4

 

Foreign governments

 

45,450

 

27.1

 

54,578

 

30.5

 

Private sector

 

77,862

 

46.4

 

86,762

 

48.5

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

167,953

 

100.0

%

$

178,935

 

100.0

%

 

Property, Plant and Equipment, Net by Geographic Location:

 

 

 

September 30, 2016

 

December 31, 2015

 

U.S./Canada

 

$

13,388

 

$

13,581

 

Latin America

 

991

 

1,031

 

Europe

 

2,943

 

3,084

 

Middle East

 

3,394

 

3,980

 

Africa

 

848

 

1,120

 

Asia/Pacific

 

743

 

955

 

Total

 

$

22,307

 

$

23,751

 

 

 

 

 

 

 

U.S.

 

$

13,388

 

$

13,581

 

Non-U.S.

 

8,919

 

10,170

 

Total

 

$

22,307

 

$

23,751

 

 

19



Table of Contents

 

Consulting Fee Revenue (“CFR”)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Project Management

 

$

333,573

 

72.8

%

$

345,122

 

73.5

%

Construction Claims

 

124,339

 

27.2

 

124,336

 

26.5

 

Total

 

$

457,912

 

100.0

%

$

469,458

 

100.0

%

 

Total Revenue

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Project Management

 

$

392,087

 

75.4

%

$

402,586

 

75.8

%

Construction Claims

 

127,676

 

24.6

 

128,265

 

24.2

 

Total

 

$

519,763

 

100.0

%

$

530,851

 

100.0

%

 

Operating Profit (Loss) by Geographic Region:

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

U.S. / Canada

 

$

16,266

 

$

13,158

 

Latin America

 

(769

)

262

 

Europe

 

1,987

 

1,028

 

Middle East

 

23,201

 

41,130

 

Africa

 

1,910

 

(158

)

Asia/Pacific

 

(1,515

)

(830

)

Corporate

 

(27,862

)

(26,638

)

Total

 

$

13,218

 

$

27,952

 

 

 

 

 

 

 

U.S.

 

$

15,603

 

$

12,336

 

Non - U.S.

 

25,477

 

42,254

 

Corporate

 

(27,862

)

(26,638

)

Total

 

$

13,218

 

$

27,952

 

 

Depreciation and Amortization Expense:

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Project Management

 

$

5,038

 

$

5,637

 

Construction Claims

 

2,204

 

2,349

 

Subtotal segments

 

7,242

 

7,986

 

Corporate

 

463

 

300

 

Total

 

$

7,705

 

$

8,286

 

 

20



Table of Contents

 

Consulting Fee Revenue by Geographic Region:

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

U.S./Canada

 

$

123,416

 

27.0

%

$

113,735

 

24.2

%

Latin America

 

17,728

 

3.9

 

23,011

 

4.9

 

Europe

 

64,555

 

14.1

 

64,905

 

13.8

 

Middle East

 

205,385

 

44.9

 

222,572

 

47.5

 

Africa

 

20,950

 

4.6

 

21,329

 

4.5

 

Asia/Pacific

 

25,878

 

5.5

 

23,906

 

5.1

 

Total

 

$

457,912

 

100.0

%

$

469,458

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

121,287

 

26.5

%

$

111,436

 

23.7

%

Non-U.S.

 

336,625

 

73.5

 

358,022

 

76.3

 

Total

 

$

457,912

 

100.0

%

$

469,458

 

100.0

%

 

During the nine months ended September 30, 2016, consulting fee revenue for the United Arab Emirates amounted to $86,596,000 representing 18.9% of the total.  No other country except the United States accounted for 10% or more of consolidated consulting fee revenue.

 

During the nine months ended September 30, 2015, consulting fee revenue for the United Arab Emirates amounted to $83,613,000 representing 17.8% of the total. No other country except the United States accounted for 10% or more of consolidated consulting fee revenue.

 

Total Revenue by Geographic Region:

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

U.S./Canada

 

$

170,027

 

32.7

%

$

159,169

 

30.0

%

Latin America

 

17,831

 

3.4

 

23,092

 

4.3

 

Europe

 

67,347

 

13.0

 

68,534

 

12.9

 

Middle East

 

214,750

 

41.3

 

231,314

 

43.6

 

Africa

 

23,706

 

4.6

 

24,444

 

4.6

 

Asia/Pacific

 

26,102

 

5.0

 

24,298

 

4.6

 

Total

 

$

519,763

 

100.0

%

$

530,851

 

100.0

%

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

167,819

 

32.3

%

$

156,715

 

29.5

%

Non-U.S.

 

351,944

 

67.7

 

374,136

 

70.5

 

Total

 

$

519,763

 

100.0

%

$

530,851

 

100.0

%

 

During the nine months ended September 30, 2016, total revenue for the United Arab Emirates amounted to $91,082,000 representing 17.5% of the total. No other country except for the United States accounted for 10% or more of consolidated total revenue.

 

During the nine months ended September 30, 2015, total revenue for the United Arab Emirates amounted to $85,898,000 representing 16.2% of the total. No other country except for the United States accounted for 10% or more of consolidated total revenue.

 

21



Table of Contents

 

Consulting Fee Revenue By Client Type:

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

U.S. federal government

 

$

7,252

 

1.6

%

$

7,061

 

1.5

%

U.S. state, regional and local governments

 

74,663

 

16.3

 

63,921

 

13.6

 

Foreign governments

 

139,499

 

30.5

 

160,694

 

34.2

 

Private sector

 

236,498

 

51.6

 

237,782

 

50.7

 

Total

 

$

457,912

 

100.0

%

$

469,458

 

100.0

%

 

Total Revenue By Client Type:

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

U.S. federal government

 

$

8,809

 

1.7

%

$

8,651

 

1.6

%

U.S. state, regional and local governments

 

117,369

 

22.6

 

101,402

 

19.1

 

Foreign governments

 

150,010

 

28.9

 

171,615

 

32.4

 

Private sector

 

243,575

 

46.8

 

249,183

 

46.9

 

Total

 

$

519,763

 

100.0

%

$

530,851

 

100.0

%

 

Note 15 — Commitments and Contingencies

 

General Litigation

 

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.

 

Acquisition-Related Contingencies

 

As of September 30, 2016, our subsidiary, Hill International (Spain), S.A. (“Hill Spain”), owned an indirect 91% interest in Engineering S.A. (“ESA”), a firm located in Brazil.  ESA’s shareholders entered into an agreement whereby the minority shareholders have a right to compel (“ESA Put Option”) Hill Spain to purchase any or all of their shares during the period from February 28, 2014 to February 28, 2021.  Hill Spain also has the right to compel (“ESA Call Option”) the minority shareholders to sell any or all of their shares during the same time period.  The purchase price for such shares shall be seven times the earnings before interest and taxes for ESA’s most recently ended fiscal year, net of any financial debt plus excess cash multiplied by a percentage which the shares to be purchased bear to the total number of shares outstanding at the time of purchase, but in the event the ESA Call Option is exercised by Hill Spain, the purchase price shall be increased by five percent.  The ESA Put Option and the ESA Call Option must be made within three months after the audited financial statements of ESA have been completed. On June 17, 2016, the three remaining minority shareholders exercised their ESA Put Option claiming a value of BRL 8,656,000 (approximately $2,655,000 at September 30, 2016). The Company accrued the liability which is included in other current liabilities and as an adjustment to additional paid-in capital in the consolidated balance sheet at September 30, 2016. The amount is subject to negotiation and any difference will be recorded upon completion of the transaction.

 

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”).  The sellers of Cadogans are entitled to an earn-out based upon the

 

22



Table of Contents

 

average earnings before interest, taxes, depreciation and amortization for the two-year period ending on October 31, 2016 (which amount shall not be less than £0 or more than £200,000). The Company accrued the potential additional consideration of £200,000 ($259,000) which is included in other current liabilities in the consolidated balance sheet at September 30, 2016.

 

Two of the selling shareholders of Cadogans may receive an earn-out in annual installments of up to £100,000 ($130,000) at September 30, 2016), which will be charged to earnings, provided that Cadogans’ EBITDA for each of the years ending October 31, 2016, 2017, 2018 and 2019 is greater than £396,000 ($513,000).   Based upon preliminary results, it appears that the two shareholders will receive an earnout amounting to £100,000 ($130,000) of which £92,000 ($120,000) has been accrued and charged to earnings for the three and nine months ended September 30, 2016.

 

In connection with the acquisition of IMS Proje Yonetimi ve Danismanlik A.S. (“IMS”) on April 15, 2015, the Company had accrued approximately TRY 1,700,000 for a potential earn out which would be payable if earnings before interest, income taxes, depreciation and amortization for the twelve month period subsequent to the closing date (“EBITDA”) exceeded TRY 3,500,000.  A lesser amount would have been payable if EBITDA was between TRY 3,200,000 and TRY 3,500,000.  IMS’s EBITDA through the one-year anniversary of the acquisition date was not sufficient to earn any of the Additional Purchase Price and the liability was eliminated by a credit of approximately $673,000 to selling, general and administrative expenses for the nine month period ended September 30, 2016.

 

23



Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

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.

 

The recent drop in global oil prices has had a negative impact on the construction industry, particularly in the Middle East, where existing projects have been suspended or have had scope reductions.  Also, political upheaval and civil unrest have negatively affected business in the region.  This trend could continue for the next few years.

 

CFR decreased $10,586,000, or 6.7%, to $147,993,000 during the third quarter of 2016 from $158,579,000 during the third quarter of 2015.  CFR for the Project Management segment decreased $9,673,000 principally due to decreases in the Middle East, where three large projects were completed and several existing projects have been suspended or have had scope reductions, and Latin America, partially offset by increases in the United States.  CFR for the Construction Claims segment decreased by $913,000, or 2.2%, due primarily to decreases in Europe and Asia/Pacific, partially offset by increases in the Middle East.

 

CFR decreased $11,546,000, or 2.5%, to $457,912,000 during the nine months ended September 30, 2016 from $469,458,000 during the nine months ended September 30, 2015.  CFR for the Project Management segment decreased $11,549,000 principally due to decreases in the Middle East, as noted above, and Latin America, partially offset by increases in the United States. CFR for the Construction Claims segment was essentially flat due primarily to increases in the United Kingdom and the Middle East, offset by decreases in the United States.

 

Net loss attributable to Hill was ($6,866,000) during the third quarter of 2016 compared to net earnings of $2,948,000 during the third quarter of 2015.  The decrease was due to a lower volume of work and declining margins in the Middle East as well as increased operating expenses.

 

Diluted loss per common share was ($0.13) during the third quarter of 2016 based upon 51,753,000 diluted common shares outstanding compared to diluted earnings per common share of $0.06 during the third quarter of 2015 based upon 51,803,000 diluted common shares outstanding.

 

Net loss attributable to Hill was ($3,926,000) during the nine months ended September 30, 2016 compared to net earnings of $8,045,000 during the nine months ended September 30, 2015.  The decrease was due to a lower volume of work and declining margins in the Middle East as well as increased operating expenses.

 

Diluted loss per common share was ($0.08) during the nine months ended September 30, 2016 based upon 51,704,000 diluted common shares outstanding compared to diluted earnings per common share of $0.16 during the nine months ended September 30, 2015 based upon 51,274,000 diluted common shares outstanding.

 

Critical Accounting Policies

 

The Company’s interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain.  As the number of variables and assumptions affecting the judgment increases such judgments become even more subjective.  While management believes its assumptions are reasonable and appropriate, actual results may be materially different than estimated.  The critical accounting estimates and assumptions have not materially changed from those identified in the Company’s 2015 Annual Report.

 

24



Table of Contents

 

Results of Operations

 

Three Months Ended September 30, 2016 Compared to

Three Months Ended September 30, 2015

 

Consulting Fee Revenue (“CFR”) (dollars in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2016

 

2015

 

Change

 

Project Management

 

$

106,868

 

72.2

%

$

116,541

 

73.5

%

$

(9,673

)

(8.3

)%

Construction Claims

 

41,125

 

27.8

 

42,038

 

26.5

 

(913

)

(2.2

)

Total

 

$

147,993

 

100.0

%

$

158,579

 

100.0

%

$

(10,586

)

(6.7

)%

 

The decrease in CFR was primarily due to decreased work in the Middle East where the recent drop in oil prices has had a negative effect on funding for construction projects, some of which have been suspended or have had scope reductions.  Also, political upheaval and civil unrest has generally had a negative effect on business in the region.  This trend could continue for the next few years.

 

The decrease in Project Management CFR included a $13,880,000 decrease in international projects and an increase of $4,207,000 in domestic projects.   The decrease in international Project Management CFR was due primarily to decreases throughout the Middle East and Brazil.  The increase in domestic Project Management CFR included increases primarily in the Northeast and Southern Regions.

 

The decrease in Construction Claims CFR was primarily due to decreases in the United Kingdom, the United States and Asia/Pacific, partially offset by increases in the Middle East.

 

Reimbursable Expenses (dollars in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2016

 

2015

 

Change

 

Project Management

 

$

19,004

 

95.2

%

$

18,998

 

93.3

%

$

6

 

%

Construction Claims

 

956

 

4.8

 

1,358

 

6.7

 

(402

)

(29.6

)

Total

 

$

19,960

 

100.0

%

$

20,356

 

100.0

%

$

(396

)

(1.9

)%

 

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 earnings.  The decrease in Construction Claims reimbursable expense is primarily due to lower direct job related expenses in the United Kingdom and the Middle East.

 

Cost of Services (dollars in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2016

 

2015

 

Change

 

 

 

 

 

 

 

% of
CFR

 

 

 

 

 

% of
CFR

 

 

 

 

 

Project Management

 

$

63,325

 

77.9

%

59.3

%

$

70,459

 

78.9

%

60.5

%

$

(7,134

)

(10.1

)%

Construction Claims

 

17,916

 

22.1

 

43.6

 

18,886

 

21.1

 

44.9

 

(970

)

(5.1

)

Total

 

$

81,241

 

100.0

%

54.9

%

$

89,345

 

100.0

%

56.3

%

$