Hill International, Inc.
Hill International, Inc. (Form: 10-Q, Received: 05/10/2017 15:23:46)

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 March 31, 2017

 

or

 

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

 

For the transition period

 

from                               to                           

 

Commission File Number: 001-33961

 

HILL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-0953973

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

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

 

19103

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  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

 

Emerging Growth Company  o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  o  No  x

 

There were 51,878,215 shares of the Registrant’s Common Stock outstanding at April 28, 2017.

 

 

 



Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

 

Index to Form 10-Q

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

4

 

 

 

 

Consolidated Balance Sheets at March 31, 2017 (unaudited) and December 31, 2016

4

 

 

 

 

Consolidated Statements of Earnings for the three months ended March 31, 2017 and 2016 (unaudited)

5

 

 

 

 

Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

PART II

OTHER INFORMATION

35

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Funds

35

 

 

 

Item 3.

Defaults Upon Senior Securities

35

 

 

 

Item 4.

Mine Safety Disclosures

35

 

 

 

Item 5

Other Information

35

 

 

 

Item 6.

Exhibits

35

 

 

 

Signatures

 

 

 

2



Table of Contents

 

PART I

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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.

 

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

 

·                   The markets for our services;

·                   Projections of revenues and earnings, anticipated contractual obligations, funding requirements or other financial items;

·                   Statements concerning our plans, strategies and objectives for future operations; and

·                   Statements regarding future economic conditions or performance.

 

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,” in 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;

·                   Unfavorable global economic conditions

·                   Our expenses may be higher than anticipated

·                   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 business, financial position or results of operations include:

 

·                   Unexpected 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.

 

3



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)

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

20,413

 

$

25,637

 

Cash - restricted

 

3,544

 

4,312

 

Accounts receivable, less allowance for doubtful accounts of $68,302 and $71,082

 

166,468

 

164,554

 

Accounts receivable - affiliates

 

7,335

 

5,712

 

Prepaid expenses and other current assets

 

7,799

 

7,751

 

Income taxes receivable

 

2,900

 

3,554

 

Current assets held for sale

 

53,351

 

54,651

 

Total current assets

 

261,810

 

266,171

 

Property and equipment, net

 

16,173

 

16,787

 

Cash - restricted, net of current portion

 

327

 

313

 

Retainage receivable

 

17,775

 

17,225

 

Acquired intangibles, net

 

6,196

 

6,747

 

Goodwill

 

51,467

 

50,665

 

Investments

 

4,385

 

3,581

 

Deferred income tax assets

 

2,047

 

2,197

 

Other assets

 

4,009

 

4,224

 

Non-current assets held for sale

 

33,353

 

33,298

 

Total assets

 

$

397,542

 

$

401,208

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current maturities of notes payable and long-term debt

 

$

4,492

 

$

1,983

 

Accounts payable and accrued expenses

 

86,750

 

83,992

 

Income taxes payable

 

3,764

 

4,808

 

Deferred revenue

 

5,094

 

12,943

 

Other current liabilities

 

8,515

 

8,168

 

Current liabilities held for sale

 

25,906

 

28,210

 

Total current liabilities

 

134,521

 

140,104

 

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

 

150,808

 

142,120

 

Retainage payable

 

1,000

 

961

 

Deferred income taxes

 

619

 

535

 

Deferred revenue

 

12,099

 

12,691

 

Other liabilities

 

10,266

 

9,732

 

Non-current liabilities held for sale

 

3,851

 

4,679

 

Total liabilities

 

313,164

 

310,822

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 1,000 shares authorized, none issued

 

 

 

Common stock, $0.0001 par value; 100,000 shares authorized, 58,848 shares and 58,835 shares issued at March 31, 2017 and December 31, 2016, respectively

 

6

 

6

 

Additional paid-in capital

 

190,956

 

190,355

 

Retained earnings (deficit)

 

(24,734

)

(17,623

)

Accumulated other comprehensive loss

 

(53,953

)

(54,327

)

 

 

112,275

 

118,411

 

Less treasury stock of 6,977 shares at March 31, 2017 and December 31, 2016, respectively

 

(30,041

)

(30,041

)

Hill International, Inc. share of equity

 

82,234

 

88,370

 

Noncontrolling interests

 

2,144

 

2,016

 

Total equity

 

84,378

 

90,386

 

Total liabilities and stockholders’ equity

 

$

397,542

 

$

401,208

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Consulting fee revenue

 

$

95,913

 

$

116,579

 

Reimbursable expenses

 

11,656

 

17,791

 

Total revenue

 

107,569

 

134,370

 

 

 

 

 

 

 

Cost of services

 

61,548

 

75,510

 

Reimbursable expenses

 

11,656

 

17,791

 

Total direct expenses

 

73,204

 

93,301

 

Gross profit

 

34,365

 

41,069

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

34,865

 

38,398

 

Share of loss (profit) of equity method affiliates

 

34

 

(15

)

Operating (loss) profit

 

(534

)

2,686

 

 

 

 

 

 

 

Interest and related financing fees, net

 

197

 

213

 

(Loss) earnings before income taxes

 

(731

)

2,473

 

 

 

 

 

 

 

Income tax expense

 

654

 

166

 

(Loss) earnings from continuing operations

 

(1,385

)

2,307

 

 

 

 

 

 

 

Loss from discontinued operations

 

(5,665

)

(853

)

Net (loss) earnings

 

(7,050

)

1,454

 

 

 

 

 

 

 

Less: net earnings - noncontrolling interests

 

61

 

4

 

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

 

$

(7,111

)

$

1,450

 

 

 

 

 

 

 

Basic (loss) earnings per common share from continuing operations

 

(0.03

)

0.05

 

Basic loss per common share from discontinued operations

 

(0.11

)

(0.02

)

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

 

$

(0.14

)

$

0.03

 

Basic weighted average common shares outstanding

 

51,860

 

51,631

 

 

 

 

 

 

 

Diluted (loss) earnings per common share from continuing operations

 

(0.03

)

0.05

 

Diluted loss per common share from discontinued operations

 

(0.11

)

(0.02

)

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

 

$

(0.14

)

$

0.03

 

Diluted weighted average common shares outstanding

 

51,860

 

51,722

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

Net (loss) earnings

 

$

(7,050

)

$

1,454

 

Foreign currency translation adjustment, net of tax

 

440

 

434

 

Other, net

 

 

34

 

Comprehensive (loss) earnings

 

(6,610

)

1,922

 

Comprehensive earnings (loss) attributable to noncontrolling interests

 

128

 

(752

)

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

 

$

(6,738

)

$

2,674

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) earnings

 

$

(7,050

)

$

1,454

 

Loss from discontinued operations

 

5,665

 

853

 

(Loss) earnings from continuing operations

 

(1,385

)

2,307

 

Adjustments to reconcile net (loss) earnings to net cash (used in):

 

 

 

 

 

Depreciation and amortization

 

1,566

 

1,878

 

Provision for bad debts

 

(526

)

1,271

 

Amortization of deferred loan fees

 

444

 

444

 

Deferred tax benefit

 

93

 

749

 

Stock based compensation

 

552

 

668

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

812

 

378

 

Accounts receivable

 

(1,308

)

(1,897

)

Accounts receivable - affiliate

 

(1,621

)

(4,149

)

Prepaid expenses and other current assets

 

61

 

18

 

Income taxes receivable

 

732

 

(292

)

Retainage receivable

 

(550

)

(281

)

Other assets

 

(337

)

3,979

 

Accounts payable and accrued expenses

 

1,544

 

(6,558

)

Income taxes payable

 

(1,129

)

(3,867

)

Deferred revenue

 

(8,721

)

(2,533

)

Other current liabilities

 

257

 

3,633

 

Retainage payable

 

38

 

266

 

Other liabilities

 

513

 

(995

)

Net cash used in continuing operations

 

(8,965

)

(4,981

)

Net cash (used in) provided by discontinued operations

 

(6,554

)

368

 

Net cash used in operating activities

 

(15,519

)

(4,613

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Payments for purchase of property and equipment

 

(241

)

(141

)

Net cash used in investing activities of continuing operations

 

(241

)

(141

)

Net cash used in investing activities of discontinued operations

 

(458

)

(31

)

Net cash used in investing activities

 

(699

)

(172

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on term loans

 

(314

)

(314

)

Net borrowings on revolving loans

 

10,997

 

1,202

 

Proceeds from stock issued under employee stock purchase plan

 

49

 

10

 

Proceeds from exercise of stock options

 

 

86

 

Net cash provided by financing activities

 

10,732

 

984

 

Effect of exchange rate changes on cash

 

262

 

747

 

Net decrease in cash and cash equivalents

 

(5,224

)

(3,054

)

Cash and cash equivalents — beginning of period

 

25,637

 

24,089

 

Cash and cash equivalents — end of period

 

$

20,413

 

$

21,035

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

HILL INTERNATIONAL, INC.AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — The Company

 

Hill International, Inc. (“Hill” or the “Company”) is a professional services firm that provides program management, project management, construction management and other consulting services primarily to the buildings, transportation, environmental, energy and industrial markets worldwide.  Hill’s clients include the U.S. federal government, U.S. state and local governments, foreign governments and the private sector.

 

Note 2 - Liquidity

 

The amount of consulting fee revenue (“CFR”) attributable to operations in the Middle East and Africa is approximately 45.5% of total consolidated CFR for the three months ended March 31, 2017.  There has been significant political upheaval and civil unrest in this region, most notably in Libya and Iraq where the Company had substantial operations.  In 2012, due to the overthrow of the Libyan government, the Company reserved a $59,937,000 receivable from the Libyan Organization for Development of Administrative Centres (“ODAC”).  Subsequently, the Company received payments totaling approximately $9,511,000. During the quarter ended March 31, 2017, the Company wrote off approximately $3,593,000 and maintains a reserve of approximately $2,777,000 against accounts receivable from various projects in Iraq.  This shortfall of cash flows continues to put a considerable strain on its liquidity.

 

The Company continues to experience slowing of collections from its clients in the Middle East, primarily Oman.  In 2012, the Company commenced operations on the Muscat International Airport (the “Oman Airport”) project with the Ministry of Transport 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 October 2015, the MOTC paid the Company for work performed in April and May 2015.  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 through approximately June 2018.  MOTC resumed payments in 2016 paying the Company approximately $42,000,000 during 2016 and $12,728,000 through April 2017.  At March 31, 2017, accounts receivable from the Oman Airport totaled approximately $29,200,000, of which approximately $18,700,000 was past due based on contractual terms.

 

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.  As a result, the Company has had to rely heavily on debt and equity transactions to fund its operations over the past few years.

 

Note 3 - Discontinued Operations

 

In early 2016, the Company began to investigate the sale of its Construction Claims Group (the “Claims Group”). The pending sale of that segment represents a strategic shift that will have a major effect on its operations and financial results. Accordingly, the Company had classified the assets and liabilities of that segment as held for sale and has reflected its operations and cash flows as discontinued operations for all periods presented.

 

On December 20, 2016, the Company and its subsidiary Hill International N.V. (“Hill N.V.” and, collectively with the Company, the “Sellers”) entered into a Stock Purchase Agreement (as amended on May 3, 2017, the “Agreement”) with Liberty Mergeco, Inc. (the “US Purchaser”) and Liberty Bidco UK Limited (the “UK Purchaser” and, collectively with the US Purchaser, the “Purchasers”) pursuant to which the Purchasers will acquire the Claims Group by the US Purchaser’s acquisition of all of the stock of Hill International Consulting, Inc. from the Company and the UK Purchaser’s acquisition of all of the stock of Hill International Consulting B.V. from Hill N.V. for a total purchase price of $140,000,000 in cash reduced by assumed indebtedness and certain other items, as set forth in the Agreement.  The transaction closed effective May 5, 2017.  See Note 18 for further information.

 

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Table of Contents

 

The carrying amounts of assets and liabilities of the discontinued operations which have been classified as held for sale are as follows (in thousands):

 

 

 

March 31, 2017

 

December 31, 2016

 

Trade receivables

 

$

48,580

 

$

50,892

 

Prepaid expense and other current assets

 

2,775

 

3,064

 

Income taxes receivable

 

1,996

 

695

 

Total current assets classified as held for sale

 

$

53,351

 

$

54,651

 

 

 

 

 

 

 

Property, plant and equipment

 

4,569

 

4,617

 

Acquired intangibles, net

 

3,271

 

3,397

 

Goodwill

 

23,152

 

22,714

 

Investments

 

7

 

6

 

Deferred income tax assets

 

1,751

 

1,954

 

Other assets

 

603

 

610

 

Total non-current assets classified as held for sale

 

$

33,353

 

$

33,298

 

 

 

 

 

 

 

Accounts payable

 

21,576

 

23,406

 

Income taxes payable

 

8

 

92

 

Deferred revenue

 

1,684

 

1,562

 

Other current liabilities

 

2,638

 

3,150

 

Total current liabilities classified as held for sale

 

$

25,906

 

$

28,210

 

 

 

 

 

 

 

Deferred income taxes

 

2,115

 

2,022

 

Deferred revenue

 

437

 

1,012

 

Other liabilities

 

1,299

 

1,645

 

Total non-current liabilities classified as held for sale

 

$

3,851

 

$

4,679

 

 

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Table of Contents

 

The line items constituting earnings from discontinued operations consist of the following (in thousands):

 

 

 

March 31,

 

 

 

2017

 

2016

 

Consulting fee revenue

 

$

40,239

 

$

40,726

 

Reimbursable expenses

 

3,791

 

1,125

 

Total revenue

 

44,030

 

41,851

 

Cost of services

 

18,203

 

18,553

 

Reimbursable expenses

 

3,791

 

1,125

 

Total direct expenses

 

21,994

 

19,678

 

Gross profit

 

22,036

 

22,173

 

Selling, general and administrative expenses

 

24,030

 

19,327

 

Operating (loss) profit

 

(1,994

)

2,846

 

Interest and related financing fees, net

 

3,647

 

3,184

 

Loss before income taxes

 

(5,641

)

(338

)

Income tax expense

 

24

 

515

 

Net loss from discontinued operations

 

$

(5,665

)

$

(853

)

 

In connection with the sale of the Construction Claims Group, the Company will be required to pay off the Secured Credit Facilities (See Note 9).  Accordingly, the Company has allocated to discontinued operations all interest expense related to the Secured Credit Facilities.  During the first quarter of 2017, the Company charged to discontinued operations approximately $1,585,000 of costs related to the pending sale of the Construction Claims and $410,000 for a potential tax liability related to foreign jurisdictions. See Notes 17 and 18 for further information.

 

Note 4 — Basis of Presentation

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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.

 

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Note 5 — Accounts Receivable

 

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

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Billed

 

$

191,243

 

$

200,134

 

Retainage, current portion

 

11,242

 

10,824

 

Unbilled

 

32,285

 

24,678

 

 

 

234,770

 

235,636

 

Allowance for doubtful accounts

 

(68,302

)

(71,082

)

Total

 

$

166,468

 

$

164,554

 

 

Unbilled receivables primarily represent revenue earned on contracts, which the Company is contractually precluded from billing until predetermined future dates.

 

In 2012, the Company commenced operations on the Muscat International Airport (the “Oman Airport”) project with the Ministry of Transport 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 $42,000,000 during the year. At March 31, 2017, accounts receivable from the Oman Airport totaled approximately $29,200,000, of which approximately $18,700,000, was past due based on contractual terms. Through April 2017, the Company received payments totaling $12,728,000 against this receivable.

 

In addition, there is approximately $17,000,000 included in non-current Retainage Receivable in the consolidated balance sheet at March 31, 2017.  Of that amount, approximately $8,400,000 relates to retention and approximately $8,600,000 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 released 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 ends with a 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.

 

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Note 6 — Intangible Assets

 

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

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

Client relationships

 

$

16,859

 

$

11,931

 

$

16,699

 

$

11,298

 

Acquired contract rights

 

2,005

 

1,901

 

2,058

 

1,912

 

Trade names

 

2,369

 

1,205

 

2,339

 

1,139

 

Total

 

$

21,233

 

$

15,037

 

$

21,096

 

$

14,349

 

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

$

6,196

 

 

 

$

6,747

 

 

 

 

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

 

Three Months Ended March 31,

 

2017

 

2016

 

$

590

 

$

904

 

 

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

 

2017 (remaining 9 months)

 

$

1,680

 

2018

 

1,207

 

2019

 

1,202

 

2020

 

941

 

2021

 

543

 

 

Note 7 — Goodwill

 

The following table summarizes the changes in the Company’s carrying value of goodwill during 2017 (in thousands):

 

Balance, December 31, 2016

 

$

50,665

 

Additions

 

 

Translation adjustments

 

802

 

Balance, March 31, 2017

 

$

51,467

 

 

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Note 8 — Accounts Payable and Accrued Expenses

 

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

 

 

 

March 31, 2017

 

December 31, 2016

 

Accounts payable

 

$

29,808

 

$

30,944

 

Accrued payroll and related expenses

 

33,397

 

31,095

 

Accrued subcontractor fees

 

11,012

 

9,188

 

Accrued agency fees

 

5,742

 

5,702

 

Accrued legal and professional fees

 

2,476

 

2,223

 

Other accrued expenses

 

4,315

 

4,840

 

 

 

$

86,750

 

$

83,992

 

 

Note 9 — Notes Payable and Long-Term Debt

 

Outstanding debt obligations are as follows (in thousands):

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Term Loan Facility

 

$

112,878

 

$

112,884

 

Domestic Revolving Credit Facility

 

25,000

 

16,500

 

International Revolving Credit Facility

 

11,274

 

11,102

 

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

 

2,835

 

2,962

 

Borrowings under revolving credit facilities with the National Bank of Abu Dhabi

 

2,671

 

 

Borrowings from Philadelphia Industrial Development Corporation

 

642

 

655

 

 

 

155,300

 

144,103

 

Less current maturities

 

4,492

 

1,983

 

 

 

 

 

 

 

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

 

$

150,808

 

$

142,120

 

 

In conjunction with the sale of its Construction Claims Group in May 2017, the Company paid off and terminated the Secured Credit Facilities described below and has entered into a new credit facility (See Note 18).  The disclosures which follow below describe the Secured Credit Facilities in existence as of March 31, 2017.

 

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 ac €11,765,000 ($15,000,000 at closing and $12,573,000 at March 31, 2017) 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 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 (b) consolidated earnings before interest, taxes, depreciation, amortization, non-cash items and share-based

 

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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%.

 

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 accounts receivable from 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. The interest rate will be reset as soon as the accounts receivable over 120 days decline below the 10% or 14% levels. At March 31, 2017, the accounts receivable from Oman exceeded the limit described above, however, due to a payment received on April 12, 2017, the accounts receivable declined below the established limit.

 

At December 31, 2016, the Company was in default of the Consolidated Net Leverage Ratio.  The Company requested and received a waiver of the default from the Agent on March 27, 2017.  In connection with the waiver, the Company incurred a consent fee amounting to $401,000 which was charged to discontinued operations in the first quarter of 2017.

 

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 March 31, 2017, 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 after the closing, (ii) with net proceeds from certain asset sales outside the ordinary course of business, and (iii) with 50% of the excess cash flow (as defined in the agreement) for each fiscal year of the Borrowers commencing with the first full fiscal year ending after closing (which percentage would be reduced to 25% if the Consolidated Net Leverage Ratio is equal to or less than 2.25 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.

 

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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 $4,122,000 and $4,416,000 are included as an offset against the Term Loan balances in the consolidated balance sheets at March 31, 2017 and December 31, 2016, 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 March 31, 2017, the interest rate was 6.75%.

 

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.   At March 31, 2017, the interest rate was 3.60%.

 

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 March 31, 2017, the domestic borrowing base was $30,000,000 and the international borrowing base was €11,765,000 (approximately $12,573,000 at March 31, 2017).

 

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 $1,500,000 and $1,650,000 are included in other assets in the consolidated balance sheet at March 31, 2017 and December 31, 2016, respectively.

 

At March 31, 2017 the Company had $4,470,000 of outstanding letters of credit and $530,000 of available borrowing capacity under the U.S. Revolver.

 

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At March 31, 2017, the Company had $909,000 of outstanding letters of credit and $1,604,000 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 2015 move of its corporate headquarters to Philadelphia, Pennsylvania, the Company received a loan from the Philadelphia Industrial Development Corporation in the amount of $750,000 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”), maintained a revolving credit facility with six banks (the “Financing Entities”) in Spain which initially provided for total borrowing of up to €5,640,000 with interest at 6.50% on outstanding borrowings. The facility expired on December 17, 2016. Concurrent with the satisfaction of this facility Hill Spain entered into a new agreement with three new banks. The total new facility is for €2,623,000 (approximately $2,803,000) at March 31, 2017. The facility was fully utilized at March 31, 2017. Interest rates at March 31, 2017 were between 1.85% and 3.50%. The loans have varying expiration dates between 36 and 60 months.

 

Hill Spain also maintains an ICO (Official Credit Institute) loan with Bankia Bank in Spain for €30,000 (approximately $32,000) at March 31, 2017.  The availability is reduced by €15,000 on a quarterly basis.  At March 31, 2017, the loan was fully utilized.  The interest rate at March 31, 2017 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 March 31, 2017) collateralized by certain overseas receivables.  At March 31, 2017, AED 9,811,000 was utilized (approximately $2,671,000).  The interest rate is the one-month Emirates InterBank Offer Rate plus 3.50% (or 4.91 % at March 31, 2017) but no less than 5.50%.  This facility allows for letters of guarantee up to AED 200,000,000 (approximately $54,451,000 at March 31, 2017) of which AED 99,180,000 (approximately $27,002,000) was outstanding at March 31, 2017.  The credit facility is subject to periodic review by the bank and as such has been classified as current in the consolidated balance sheet.

 

Engineering S.A. maintains four unsecured revolving credit facilities with two banks in Brazil aggregating 2,380,000 Brazilian Reais (BRL) (approximately $755,000 at March 31, 2017, with a weighted average interest rate of 5.07% per month at March 31, 2017.  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 March 31, 2017, the maximum U.S. dollar equivalent of the commitments was $83,376,000 of which $33,177,000 is outstanding.

 

Note 10 — Supplemental Cash Flow Information

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

Interest and related financing fees paid

 

$

3,500

 

$

3,003

 

Income taxes paid

 

$

1,194

 

$

2,956

 

 

Note 11 — Earnings per Share

 

Basic earnings per common share have been computed using the weighted-average number of shares of common stock outstanding during the period.  Diluted earnings per common share incorporates the incremental shares issuable upon the

 

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assumed exercise of stock options using the treasury stock method, if dilutive.  Dilutive stock options increased average common shares outstanding by 91,000 shares for the three-month period ended March 31, 2016.  Options to purchase approximately 6,754,000 shares and 2,590,000 shares were excluded from the calculation of diluted earnings per share for the three-month periods ended March 31, 2017 and 2016, respectively, because they were antidilutive.

 

Note 12 — Share-Based Compensation

 

At March 31, 2017, the Company had 6,517,473 options outstanding with a weighted average exercise price of $3.96.  During the three months ended March 31, 2017, the Company granted 715,853 options which vest over a five-year period. The options have a weighted average exercise price of $4.98 and a weighted-average contractual life of 7.0 years.  The aggregate fair value of the options was $1,412,500 calculated using the Black-Scholes valuation model. The weighted average assumptions used to calculate fair value were: expected life—5 years; volatility—48.30% and risk-free interest rate—2.08%. During the three months ended March 31, 2017, options for 1,165,200 shares with a weighted average exercise price of $5.55 lapsed and options for 95,000 shares with a weighted average exercise price of $4.40 were forfeited.

 

During the three months ended March 31, 2017, employees purchased 13,104 common shares for an aggregate purchase price of approximately $49,000 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 $552,000 and $668,000 for the three months ended March 31, 2017 and 2016, respectively.

 

Note 13 — Stockholders’ Equity

 

The following table summarizes the changes in stockholders’ equity during the three months ended March 31, 2017 (in thousands):

 

 

 

 

 

Hill International,
Inc.

 

Noncontrolling

 

 

 

Total

 

Stockholders

 

Interest

 

Stockholders’ equity, December 31, 2016

 

$

90,386

 

$

88,370

 

$

2,016

 

Net (loss) earnings

 

(7,050

)

(7,111

)

61

 

Other comprehensive earnings

 

440

 

373

 

67

 

Comprehensive (loss) earnings

 

(6,610

)

(6,738

)

128

 

Additional paid in capital

 

602

 

602

 

 

Stockholders’ equity, March 31, 2017

 

$

84,378

 

$

82,234

 

$

2,144

 

 

Note 14 — Income Taxes

 

The effective tax rates for the three months ended March 31, 2017 and 2016 were (89.5%) and 6.7%, respectively.  The Company’s effective tax rate represents the Company’s estimated tax rate for the year based on projected income and mix of income among the various foreign tax jurisdictions, adjusted for discrete transactions occurring during the period.  The Company’s effective tax rate in both years is higher than it otherwise would be primarily as a result of not recording an income benefit related to the U.S. net operating loss.

 

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

 

 

 

Three Months Ended March 31, 2017

 

Three Months Ended March 31, 2016

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

(Loss) earnings before income taxes

 

$

(4,112

)

$

3,381

 

$

(731

)

$

(6,621

)

$

9,094

 

$

2,473

 

Income tax expense, net

 

$

 

$

654

 

$

654

 

$

 

$

166

 

$

166

 

 

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The reserve for uncertain tax positions amounted to $1,720,000 and $1,698,000 at March 31, 2017 and December 31, 2016, respectively, and is included in “Other liabilities” in the consolidated balance sheet at those dates.

 

The Company’s policy is to record income tax related interest and penalties in income tax expense. At both March 31, 2017 and December 31, 2016, potential interest and penalties related to uncertain tax positions amounting to $228,000 and $206,000 at March 31, 2017 and December 31, 2016, respectively, were 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 ASC 740,  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.

 

Note 15 —Segment and Related Information

 

At March 31, 2017, due to the pending sale of our Construction Claims Group (which was closed on May 5, 2017; see Note 18), the Company now has one operating segment, the Project Management Group, which reflects how the Company will be managed going forward.  The Project Management Group 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 services and facilities management services.  The information for 2016 has been revised to exclude the operations of the Construction Claims Group which is accounted for as discontinued operations.

 

The following tables present certain information for the Project Management Group’s operations (in thousands):

 

Consulting Fee Revenue by Geographic Region

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

37,389

 

39.0

%

$

31,972

 

27.4

%

Latin America

 

3,040

 

3.2

 

5,200

 

4.5

 

Europe

 

9,541

 

9.9

 

9,310

 

8.0

 

Middle East

 

38,514

 

40.2

 

60,846

 

52.2

 

Africa

 

5,050

 

5.3

 

5,523

 

4.7

 

Asia/Pacific

 

2,379

 

2.4

 

3,728

 

3.2

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

95,913

 

100.0

%

$

116,579

 

100.0

%

 

For the quarter ended March 31, 2017, consulting fee revenue for Saudi Arabia amounted to $10,440,000 representing 10.9% of the total. No other country, except for the United States, accounted for over 10% of consolidated consulting fee revenue.

 

For the quarter ended March 31, 2016, consulting fee revenue for the United Arab Emirates amounted to $24,065,000 representing 20.6% of the total and Saudi Arabia consulting fee revenue amounted to $13,416,000 representing 11.5% of the total. No other country, except for the United States, accounted for over 10% of consolidated consulting fee revenue.

 

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Total Revenue by Geographic Region

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

43,431

 

40.4

%

$

45,240

 

33.7

%

Latin America

 

3,043

 

2.8

 

5,206

 

3.9

 

Europe

 

10,190

 

9.5

 

9,797

 

7.3

 

Middle East

 

42,691

 

39.7

 

63,488

 

47.2

 

Africa

 

5,714

 

5.3

 

6,395

 

4.8

 

Asia/Pacific

 

2,500

 

2.3

 

4,244

 

3.1

 

Total

 

$

107,569

 

100.0

%

$

134,370

 

100.0

%

 

For the quarter ended March 31, 2017, no other country, except for the United States, accounted for over 10% of consolidated total revenue.

 

For the quarter ended March 31, 2016, total revenue for the United Arab Emirates amounted to $25,483,000 representing 19.0% of the total and Saudi Arabia amounted to $13,473,000 representing 10.0% of consolidated total revenue. No other country, except for the United States, accounted for over 10% of consolidated total revenue.

 

Operating Profit (Loss)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

United States

 

$

4,335

 

$

2,890

 

Latin America

 

(712

)

28

 

Europe

 

(326

)

(330

)

Middle East

 

3,721

 

8,556

 

Africa

 

901

 

331

 

Asia/Pacific

 

(35

)

545

 

Corporate

 

(8,418

)

(9,334

)

 

 

 

 

 

 

Total

 

$

(534

)

$

2,686

 

 

Depreciation and Amortization Expense

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

Project Management

 

$

1,493

 

$

1,822

 

Corporate

 

73

 

56

 

 

 

 

 

 

 

Total

 

$

1,566

 

$

1,878

 

 

Consulting Fee Revenue By Client Type

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

2,597

 

2.7

%

$

2,458

 

2.1

%

U.S. state, regional and local governments

 

23,743

 

24.8

 

21,662

 

18.6

 

Foreign governments

 

30,971

 

32.3

 

46,377

 

39.8

 

Private sector

 

38,602

 

40.2

 

46,082

 

39.5

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

95,913

 

100.0

%

$

116,579

 

100.0

%

 

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Table of Contents

 

Total Revenue By Client Type

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

U.S. federal government

 

$

3,172

 

2.9

%

$

2,848

 

2.1

%

U.S. state, regional and local governments

 

34,185

 

31.8

 

33,817

 

25.2

 

Foreign governments

 

35,314

 

32.8

 

50,039

 

37.2

 

Private sector

 

34,898

 

32.5

 

47,666

 

35.5

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

107,569

 

100.0

%

$

134,370

 

100.0

%

 

Property, Plant and Equipment, Net, by Geographic Location

 

 

 

March 31, 2017

 

December 31, 2016

 

United States

 

$

12,527

 

$

13,024

 

Latin America

 

865

 

880

 

Europe

 

892

 

218

 

Middle East

 

1,603

 

1,645

 

Africa

 

151

 

169

 

Asia/Pacific

 

135

 

851

 

 

 

 

 

 

 

Total

 

$

16,173

 

$

16,787

 

 

Note 16—Client Concentrations

 

The Company had no individual clients that accounted for 10% or more of total revenue or consulting fee revenue during the three months ended March 31, 2017 and 2016.

 

Note 17 — Commitments and Contingencies

 

General Litigation

 

Knowles Limited (“Knowles”), a subsidiary of the Company, is a party to an arbitration proceeding instituted on July 8, 2014 in which Knowles claimed that it was entitled to payment for services rendered to Celtic Bioenergy Limited (“Celtic”). The arbitrator decided in favor of Knowles. The arbitrator’s award was appealed by Celtic to the U.K. High Court of Justice, Queen’s Bench Division, Technology and Construction Court (“Court”). On March 16, 2017, the Court (1) determined that certain relevant facts had been deliberately withheld from the arbitrator by an employee of Knowles and (2) remitted the challenged parts of the arbitrator’s award back to the arbitrator to consider the award in possession of the full facts. The Company is evaluating the impact of the judgment of the Court.

 

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 March 31, 2017 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

 

20



Table of Contents

 

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 Options claim a value of BRL 8,656,000 (approximately $2,670,000 at March 31, 2017).  At that time, the Company accrued the liability in other current liabilities and as an adjustment to additional paid in capital. The amount is subject to negotiation and any difference will be recorded upon completion of the transaction. See Note 5.

 

Other

 

The Company has identified a potential tax liability related to certain foreign subsidiaries ’ failure to comply with laws and regulations of the jurisdictions, outside of their home country, in which their employees provided services. The Company has estimated the potential liability to be approximately $2,545,000 of which approximately $410,000 has been included in discontinued operations in the consolidated statement of operations for the three months ended March 31, 2017. The potential liability balance is included in other liabilities in the consolidated balance sheet at March 31, 2017.

 

In connection with the move of its corporate headquarters, the Commonwealth of Pennsylvania provided the Company with a $1,000,000 grant received on July 13, 2015.  The terms of the grant require the Company to spend at least $6,425,000 on capital expenditures for leasehold improvements and equipment for its new headquarters, remain at One Commerce Square for at least seven years and employ at least 359 persons no later than April 1, 2018.  The Company has met the capital expenditure requirement and has a twelve year lease for its corporate headquarters.  Upon receipt of the funds, the Company recorded a deferred credit which, assuming the employment requirement is met, will be reflected in income in the second quarter of 2018.  If the Company does not meet the employment criteria, it will be required to repay the grant to the Commonwealth of Pennsylvania.

 

The landlord for the new Philadelphia headquarters provided the Company with a tenant improvement allowance amounting to approximately $3,894,000. The tenant improvement allowance has been deferred, is included in other liabilities in the consolidated balance sheet at March 31, 2017 and December 31, 2016 and is being amortized on a straight-line basis against rent expense over the term of the twelve-year lease which commenced on May 1, 2015.

 

Note 18 — Subsequent Events

 

Sale of Construction Claims Group

 

On May 5, 2017, the Company closed the sale of its Construction Claims Group to two purchasers controlled by funds managed by Bridgepoint Development Capital for a total purchase price of $140,000,000 in cash minus: (1) an estimated working capital adjustment at closing amounting to approximately $8,449,000; and (2) approximately $2,187,000 of assumed indebtedness. The estimated working capital adjustment was supported by a working capital escrow of $2.0 million in cash, funded by the Company at closing. Within sixty days after closing, a final net working capital will be determined and if the net working capital is greater than the estimated working capital as of closing (i) the purchasers shall pay the Company such excess amount and (ii) the working capital escrow amount shall be released together in its entirety. If the final net working capital is less than the estimated working capital, then the shortfall amount shall be paid by the escrow agent from the working capital escrow amount. If such shortfall is greater than the working capital escrow amount, then the Company shall pay the amount by which such shortfall amount exceeds the working capital escrow amount to the purchasers.in cash. In addition, the Company was required to provide a $3.75 million letter of credit into escrow in order to secure certain of the Company’s indemnification obligations for 12 months following closing. The funds provided by the sale of the Construction Claims Group and the cash received upon the draw down under the amended Revolving Credit Facilities (described below) were used as follows: (a) $117,000,000 to pay off the Term Loan Facility; (b) $25,000,000 to pay down the U.S. Revolver; (c) approximately $9,072,000 to pay down the International Revolver; and (d) approximately $1,214,000 to pay accrued interest and certain bank fees.

 

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Table of Contents

 

Financing Transactions

 

Simultaneously with the closing of the sale, the Company terminated its Term Loan Facility, amended its U.S. Revolver to reduce the amount available to the Company from $30,000,000 to $25,000,000, amended its International Revolver to reduce the amount available to the Company from $15,000,000 to $10,000,000, and drew approximately $25,191,000 in cash and approximately $9,193,000 in letters of credit against the new Revolving Credit Facilities.  Deferred fees incurred with establishing the Secured Credit Facilities amounting to approximately $5,622,000 will be charged to discontinued operations in the quarter ending June 30, 2017.

 

The U.S. Revolver and the International Revolver each have a term of five years from the closing and provide for letter of credit sub-limits in amounts of $20,000,000 and $8,000,000, respectively.  The maximum Consolidated Net Leverage Ratio will be increased from the prior credit facilities to 3.00 for all test dates and will not decline.  The definition of Consolidated Net Leverage Ratio was amended to (i) remove the cap on the amount of permitted cash netting and (ii) permit netting of unrestricted cash and cash equivalents.  The Company incurred fees totaling $1,625,000 which will be deferred and amortized to interest expense over the five year term of the facilities.  As of the date of closing, the new facilities are substantially drawn.  We intend to pursue additional borrowing options to improve our liquidity.

 

Resignation of Chief Executive Officer

 

Effective as of May 3, 2017, David L. Richter, the Company’s Chief Executive Officer and a member of the Company’s Board of Directors, tendered his resignation from all positions with the Company.  In connection with his resignation, Mr. Richter and the Company entered into a Separation Agreement and General Release of Claims (the “Agreement).  Under the Agreement, the Company agreed to (1) pay severance to Mr. Richter in the amount of $3,300,000, of which $1,100,000 was paid on May 9, 2017 and the remaining $2,200,000 will be paid in equal semi-monthly installments over the next two years; (2) pay unused vacation amounting to approximately $256,000; (3) accelerate the vesting of 1,000,000 options granted to Mr. Richter under the Company’s 2006 Employee Stock Option Plan for the purchase of shares of the Company’s common stock; the total vested options available to Mr. Richter are 2,100,000 with a remaining unrecognized compensation expense of $1,630,000; (4) pay COBRA premiums for a period 18 months; (5) reimburse Mr. Richter for the costs of operating one of his personal vehicles through September 1, 2017; and (6) terminate the lease of his other personal vehicle, purchase the vehicle and transfer title to Mr. Richter.  The total cost of the benefits, including employment taxes, under the Agreement is estimated to be approximately $5,100,000 which will be charged to earnings from continuing operations in the second quarter of 2017.

 

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Table of Contents

 

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

 

Overview

 

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

 

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

 

CFR decreased $20,666,000, or 17.7%, to $95,913,000 for the first quarter of 2017 from $116,579,000 for the first quarter of 2016. The primary decrease in CFR occurred in the Middle East as economic conditions caused a decrease in project activity and a decrease in Oman as a major project began to wind down.

 

Cost of services decreased $13,962,000 or 18.5% to $61,548,000 for the first quarter of 2017 from $75,510,000 for the first quarter of 2016 primarily due to decreases in the Middle East and Latin America partially offset by increases in the United States.

 

Gross profit decreased $6,704,000, or 16.3%, to $34,365,000 for the first quarter of 2017 from $41,069,000 for the first quarter of 2016 due to decreases in CFR in the Middle East, Latin America and Asia Pacific, partially offset by increases in the United States. The overall gross profit percentage increased due to higher margins in Africa.

 

Selling, general and administrative expenses decreased $3,533,000, or 9.2%, to $34,865,000 for the first quarter of 2017 from $38,398,000 for the first quarter of 2016 primarily due to the decrease in unapplied and indirect labor cost in Brazil and Spain.

 

Operating loss was ($534,000), for the first quarter of 2017 compared to operating profit of $2,686,000 for the first quarter of 2016. The decrease in operating profit was primarily due to the decrease in CFR in the Middle East, partially offset by an increase in the United States.

 

Income tax expense was $654,000 for the first quarter of 2017 compared to income tax expense of $166,000 for the first quarter of 2016.  The increase in expense resulted from a change in the mix of pretax profits from foreign operations and the mix of tax rates in those jurisdictions and no offsetting tax benefits arising from the Company’s U.S. net operating losses which management believes the Company will not be able to utilize.

 

Net loss attributable to Hill was ($7,111,000) for the first quarter of 2017, a decrease of 590.4%, from $1,450,000 for the first quarter of 2016.  Diluted loss per common share were ($0.14) for the first quarter of 2017 based upon 51,860,000 diluted common shares outstanding compared to a diluted earnings per common share of $0.03 for the first quarter of 2016 based upon 51,722,000 diluted common shares outstanding.

 

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

 

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Table of Contents

 

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 2016 Annual Report on Form 10-K

 

Results of Operations

 

Three Months Ended March 31, 2017 Compared to

Three Months Ended March 31, 2016

 

Consulting Fee Revenue (dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

37,389

 

39.0

%

$

31,972

 

27.4

%

$

5,417

 

16.9

%

Latin America

 

3,040

 

3.2

 

5,200

 

4.5

 

(2,160

)

(41.5

)

Europe

 

9,541

 

9.9

 

9,310

 

8.0

 

231

 

2.5

 

Middle East

 

38,514

 

40.2

 

60,846

 

52.2

 

(22,332

)

(36.7

)

Africa

 

5,050

 

5.3

 

5,523

 

4.7

 

(473

)

(8.6

)

Asia/Pacific

 

2,379

 

2.4

 

3,728

 

3.2

 

(1,349

)

(36.2

)

Total

 

$

95,913

 

100.0

%

$

116,579

 

100.0

%

$

(20,666

)

(17.7

)%

 

The primary decrease in CFR occurred in the Middle East with decreases of $14,918,000 in the United Arab Emirates and $2,977,000 in Saudi Arabia due to a decrease in funding for projects as well as the demobilization of personnel due to the wind down of certain projects in the region and a decrease of $3,258,000 in Oman due to a wind down of a major project.  The increase in CFR in the United States occurred throughout all regions.  In Latin America, the decrease was primarily in Brazil where CFR decreased by $1,817,000 as the economic conditions in the region continue to limit available work.  The decrease in Asia/Pacific occurred primarily in India and Afghanistan.

 

Reimbursable Expenses (dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

6,042

 

51.8

%

$

13,268

 

74.6

%

$

(7,226

)

(54.5

)%

Latin America

 

3

 

 

7

 

 

(4

)

(57.1

)

Europe

 

650

 

5.6

 

487

 

2.7

 

163

 

33.5

 

Middle East

 

4,177

 

35.8

 

2,642

 

14.9

 

1,535

 

58.1

 

Africa

 

664

 

5.7

 

872

 

4.9

 

(208

)

(23.9

)

Asia/Pacific

 

120

 

1.1

 

515

 

2.9

 

(395

)

(76.7

)

Total

 

$

11,656

 

100.0

%

$

17,791

 

100.0

%

$

(6,135

)

(34.5

)%

 

Reimbursable expenses consist of amounts paid to subcontractors and other third parties, and travel and other job-related expenses that are contractually reimbursable from clients.  These items are reflected as separate line items in both our revenue and cost of services captions in our consolidated statements of operations.  The decrease in reimbursable expenses is primarily due to lower use of subcontractors in our United States Northeast and Western regions, partially offset by an increase in subcontractors in our Middle East region.

 

24



Table of Contents

 

Cost of Services (dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

 

 

CFR

 

 

 

 

 

CFR

 

 

 

 

 

United States

 

$

21,809

 

35.4

%

58.3

%

$

18,295

 

24.2

%

57.2

%

$

3,514

 

19.2

%

Latin America

 

1,957

 

3.2

 

64.4

 

3,285

 

4.4

 

63.2

 

(1,328

)

(40.4

)

Europe

 

6,250

 

10.2

 

65.5

 

5,809

 

7.7

 

62.4

 

441

 

7.6

 

Middle East

 

27,760

 

45.1

 

72.1

 

42,855

 

56.8

 

70.4

 

(15,095

)

(35.2

)

Africa

 

2,541

 

4.1

 

50.3

 

3,464

 

4.6

 

62.7

 

(923

)

(26.6

)

Asia/Pacific

 

1,231

 

2.0

 

51.7

 

1,802

 

2.3

 

48.3

 

(571

)

(31.7

)

Total

 

$

61,548

 

100.0

%

64.2

%

$

75,510

 

100.0

%

64.8

%

$

(13,962

)

(18.5

)%

 

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

 

Gross Profit (dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

 

 

CFR

 

 

 

 

 

CFR

 

 

 

 

 

United States

 

$

15,580

 

45.3

%

41.7

%

$

13,677

 

33.3

%

42.8

%

$

1,903

 

13.9

%

Latin America

 

1,083

 

3.2

 

35.6

 

1,915

 

4.7

 

36.8

 

(832

)

(43.4

)

Europe

 

3,291

 

9.6

 

34.5

 

3,501

 

8.5

 

37.6

 

(210

)

(6.0

)

Middle East

 

10,754

 

31.3

 

27.9

 

17,991

 

43.8

 

29.6

 

(7,237

)

(40.2

)

Africa

 

2,509

 

7.3

 

49.7

 

2,059

 

5.0

 

37.3

 

450

 

21.9

 

Asia/Pacific

 

1,148

 

3.3

 

48.3

 

1,926

 

4.7

 

51.7

 

(778

)

(40.4

)

Total

 

$

34,365

 

100.0

%

35.8

%

$

41,069

 

100.0

%

35.2

%

$

(6,704

)

(16.3

)%

 

The decrease in gross profit included decreases in the Middle East, Latin America and Asia/Pacific due to the decreases in CFR partially offset by increases in the United States.  The overall gross profit percentage was essentially flat excluding the higher margins in Africa.

 

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

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

 

 

CFR

 

 

 

CFR

 

 

 

 

 

United States

 

$

11,245

 

30.1

%

$

10,787

 

33.7

%

$

458

 

4.2

%

Latin America

 

1,795

 

59.0

 

1,887

 

36.3

 

(92

)

(4.9

)

Europe

 

3,617

 

37.9

 

3,831

 

41.1

 

(214

)

(5.6

)

Middle East

 

7,033

 

18.3

 

9,435

 

15.5

 

(2,402

)

(25.5

)

Africa

 

1,608

 

31.8

 

1,728

 

31.3

 

(120

)

(6.9

)

Asia/Pacific

 

1,149

 

48.3

 

1,396

 

37.4

 

(247

)

(17.7

)

Corporate

 

8,418

 

(8.8

)

9,334

 

(8.0

)

(916

)

(9.8

)

Total

 

$

34,865

 

36.4

%

$

38,398

 

32.9

%

$

(3,533

)

(9.2

)%

 

25



Table of Contents

 

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

 

·                   A decrease of $1,796,000 in bad debt expense for decreased reserves for certain accounts receivable due primarily to the Middle East region; and

·                   A decrease of $1,259,000 in unapplied and indirect labor due primarily to reductions in staff in the United Arab Emirates, Saudi Arabia and Latin America regions and increased utilization in the United States.

 

Operating (Loss) Profit (dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

 

 

CFR

 

 

 

CFR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

4,335

 

11.6

%

$

2,890

 

9.0

%

$

1,445

 

50.0

%

Latin America

 

(712

)

(23.4

)

28

 

0.5

 

(740

)

N.M.

 

Europe

 

(326

)

(3.4

)

(330

)

(3.5

)

4

 

(1.2

)

Middle East

 

3,721

 

9.7

 

8,556

 

14.1

 

(4,835

)

(56.5

)

Africa

 

901

 

17.8

 

331

 

6.0

 

570

 

172.2

 

Asia/Pacific

 

(35

)

(1.5

)

545

 

14.6

 

(580

)

(106.4

)

Corporate cost

 

(8,418

)

8.8

 

(9,334

)

8.0

 

916

 

(9.8

)

Total

 

$

(534

)

(0.6

)%

$

2,686

 

2.3

%

$

(3,220

)

(119.9

)%

 

The decrease in operating profit was primarily due to the decrease in CFR in the Middle East partially offset by an increase in the United States.  Corporate expenses decreased by $916,000, but represented 8.8% of CFR in 2017 compared to 8.0% of CFR in 2016.

 

Interest and Related Financing Fees, net

 

Interest and related financing fees decreased $16,000 to $197,000 for the three months ended March 31, 2017 as compared with $213,000 for the three months ended March 31, 2016.  With the sale of our Construction Claims Group, we paid down and terminated our Secured Credit Facilities (See Notes 9 and 18).  Accordingly, we have allocated approximately $3,647,000 and $3,184,000 of interest expense to discontinued operations for the three month periods ended March 31, 2017 and 2016, respectively.

 

Income Taxes

 

For the three months ended March 31, 2017 and 2016 , the Company recognized income tax expense of $654,000 and $166,000, respectively. The income tax expense in both periods was related to the pre-tax income generated from foreign operations without recognizing an income tax benefit related to the U.S. net operating loss which management believes the Company will not be able to utilize.

 

The effective income tax rates for the three-month periods ended March 31, 2017 and 2016 were (89.5%) and 6.7%, respectively. The change in the Company’s effective tax rate in 2017 was primarily a result of a decrease in projected income and the mix of income among various foreign tax jurisdictions.

 

Net (Loss) Earnings Attributable to Hill

 

The net loss attributable to Hill International, Inc. for the quarter ended March 31, 2017 was ($7,111,000), or ($0.14) per diluted common share based on 51,860,000 diluted common shares outstanding, as compared to net earnings in the first quarter of 2016 of $1,450,000, or $0.03 per diluted common share based upon 51,722,000 diluted common shares outstanding. Net loss from continuing operations for the three months ended March 31, 2017 was ($1,446,000), or ($0.03)

 

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per diluted share, compared to net earnings from continuing operations of $2,303,000, or $0.05 per diluted share, for the three months ended March 31, 2016.

 

Non-GAAP Financial Measures

 

EBITDA, a non-GAAP performance measure used by management, is defined as net earnings plus interest expense, income tax expense and depreciation and amortization, as shown in the table below. EBITDA does not purport to be an alternative to net earnings as a measure of financial and operating performance or ability to generate cash flows from operations that are available for taxes and capital expenditures. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly-titled measures of other companies. We use, and we believe investors benefit from the presentation of, EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired.

 

Using EBITDA as a performance measure has material limitations as compared to net earnings, or other financial measures as defined under U.S. GAAP as it excludes certain recurring items which may be meaningful to investors. EBITDA excludes interest expense; however, as we have borrowed money in order to finance transactions and operations, interest expense is an element of our cost structure and can affect our ability to generate revenue and returns for our stockholders. Further, EBITDA excludes depreciation and amortization; however, as we use capital and intangible assets to generate revenues, depreciation and amortization are a necessary element of our costs and ability to generate revenue. Finally, EBITDA excludes income taxes; however, as we are organized as a corporation, the payment of taxes is a necessary element of our operations. As a result of these exclusions from EBITDA, any measure that excludes interest expense, depreciation and amortization and income taxes has material limitations as compared to net earnings. When using EBITDA as a performance measure, management compensates for these limitations by comparing EBITDA and net earnings in each period, so as to allow for the comparison of the performance of the underlying core operations with the overall performance of the company on a full-cost, after-tax basis. Using both EBITDA and net earnings to evaluate the business allows management and investors to (a) assess our relative performance against our competitors and (b) monitor our capacity to generate returns for our stockholders.

 

A reconciliation of EBITDA to the most directly comparable GAAP measure follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

Net (loss) earnings from continuing operations

 

$

(1,446

)

$

2,303

 

Interest expense, net

 

197

 

213

 

Income tax expense

 

654

 

166

 

Depreciation and amortization

 

1,566

 

1,878

 

EBITDA

 

$

971

 

$

4,560

 

 

Liquidity and Capital Resources

 

At March 31, 2017, our primary sources of liquidity consisted of $20,413,000 of cash and cash equivalents, of which $17,105,000 was on deposit in foreign locations, and $2,134,000 of available borrowing capacity under our various credit facilities.  See Note 9 to our consolidated financial statements for a description of our credit facilities and term loan and Note 18 to our consolidated financial statements for a discussion of our new credit facility arising concurrently with the sale of our Construction Claims Group.  We believe that we have sufficient liquidity to support the reasonably anticipated cash needs of our operations over the next twelve months.  However, significant unforeseen events, such as termination or

 

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cancellation of major contracts or further delays in receivable collections, could adversely affect our liquidity and results of operations.  If market opportunities exist, we intend to undertake financing actions to increase our liquidity, which could include borrowing additional funds under our credit agreements, obtaining new bank debt, raising funds through capital market transactions, or other strategic initiatives.  See “Sources of Additional Capital” for further information.

 

The amount of CFR attributable to operations in the Middle East and Africa is approximately 45.5% of total consolidated CFR as of March 31, 2017. We continue to experience a slowdown in