Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 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  o     No  ý
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  o     No  ý
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
ý
Non-Accelerated Filer
o
 
Smaller Reporting Company
o
 
 
 
Emerging Growth Company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  o     No  ý
 
There were 52,960,817 shares of the Registrant’s Common Stock outstanding at March 31, 2018.
 

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Explanatory Note
 
On May 8, 2018, the Hill International Inc. (the "Company") filed its Annual Report on Form 10-K/A Amendment No. 2 which amended and restated the Company’s financial statements as of December 31, 2016, and for each of the three years in the period ended December 31, 2016 and the related notes thereto originally filed on Form 10-K with the SEC on March 31, 2017. This Form 10-Q amends the Company’s unaudited condensed consolidated financial statements for the three and six months ended June 30, 2016 and the related notes thereto, included on Form 10-Q filed on August 5, 2016 (“Prior Filing”).

This restatement in this Form 10-Q ("Restatement") reflects the correction of the following errors identified subsequent to the filing of the Prior Filing:
 
A.
The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with U. S. generally accepted accounting principles ("US GAAP"). The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive loss instead of properly recording the effect as operating expenses as required under Accounting Standard Codification (ASC) 830 “Foreign Currency Matters.”

B.
The Company identified departures from US GAAP under ASC 605-35 “Construction-Type and Production-Type Contracts” in its historical accounting for revenue recognition on nine long-term customer contracts with fee constraints (e.g., fixed fee, lump sum, maximum contract value). The Company enters into agreements for construction management and consulting services with customers, and the guidance of ASC 605-35 states that contracts for construction consulting services, such as under agency contracts or construction management agreements, fall within the scope of the standard and should follow either Percentage of Completion or Completed Contract methods of accounting. Historically, the Company had not consistently applied the percentage of completion method of revenue recognition.

C.
The Company discovered that it had not properly performed the required impairment testing of amortizable intangible assets in accordance with US GAAP in that an asset that was no longer in use as of July 2013 was not identified and impaired. In addition, an improper useful life was used for some of the Company’s internally developed software assets resulting in an improper amount of amortization expense being recorded in previous periods.

D.
The Company discovered that the amounts of liabilities pertaining to the obligation for end of service benefits in six foreign countries were improperly accounted for under the guidance in ASC 715 “Compensation — Retirement Benefits”.

E.
The Company determined the accrual for uncertain tax benefits taken with respect to income tax matters in Libya had been improperly released during 2013 and 2014 prior to the expiration of the statute of limitations on the Libyan tax authority’s right to audit the related tax years.

F.
During the restatement process, the Company identified other transactions that had been recorded to incorrect accounts and/or in improper amounts.

G.
Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact.
 
The following sections in the Prior Filing have been revised to reflect the Restatement:
 
·                  Part I - Item - 1. Financial Statements.
·                  Part I - Item - 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
·                  Part I - Item - 3. Quantitative and Qualitative Disclosures About Market Risk.
·                  Part I - Item - 4. Controls and Procedures.
·                  Part II - Item - 1A. Risk Factors.

The unaudited interim financial statements for the quarter ended June 30, 2016 does not reflect adjustments for events occurring after the filing of the Prior Filing except to the extent they are otherwise required to be included and discussed herein and did not substantively modify or update the disclosures herein other than as required to reflect the adjustments described above. See Note 1 to the accompanying consolidated financial statements, set forth in Item 1 of this Form 10-Q, for additional information.
 

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See “Item 9A — Controls and Procedures” to the Company’s Amended Form 10-K/A filed on May 8, 2018 that discloses additional material weaknesses in the Company’s internal controls associated with the restatement, as well as management’s restated conclusion that the Company’s internal controls over financial reporting were not effective as of December 31, 2016. As disclosed therein, management is currently developing and implementing the changes needed in the Company’s internal control over financial reporting to remediate these material weaknesses. These changes are still in the process of being implemented.
 


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


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PART I
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and it the Company's intent that any such statements be protected by the safe harbor created thereby. Except for historical information, the matters set forth herein including, but not limited to, any projections of revenues, earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), margin, profit improvement, cost savings or other financial items; any statements of belief, any statements concerning the Company's plans, strategies and objectives for future operations; and any statements regarding future economic conditions or performance, are forward-looking statements.
 
These forward-looking statements are based on the Company's current expectations, estimates and assumptions and are subject to certain risks and uncertainties. Although the Company believes that the expectations, estimates and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.
 
Those forward-looking statements may concern, among other things:
 
•
The markets for the Company's services;
•
Projections of revenues and earnings, anticipated contractual obligations, funding requirements or other financial items;
•
Statements concerning the Company's plans, strategies and objectives for future operations; and
•
Statements regarding future economic conditions or the Company's performance.
 
Important factors that could cause the Company's actual results to differ materially from estimates or projections contained in our forward-looking statements include:
 
•
The risks set forth in Item 1A, “Risk Factors,” in the Company's most recent Annual Report on Form 10K/A;
•
Unfavorable global economic conditions may adversely impact its business;
•
Backlog, which is subject to unexpected adjustments and cancellations, may not be fully realized as revenue;
•
The Company may incur difficulties in implementing the Profit Improvement Plan;
•
The Company's expenses may be higher than anticipated;
•
Modifications and termination of client contracts;
•
Control and operational issues pertaining to business activities that the Company conducts pursuant to joint ventures with other parties;
•
Difficulties that may incur in implementing the Company's acquisition strategy; and
•
The need to retain and recruit key technical and management personnel.
 
Other factors that may affect the Company's business, financial position or results of operations include:
 
•
Unexpected delays in collections from clients, particularly those located in the Middle East;
•
Risks of the Company's ability to obtain debt financing or otherwise raise capital to meet required working capital needs and to support potential future acquisition activities;
•
Risks of international operations, including uncertain political and economic environments, acts of terrorism or war, potential incompatibilities with foreign joint venture partners, foreign currency fluctuations, civil disturbances and labor issues; and
•
Risks 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.
 
The Company does not intend, and undertakes no obligation to, update any forward-looking statement. In accordance with the Reform Act, Item 1A of this Report entitled “Risk Factors” contains cautionary statements that accompany those forward-looking statements. You should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-Q/A, in our other filings with the SEC or in materials incorporated therein by reference.


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PART I — FINANCIAL INFORMATION
Item 1.   Financial Statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
June 30, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
Assets
 
 

 
 

Assets
 
 
 
 
Cash and cash equivalents
 
$
16,738

 
$
25,637

Cash - restricted
 
4,470

 
4,312

Accounts receivable, less allowance for doubtful accounts of $66,941 and $71,082
 
160,656

 
164,844

Accounts receivable - affiliates
 
8,402

 
5,712

Prepaid expenses and other current assets
 
7,770

 
7,751

Income tax receivable
 
4,723

 
3,554

Current assets held for sale
 
—

 
54,651

Total current assets
 
202,759

 
266,461

Property and equipment, net
 
14,880

 
16,389

Cash - restricted, net of current portion
 
1,160

 
313

Retainage receivable
 
18,112

 
17,225

Acquired intangibles, net
 
4,965

 
6,006

Goodwill
 
51,942

 
50,665

Investments
 
4,466

 
3,501

Deferred income tax assets
 
3,695

 
3,200

Other assets
 
5,500

 
4,224

Non-current assets held for sale
 
—

 
32,091

Total assets
 
$
307,479

 
$
400,075

Liabilities and Stockholders’ Equity
 
 
 
 
Current maturities of notes payable and long-term debt
 
$
4,532

 
$
1,983

Accounts payable and accrued expenses
 
87,384

 
85,680

Income taxes payable
 
9,691

 
4,874

Current portion of deferred revenue
 
5,334

 
12,943

Other current liabilities
 
9,982

 
8,157

Current liabilities held for sale
 
—

 
25,888

Total current liabilities
 
116,923

 
139,525

Notes payable and long-term debt, net of current maturities
 
32,374

 
142,120

Retainage payable
 
1,071

 
961

Deferred income taxes
 
2,670

 
560

Deferred revenue
 
15,866

 
22,804

Other liabilities
 
18,624

 
12,666

Non-current liabilities held for sale
 
—

 
5,087

Total liabilities
 
187,528

 
323,723

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, 59,076 shares and 58,835 shares issued at June 30, 2017 and December 31, 2016, respectively
 
6

 
6

Additional paid-in capital
 
194,491

 
190,353

Accumulated deficit
 
(39,802
)
 
(81,349
)
Accumulated other comprehensive loss
 
(6,681
)
 
(4,611
)
 
 
148,014

 
104,399

Less treasury stock of 6,977 shares at June 30, 2017 and December 31, 2016, respectively
 
(30,041
)
 
(30,041
)
Hill International, Inc. share of equity
 
117,973

 
74,358

Noncontrolling interests
 
1,978

 
1,994

Total equity
 
119,951

 
76,352

Total liabilities and stockholders’ equity
 
$
307,479

 
$
400,075

 See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 

 
(As restated)
 

 
(As restated)
Revenues
 
$
125,436

 
$
132,709

 
$
241,556

 
$
269,608

Direct expenses
 
86,807

 
92,354

 
165,316

 
185,655

Gross profit
 
38,629

 
40,355

 
76,240

 
83,953

Selling, general and administrative expenses
 
40,074

 
34,323

 
73,537

 
72,116

Share of (profit) loss of equity method affiliates
 
(82
)
 
31

 
(48
)
 
16

Operating (loss) profit
 
(1,363
)
 
6,001

 
2,751

 
11,821

Interest and related financing fees, net
 
282

 
576

 
1,031

 
1,204

(Loss) Earnings before income taxes
 
(1,645
)
 
5,425

 
1,720

 
10,617

Income tax (benefit) expense
 
(649
)
 
2,749

 
700

 
3,205

(Loss) Earnings from continuing operations
 
(996
)
 
2,676

 
1,020

 
7,412

Discontinued operations:
 
 
 
 
 
 
 
 
  Loss from discontinued operations, net of tax
 
(7,301
)
 
(574
)
 
(11,552
)
 
(1,817
)
  Gain on disposal of discontinued operations, net of tax
 
52,195

 
—

 
52,195

 
—

     Total gain (loss) from discontinued operations
 
44,894

 
(574
)
 
40,643

 
(1,817
)
Net earnings
 
43,898

 
2,102

 
41,663

 
5,595

Less: net earnings (loss) - noncontrolling interests
 
1

 
(28
)
 
120

 
(39
)
Net earnings attributable to Hill International, Inc.
 
$
43,897

 
$
2,130

 
$
41,543

 
$
5,634

 
 
 
 
 
 
 
 
 
Basic (loss) earnings per common share from continuing operations
 
$
(0.02
)
 
$
0.05

 
$
0.02

 
$
0.14

Basic loss per common share from discontinued operations
 
(0.14
)
 
(0.01
)
 
(0.22
)
 
(0.03
)
Basic gain on disposal of discontinued operations, net of tax
 
1.00

 
—

 
1.00

 
—

Basic earnings per common share - Hill International, Inc.
 
$
0.84

 
$
0.04

 
$
0.80

 
$
0.11

Basic weighted average common shares outstanding
 
51,952
 
51,727

 
51,906

 
51,679

 
 
 
 
 
 
 
 
 
Diluted (loss) earnings per common share from continuing operations
 
$
(0.02
)
 
$
0.05

 
$
0.02

 
$
0.14

Diluted loss per common share from discontinued operations
 
(0.14
)
 
(0.01
)
 
(0.22
)
 
(0.03
)
Diluted gain on disposal of discontinued operations, net of tax
 
1.00

 
—

 
0.99

 
—

Diluted earnings per common share - Hill International, Inc.
 
$
0.84

 
$
0.04

 
$
0.79

 
$
0.11

Diluted weighted average common shares outstanding
 
51,952

 
51,948

 
52,468

 
51,777

 
See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
(As restated)
 
 
 
(As restated)
Net earnings
 
$
43,898

 
$
2,102

 
$
41,663

 
$
5,595

Foreign currency translation adjustment, net of tax
 
(644
)
 
581

 
(2,202
)
 
578

Other, net
 
—

 
22

 
—

 
56

Comprehensive earnings (loss)
 
43,254

 
2,705

 
39,461

 
6,229

Comprehensive loss attributable to non-controlling interests
 
(135
)
 
(810
)
 
(16
)
 
(1,520
)
Comprehensive earnings (loss) attributable to Hill International, Inc.
 
$
43,389

 
$
3,515

 
$
39,477

 
$
7,749

 
See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
 

 
(As restated)
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
41,663

 
$
5,595

Loss from discontinued operations
 
11,552

 
1,817

Gain on sale of discontinued operations, net of taxes (see note 2)
 
(52,195
)
 
—

Earnings from continuing operations
 
1,020

 
7,412

Adjustments to reconcile net earnings to net cash provided by (used in):
 
 
 
 
Depreciation and amortization
 
3,255

 
4,209

Provision for bad debts
 
215

 
3,370

Amortization of deferred loan fees
 
597

 
889

Deferred tax benefit
 
332

 
(312
)
Stock based compensation
 
2,435

 
1,175

Unrealized foreign exchange losses on intercompany balances
 
1,122

 
2,117

Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
(995
)
 
565

Accounts receivable
 
3,973

 
3,485

Accounts receivable - affiliate
 
(2,684
)
 
(2,321
)
Prepaid expenses and other current assets
 
343

 
1,567

Income taxes receivable
 
(832
)
 
(410
)
Retainage receivable
 
414

 
(12,714
)
Other assets
 
(4,080
)
 
6,211

Accounts payable and accrued expenses
 
(7,651
)
 
(11,261
)
Income taxes payable
 
(5,691
)
 
(3,532
)
Deferred revenue
 
(14,470
)
 
7,374

Other current liabilities
 
2,631

 
2,196

Retainage payable
 
108

 
530

Other liabilities
 
9,042

 
1,545

Net cash (used in) provided by continuing operations
 
(10,916
)
 
12,095

Net cash provided by (used in) discontinued operations
 
(2,895
)
 
(4,535
)
Net cash (used in) provided by in operating activities
 
(13,811
)
 
7,560

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of business
 
(123
)
 
(58
)
Payments for purchase of property and equipment
 
(1,574
)
 
(231
)
Net cash used in investing activities of continuing operations
 
(1,697
)
 
(289
)
Net cash provided by (used in) investing activities of discontinued operations
 
129,247

 
(566
)
Net cash provided by (used in) investing activities
 
127,550

 
(855
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Payments on term loans
 
—

 
(600
)
Proceeds from term loans
 
30,000

 
—

Net (payments) borrowings on revolving loans
 
(26,605
)
 
348

Pay-off and termination of term loan
 
(117,494
)
 
—

Payments on Philadelphia Industrial Development Corporation loan
 
(14
)
 
(23
)
Dividends paid to noncontrolling interest
 
(18
)
 
(109
)
Payments of financing fees
 
(4,038
)
 
—

Proceeds from stock issued under employee stock purchase plan
 
115

 
10

Proceeds from exercise of stock options
 
735

 
204

Net cash used in financing activities
 
(117,319
)
 
(170
)
Effect of exchange rate changes on cash
 
(5,319
)
 
(5,702
)
Net (decrease) increase in cash and cash equivalents
 
(8,899
)
 
833

Cash and cash equivalents — beginning of period
 
25,637

 
24,089

Cash and cash equivalents — end of period
 
$
16,738

 
$
24,922

 
See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
 

Note 1 — The Company
 
Hill International, Inc. (“Hill” or the “Company”) is a professional services firm that provides program management, project management, construction management and other consulting services primarily to the buildings, transportation, environmental, energy and industrial markets worldwide.  Hill’s clients include the U.S. federal government, U.S. state and local governments, foreign governments and the private sector.

Restatement of Previously Issued Unaudited Condensed Consolidated Financial Statements
On May 8, 2018, the Company filed its Annual Report on Form 10-K/A for the year ended December 31, 2016, which amended the Company’s audited consolidated financial statements for each of the years ended December 31, 2016, 2015 and 2014 and the related notes thereto. This Form 10-Q amends the Company’s unaudited condensed consolidated financial statements for the three and six months ended June 30, 2016 and the related notes thereto, included on Form 10-Q filed on August 8, 2016 (“Prior Filing”). The Restatement reflects the correction of the following errors identified for the three and six months ended June 30, 2016 subsequent to the Prior Filing and the impact of restating the three months ended March 31, 2017 on the six months ended June 30, 2017:
A. In connection with the accounting for the May 2017 sale of its Construction Claims Group, the Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with accounting principles generally accepted in the United States (“US GAAP”). The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under Accounting Standard Codification (ASC) 830 “Foreign Currency Matters.” As a result of these corrections, selling, general and administrative (“SG&A”) expenses increased $270 and $476 for the three and six months ended June 30, 2016, respectively and decreased $1,813 for the six months ended June 30, 2017.

B. The Company identified departures from US GAAP under ASC 605-35 “Construction-Type and Production-Type Contracts” in its historical accounting for revenue recognition on nine long-term customer contracts with fee constraints (e.g., fixed fee, lump sum, maximum contract value). The Company enters into agreements for construction management and consulting services with customers, and the guidance of ASC 605-35-15-3D states that contracts for construction consulting services, such as under agency contracts or construction management agreements, fall within the scope of the standard and should follow either Percentage of Completion or Completed Contract methods of accounting. Historically, the Company had not consistently applied the percentage of completion method of revenue recognition. The corrections to properly apply U.S. GAAP to the identified contracts resulted in an increase of $1,574 to revenues for the three months ended June 30, 2016 and increases of $3,130 and $4,155 to revenues for the six months ended June 30, 2017 and 2016, respectively.

C. The Company discovered that it had not properly performed the required impairment testing of amortizable intangible assets in accordance with US GAAP in that certain assets no longer in use were not identified and impaired. In addition, an improper useful life was used for some of the Company’s internally developed software assets resulting in an improper amount of amortization expense being recorded in previous periods. The net effect of correcting these errors resulted in a $29 increase in SG&A expense for the six months ended June 30, 2017 and increases of $27 and $55 in SG&A expense for the three and six months ended June 30, 2016, respectively.


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D. The Company identified other transactions that had been recorded to incorrect accounts and/or in improper amounts. The net corrections of these transactions resulted in a $710 and $762 decrease in revenues for the three and six months ended June 30, 2016, respectively and a $5,421 increase in revenues for the six months ended June 30, 2017; a $5,305 increase in direct expenses for the six months ended June 30, 2017; a decrease of $1,670 and $2,509 in SG&A expenses for the three and six months ended June 30, 2016, respectively and an increase of $473 in SG&A expenses for the six month ended June 30, 2017; a $415 and a $830 increase in interest expense for the three and six months ended June 30, 2016; a $1,593 and $2,399 increase in net loss from discontinued operations for the three and six months ended June 30, 2016, respectively and a $504 decrease in net loss from discontinued operations for the six months ended June 30, 2017; and a $15 and $30 decrease in earnings from noncontrolling interest for the three and six months ended June 30, 2016, respectively and a $58 increase in earnings from noncontrolling interest for the six months ended June 30, 2017. In conjunction with the sale of the construction claims group, interest expense of $415 and $830 for the three and six months ended June 30, 2016, respectively, and interest expense of $552 for the six months ended June 30, 2017 was reclassified from continuing operations to discontinued operations.

E. Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact. The net impact was an increase in income tax expense of $18 and $308 for the three and six months ended June 30, 2016, respectively and an increase in income tax expense of $695 for the six months ended June 30, 2017.
 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended June 30, 2016
(in thousands, except per share data)
 
 
As Previously
 
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
 
Reference
 
 
 
 
 
 
 
 
 
Revenues
 
$
131,845

 
$
864

 
$
132,709

 
B, D
Direct expenses
 
92,354

 
—

 
92,354

 
 
Gross profit
 
39,491

 
864

 
40,355

 
 
Selling, general and administrative expenses
 
35,695

 
(1,372
)
 
34,323

 
A, C, D
Share of loss of equity method affiliates
 
31

 
—

 
31

 
 
Operating profit
 
3,765

 
2,236

 
6,001

 
 
Interest and related financing fees, net
 
161

 
415

 
576

 
D
Earnings before income taxes
 
3,604

 
1,821

 
5,425

 
 
Income tax expense
 
2,731

 
18

 
2,749

 
E
Earnings from continuing operations
 
873

 
1,803

 
2,676

 
 
Loss (earnings) from discontinued operations
 
604

 
(1,178
)
 
(574
)
 
D
Net earnings
 
1,477

 
625

 
2,102

 
 
Less: net loss - noncontrolling interests
 
(13
)
 
(15
)
 
(28
)
 
D
Net earnings attributable to Hill International, Inc.
 
$
1,490

 
$
640

 
$
2,130

 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share from continuing operations
 
$
0.02

 
$
0.03

 
$
0.05

 
 
Basic loss (earnings) per common share from discontinued operations
 
0.01

 
(0.02
)
 
(0.01
)
 
 
Basic earnings per common share - Hill International, Inc.
 
$
0.03

 
$
0.01

 
$
0.04

 
 
Basic weighted average common shares outstanding
 
51,727

 
—

 
51,727

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share from continuing operations
 
$
0.02

 
$
0.03

 
$
0.05

 
 
Diluted loss (earnings) per common share from discontinued operations
 
0.01

 
(0.02
)
 
(0.01
)
 
 
Diluted earnings per common share - Hill International, Inc.
 
$
0.03

 
$
0.01

 
$
0.04

 
 
Diluted weighted average common shares outstanding
 
51,948

 
—

 
51,948

 
 




13
Table of Contents

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended June 30, 2016
(in thousands, except per share data)
 
 
As Previously
 
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
 
Reference
 
 
 
 
 
 
 
 
 
Revenues
 
$
266,215

 
$
3,393

 
$
269,608

 
B, D
Direct expenses
 
185,655

 
—

 
185,655

 
 
Gross profit
 
80,560

 
3,393

 
83,953

 
 
Selling, general and administrative expenses
 
74,093

 
(1,977
)
 
72,116

 
A, C, D
Share of loss of equity method affiliates
 
16

 
—

 
16

 
 
Operating profit
 
6,451

 
5,370

 
11,821

 
 
Interest and related financing fees, net
 
374

 
830

 
1,204

 
D
Earnings before income taxes
 
6,077

 
4,540

 
10,617

 
 
Income tax expense
 
2,897

 
308

 
3,205

 
E
Earnings from continuing operations
 
3,180

 
4,232

 
7,412

 
 
Loss from discontinued operations
 
(249
)
 
(1,568
)
 
(1,817
)
 
D
Net earnings
 
2,931

 
2,664

 
5,595

 
 
Less: net loss - noncontrolling interests
 
(9
)
 
(30
)
 
(39
)
 
D
Net earnings attributable to Hill International, Inc.
 
2,940

 
2,694

 
5,634

 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share from continuing operations
 
$
0.06

 
$
0.08

 
$
0.14

 
 
Basic loss per common share from discontinued operations
 
—

 
(0.03
)
 
(0.03
)
 
 
Basic earnings per common share - Hill International, Inc.
 
$
0.06

 
$
0.05

 
$
0.11

 
 
Basic weighted average common shares outstanding
 
51,679

 
—

 
51,679

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share from continuing operations
 
$
0.06

 
$
0.08

 
$
0.14

 
 
Diluted loss per common share from discontinued operations
 
—

 
(0.03
)
 
(0.03
)
 
 
Diluted (loss) earnings per common share - Hill International, Inc.
 
$
0.06

 
$
0.05

 
$
0.11

 
 
Diluted weighted average common shares outstanding
 
51,777

 
—

 
51,777

 
 



14
Table of Contents

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three Months Ended June 30, 2016
(in thousands)

 
 
As Previously
 
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
 
Reference
 
 
 
 
 
 
 
 
 
Net earnings
 
$
1,477

 
$
625

 
$
2,102

 
A, B, C, D, E
Foreign currency translation adjustment, net
 
(53
)
 
634

 
581

 
A, B, C, D
Other, net
 
22

 
—

 
22

 
 
Comprehensive loss
 
$
1,446

 
$
1,259

 
$
2,705

 
 
Comprehensive loss attributable to noncontrolling interest
 
(603
)
 
(207
)
 
(810
)
 
 
Comprehensive loss attributable to Hill International Inc.
 
$
2,049

 
1,466

 
$
3,515

 
 


HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Six Months Ended June 30, 2016
(in thousands)

 
 
As Previously
 
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
 
Reference
 
 
 
 
 
 
 
 
 
Net earnings
 
$
2,931

 
$
2,664

 
$
5,595

 
A, B, C, D, E
Foreign currency translation adjustment, net
 
381

 
197

 
578

 
A, B, C, D
Other, net
 
56

 
—

 
56

 
 
Comprehensive loss
 
$
3,368

 
$
2,861

 
6,229

 
 
Comprehensive loss attributable to noncontrolling interest
 
(1,355
)
 
(165
)
 
(1,520
)
 
 
Comprehensive loss attributable to Hill International Inc.
 
$
4,723

 
$
3,026

 
$
7,749

 
 



In addition to the items noted above as part of the Restatement, the Company identified departures from US GAAP in its historical preparation and presentation of its statement of cash flows. The Company did not report its cash flows in the reporting currency equivalent of foreign currency using the exchange rates in effect at the time of the cash flows, or an appropriate average rate to approximate the rates in effect at the time of the cash flows. The impact of properly preparing a cash flow statement in each functional currency, translating the cash flow statement using the appropriate rate in effect at the time of a transaction, or substantially equivalent average rate for the period, and consolidation of the individual functional currency cash flows, as prescribed by the guidance in ASC 230, is depicted in the table below. The adjustments noted in the cash flow statements that follow are both a result of items “A” through “E” explained above, as well as the foreign currency effect from cash flow statements prepared in functional currency and appropriately translated.


15
Table of Contents

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
Six Months Ended June 30, 2016
(in thousands)
 
 
As Previously
 
 
 
 
 
 
Reported
 
Adjustment
 
As Restated
Cash flows from operating activities:
 
 
 
 
 
 
Net earnings
 
$
2,931

 
$
2,664

 
$
5,595

Loss from discontinued operations
 
—

 
1,817

 
1,817

Earnings from continuing operations
 
2,931

 
4,481

 
7,412

Adjustments to reconcile net earnings to net cash provided by (used in):
 
 
 
 
 
 
Depreciation and amortization
 
5,200

 
(991
)
 
4,209

Provision for bad debts
 
3,326

 
44

 
3,370

Amortization of deferred loan fees
 
889

 
—

 
889

Deferred tax benefit
 
605

 
(917
)
 
(312
)
Stock based compensation
 
1,257

 
(82
)
 
1,175

Unrealized foreign exchange losses on intercompany balances
 
—

 
2,117

 
2,117

Changes in operating assets and liabilities:
 
 
 
 
 
 
Restricted cash
 
633

 
(68
)
 
565

Accounts receivable
 
7,237

 
(3,752
)
 
3,485

Accounts receivable - affiliate
 
(2,208
)
 
(113
)
 
(2,321
)
Prepaid expenses and other current assets
 
844

 
723

 
1,567

Income taxes receivable
 
(622
)
 
212

 
(410
)
Retainage receivable
 
(12,714
)
 
—

 
(12,714
)
Other assets
 
4,104

 
2,107

 
6,211

Accounts payable and accrued expenses
 
(11,060
)
 
(201
)
 
(11,261
)
Income taxes payable
 
(5,013
)
 
1,481

 
(3,532
)
Deferred revenue
 
5,546

 
1,828

 
7,374

Other current liabilities
 
1,116

 
1,080

 
2,196

Retainage payable
 
68

 
462

 
530

Other liabilities
 
430

 
1,115

 
1,545

Net cash provided by continuing operations
 
2,569

 
9,526

 
12,095

Net cash used in discontinued operations
 
—

 
(4,535
)
 
(4,535
)
Net cash provided by in operating activities
 
2,569

 
4,991

 
7,560

 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
Purchases of business
 
—

 
(58
)
 
(58
)
Payments for purchase of property and equipment
 
(783
)
 
552

 
(231
)
Net cash used in investing activities of continuing operations
 
(783
)
 
494

 
(289
)
Net cash used in investing activities of discontinued operations
 
—

 
(566
)
 
(566
)
Net cash used in investing activities
 
(783
)
 
(72
)
 
(855
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
Payments on term loans
 
(600
)
 
—

 
(600
)
Net borrowings on revolving loans
 
348

 
—

 
348

Payments on Philadelphia Industrial Development Corporation loan
 
(27
)
 
4

 
(23
)
Dividends paid to noncontrolling interest
 
(111
)
 
2

 
(109
)
Proceeds from stock issued under employee stock purchase plan
 
10

 
—

 
10

Proceeds from exercise of stock options
 
204

 
—

 
204

Net cash used in financing activities
 
(176
)
 
6

 
(170
)
Effect of exchange rate changes on cash
 
(777
)
 
(4,925
)
 
(5,702
)
Net increase in cash and cash equivalents
 
833

 
—

 
833

Cash and cash equivalents — beginning of period
 
24,089

 
—

 
24,089

Cash and cash equivalents — end of period
 
$
24,922

 
$
—

 
$
24,922



16
Table of Contents

Note 2 - Discontinued Operations and Sale of Business Unit
 
On December 20, 2016, the Company and its subsidiary Hill International N.V. (“Hill N.V.” and, collectively with the Company, the “Sellers”) entered into a Stock Purchase Agreement (as amended on May 3, 2017, the “Agreement”) with Liberty Mergeco, Inc. (the “US Purchaser”) and Liberty Bidco UK Limited (the “UK Purchaser” and, collectively with the US Purchaser, the “Purchasers”) pursuant to which the Purchasers were to acquire the Construction Claims Group (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 in cash reduced by assumed indebtedness and certain other items, as set forth in the Agreement.

The Claims Group sale closed on May 5, 2017 with an effective date of April 30, 2017 for a total purchase price of $140,000 in cash less: (1) an estimated working capital adjustment at closing amounting to approximately $8,449; and (2) approximately $2,187 of assumed indebtedness. In addition, the Company was required to provide a $3,750 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 2017 Term Loan Facility and the amended Revolving Credit Facilities (described below) were required to be used as follows: (a) $117,000 to pay off the 2014 Term Loan Facility; (b) approximately $8,793 to pay down the International Revolver; and (c) approximately $1,214 to pay accrued interest and certain bank fees. The remaining proceeds along with a portion of the proceeds from the 2017 Term Loan were used to pay down the $25,000 U.S. Revolver.

The Company entered into a transition services agreement (the “TSA”) and certain other agreements with the Purchasers that governs the relationships between the Purchasers and the Company following the Claims Group sale. Pursuant to the TSA, the Company provides the Purchasers with certain specified services on a transitional basis for periods up to six months following the Claims Group sale, including support in areas such as facilities, finance, human resources, legal, marketing, technology and treasury. In addition, the Company granted the Purchasers a license to use certain office premises as specified in the TSA. The TSA also outlines the services that the Purchasers provides to the Company for a period of up to six months following the Claims Group sale, including support in areas such as finance, legal and treasury. The charges for the transition services and licensed premises generally allows the providing company to recover the incremental costs and expenses it actually incurs in connection with providing the services and premises apart from the provision of certain services that will be provided at no cost for terms specified in the TSA.

As of April 30, 2017, the assets and liabilities of the Claims Group were reflected as held for sale in the Company’s Consolidated Balance Sheets, and the operating results and cash flows of the Claims Group were reflected as discontinued operations in the Company’s Consolidated Statements of Operations, Consolidated Statements of Comprehensive Earnings, and Consolidated Statements of Cash Flows for all periods presented.


17
Table of Contents

The carrying amounts of assets and liabilities of the discontinued operations of the Claims Group that were classified as held for sale are as follows (in thousands): 
 
 
April 30, 2017
 
December 31, 2016
 
 
 
 
 
Accounts receivable, net
 
$
47,611

 
$
50,892

Prepaid expenses and other current assets
 
3,153

 
3,064

Income taxes receivable
 
—

 
695

Total current assets classified as held for sale
 
$
50,764

 
$
54,651

 
 
 
 
 
Property and equipment, net
 
5,786

 
4,617

Acquired intangibles, net
 
3,289

 
3,397

Goodwill
 
23,454

 
23,461

Investments
 
5

 
6

Other assets
 
2,860

 
610

Total non-current assets classified as held for sale
 
$
35,394

 
$
32,091

 
 
 
 
 
Accounts payable and accrued expenses
 
15,960

 
21,539

Income taxes payable
 
(17
)
 
92

Deferred revenue
 
—

 
1,562

Other current liabilities
 
15,867

 
2,695

Total current liabilities classified as held for sale
 
$
31,810

 
$
25,888

 
 
 
 
 
Deferred income taxes
 
—

 
385

Deferred revenue
 
92

 
1,012

Retained Earnings
 
—

 
457

Other liabilities
 
1,257

 
3,233

Total non-current liabilities classified as held for sale
 
$
1,349

 
$
5,087

 
 
 
 
 
Net Assets
 
$
52,999

 
55,767



18
Table of Contents

The line items constituting earnings from discontinued operations consist of the following (in thousands):
 
 
 
Three Months Ended June 30,
 
  Six Months Ended June 30,
 
 
2017 (1)
 
2016
 
2017 (1)
 
2016
 
 
 
 
(As restated)
 
 
 
(As restated)
Revenues
 
$
18,119

 
$
43,821

 
$
62,149

 
$
85,706

Direct expenses
 
9,377

 
20,369

 
31,339

 
40,047

Gross profit
 
8,742

 
23,452

 
30,810

 
45,659

Selling, general and administrative expenses (2)
 
10,155

 
20,617

 
33,147

 
40,783

Operating (loss) profit
 
(1,413
)
 
2,835

 
(2,337
)
 
4,876

Interest and related financing fees, net (3)
 
5,763

 
2,762

 
8,858

 
5,531

Loss before gain on disposal and income taxes
 
(7,176
)
 
73

 
(11,195
)
 
(655
)
Pretax gain on the disposal of discontinued operations (4)
 
61,443

 
—

 
61,443

 
—

   Earnings from discontinued operations before income taxes
 
54,267

 
73

 
50,248

 
(655
)
Income tax expense (5)
 
9,373

 
647

 
9,605

 
1,162

Net gain (loss) from discontinued operations
 
$
44,894

 
$
(574
)
 
$
40,643

 
$
(1,817
)
 
(1)
Results of operations for the Claims Group are reflected through April 30, 2017, the effective closing date of the Claims Group sale.
(2)
No amortization or depreciation expense was recorded by the Company in 2017 as the Claims Group’s assets were held for sale as of December 31, 2016.
(3)
In connection with the sale of the Claims Group, the Company was required to pay off its existing term loan facility and amend and pay down its existing revolving credit facilities (See Note 9). Interest expense and debt issuance costs attributable to the Claims Group were charged to discontinued operations.
(4)
The pretax gain on the sale of the Construction Claims Group was calculated as follows (in thousands):
    
Adjusted purchase price                $129,364
Cash transferred to buyer                 4,041
Net proceeds received from Purchaser        $125,323
Less net assets held for sale             52,999
Less other adjustments                 10,881
Pretax gain on disposal                $ 61,443

(5)
The effective tax rates on pretax income from discontinued operations were 17.3% and 19.1% for the three and six months ended June 30, 2017, respectively. The 2017 rate differs from the U.S. federal statutory rate of 35% primarily due to the utilization of the US operating loss which had a full valuation allowance, on the US gain on the sale of the discontinued operations. During the second quarter of 2017, the Company charged discontinued operations approximately $9,248 for potential tax liability related to the gain on the sale.
 
The results of discontinued operations include selling and transaction costs, including legal and professional fees incurred by the Company to complete the Claims Group sale of $3,503 and $4,742 during the three and six months ended June 30, 2017, respectively.

19
Table of Contents

Note 3 - Liquidity
 
The amount of revenues attributable to operations in the Middle East and Africa is approximately $49,089 and $100,580 of total consolidated revenue for the three and six months ended June 30, 2017, respectively. In 2012, due to the overthrow of the Libyan government, the Company reserved a $59,937 receivable from the Libyan Organization for Development of Administrative Centres (“ODAC”). Subsequently, the Company received payments totaling approximately $9,511. The Company wrote off approximately $3,593 during the six months ended June 30, 2017. The Company maintains a reserve of approximately $2,788 against accounts receivable from various projects in Iraq.
 
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. The Company began to experience delays in payments during the second quarter of 2015 when MOTC commenced its formal review and certification of the Company’s invoices. The MOTC resumed payments in 2016, paying the Company approximately $42,000 during 2016 and approximately $19,253 through June 30, 2017. At June 30, 2017 accounts receivable from the Oman Airport totaled approximately $32,058, of which approximately $16,607 was past due based on contractual terms. From June 30, 2017 through May 31, 2018, the Company has collected approximately $33,905 on the MOTC contract.
 
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.

From May 31, 2018 to June 21, 2018, the date of this filing, we were not in compliance with the requirements of our Revolving Credit Facilities which required the filing of this Quarterly Report on Form 10-Q by May 31, 2018. Upon the filing of this Quarterly Report on Form 10-Q, we are compliant under such requirements again. Prior waivers of non-compliance with certain covenants in our Revolving Credit Facilities require us to file the Form 10-Q for the third quarter of 2017 by June 30, 2018, the Form 10-K for the 2017 fiscal year by July 17, 2018 and the Form 10-Q for the first quarter of 2018 by July 30, 2018. If we do not file such reports in accordance with these deadlines, we may again be in noncompliance with the requirements of our Revolving Credit Facilities.


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/A (Amendment No. 2) for the year ended December 31, 2016. Accordingly, they do not include all of the information and footnotes required by US 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 US 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.


20
Table of Contents

Note 5 — Accounts Receivable
 
The components of accounts receivable are as follows (in thousands):
 
 
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
Billed
 
$
192,430

 
$
200,134

Retainage, current portion
 
9,415

 
10,824

Unbilled
 
25,752

 
24,968

 
 
227,597

 
235,926

Allowance for doubtful accounts
 
(66,941
)
 
(71,082
)
Total
 
$
160,656

 
$
164,844

 
Unbilled receivables primarily represent revenue earned on contracts, which the Company is contractually precluded from billing until predetermined future dates.
 
There is approximately $18,112 included in non-current Retainage Receivable in the consolidated balance sheet at June 30, 2017. Of that amount, approximately $9,660 relates to retention and approximately $8,452 relates to a Defect and Liability Period (“DLP”), which represents five percent of each monthly invoice which is retained by MOTC in Oman. Fifty percent of the DLP will be released one year from the commencement and the balance will be released upon the issuance of final Completion Certificates. This period commences upon the issuance of a “Taking Over Certificate” (by MOTC) to contractors, for a period of up to 24 months, and ends with a final certificate closing the project.
 


21
Table of Contents

Note 6 — Intangible Assets
 
The following table summarizes the Company’s acquired intangible assets (in thousands):
 
 
 
June 30, 2017
 
December 31, 2016
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 

 

 
 
 
 
Client relationships
 
$
17,094

 
$
12,606

 
$
16,699

 
$
11,298

Acquired contract rights
 
2,055

 
1,983

 
2,058

 
1,912

Trade names
 
860

 
455

 
959

 
500

Total
 
$
20,009

 
$
15,044

 
$
19,716

 
$
13,710

 
 

 

 

 

Intangible assets, net
 
$
4,965

 

 
$
6,006

 

 
Amortization expense related to intangible assets was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2017
 
2016
 
2017
 
2016
 
 
(As restated)
 

 
(As restated)
$
504

 
$
1,121

 
$
1,063

 
$
1,993

 
The following table presents the estimated amortization expense based on our present intangible assets for the next five years (in thousands):
 
 
 
Estimated
Amortization
Expense
 
 
Year ending December 31,
 
 
 
 
2017 (remaining 6 months)
 
$
978

2018
 
1,088

2019
 
990

2020
 
728

2021
 
342

 
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

Translation adjustments
1,277

Balance, June 30, 2017
$
51,942



22
Table of Contents

Note 8 — Accounts Payable and Accrued Expenses
 
Below are the components of accounts payable and accrued expenses (in thousands):
 
 
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
Accounts payable
 
$
28,049

 
$
30,944

Accrued payroll and related expenses
 
35,140

 
32,618

Accrued subcontractor fees
 
11,824

 
9,188

Accrued agency fees
 
6,379

 
5,702

Accrued legal and professional fees
 
2,814

 
2,223

Other accrued expenses
 
3,178

 
5,005

 
 
$
87,384

 
$
85,680

 
Note 9 — Notes Payable and Long-Term Debt
 
Outstanding debt obligations are as follows (in thousands):
 
 
 
June 30, 2017
 
December 31, 2016
2014 Term Loan Facility, net of unamortized discount and deferred financing costs of $4,416 at December 31, 2016
 
$
—

 
$
112,884

2017 Term Loan Facility, net of unamortized discount and deferred financing costs of $972 at June 30, 2017
 
28,832

 
—

Domestic Revolving Credit Facility
 
1,500

 
16,500

International Revolving Credit Facility
 
—

 
11,102

Borrowings under credit facilities with a consortium of banks in Spain
 
2,841

 
2,962

Borrowings under overdraft credit facilities with the National Bank of Abu Dhabi
 
3,106

 
—

Borrowings from Philadelphia Industrial Development Corporation
 
627

 
655

 
 
36,906

 
144,103

Less current maturities, net of unamortized discount and deferred financing costs of $196
 
4,532

 
1,983

Notes payable and long-term debt, net of current maturities
 
$
32,374

 
$
142,120

 
In conjunction with the sale of its Claims Group on May 5, 2017 (See Note 2), as required, the Company terminated and paid off the 2014 Term Loan Facility and amended and paid down its Domestic and International Revolving Credit Facilities with Société Générale (the “Agent”), and other U.S. Loan Parties (the “U.S. Lenders”). There was approximately $117,000 outstanding under the 2014 Term Loan, $25,000 outstanding on the Domestic Revolving Credit Facility and €8,300 ($8,793) outstanding on the International Revolving Credit Facility prior to the debt extinguishment and modification. The Company recorded a charge of approximately $4,024 for the write-off of unamortized debt issuance costs related to the extinguishment of the 2014 Term Loan Facility and approximately $325 for the write-off of unamortized debt issuance costs related to the modification and reduction of borrowing capacity of the Domestic Revolving Credit Facility. The write-off of unamortized debt issuance costs is included in the results from discontinued operations.

The Company is party to a credit agreement with Société Générale (the “Agent”), and other U.S. Loan Parties (the “U.S. Lenders”) consisting of the $30,000 (the "2017 Term Loan Facility") and a $25,000 U.S. dollar-denominated revolving credit facility (the “Domestic Revolving Credit Facility”, together with the 2017 Term Loan Facility, the “U.S. Credit Facilities”) available to the Company and a credit agreement with the Agent (the “International Lender”) providing a €9,156 ($10,000 at closing) revolving credit facility (the “International Revolving Credit Facility” and together with the Domestic Revolving Credit Facility, the “Revolving Credit Facilities” and, together with the U.S. Credit Facilities, the “Secured Credit Facilities”) which is available to the Hill International N.V. The Domestic Revolving Credit Facility and the International Revolving Credit Facility include sub-limits for letters of credit amounting to $20,000 and €8,000 ($9,130 at June 30, 2017), respectively.


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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 covenant is comprised of a Maximum Consolidated Net Leverage Ratio of 3.00 to 1.00 for any fiscal quarter ending on or subsequent to March 31, 2017 for the trailing twelve months then-ended. The Consolidated Net Leverage Ratio is the ratio of (a) consolidated total debt (minus unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, depreciation, amortization, share-based compensation and other non-cash charges, including bad debt expense, certain one-time litigation and transaction related expenses, and restructuring charges for the trailing twelve months. In the event of a default, the U.S. Lender and the International Lender may increase the interest rates by 2.0%.

From May 31, 2018 to June 21, 2018, the date of this filing, we were not in compliance with the requirements of our Revolving Credit Facilities which required the filing of this Quarterly Report on Form 10-Q by May 31, 2018. Upon the filing of this Quarterly Report on Form 10-Q, we are compliant under such requirements again. Prior waivers of non-compliance with certain covenants in our Revolving Credit Facilities require us to file the Form 10-Q for the third quarter of 2017 by June 30, 2018, the Form 10-K for the 2017 fiscal year by July 17, 2018 and the Form 10-Q for the first quarter of 2018 by July 30, 2018. If we do not file such reports in accordance with these deadlines, we may again be in noncompliance with the requirements of our Revolving Credit Facilities.

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.
 
2017 Term Loan Facility
 
The disclosures that follow below describe the debt obligations outstanding as of June 30, 2017 under the 2017 Term Loan Facility.

On June 21, 2017, the Company entered into the 2017 Term Loan Facility with a term of 6 years, requires repayment of 1.0% of the original principal amount annually for the first five years and was fully funded at closing. Any amounts repaid on the 2017 Term Loan Facility will not be available to be re-borrowed.

The 2017 Term Loan Facility was funded net of a 1.0% discount of $300 of the principal amount, which has been deferred. In addition, the Company incurred fees and expenses related to the 2017 Term Loan Facility of approximately $874, which have been deferred. The original issue discount and debt issuance costs are being amortized on a straight-line basis, which approximates the effective interest method, to interest and related financing fees, net over the six years ending June 21, 2023, the loan maturity date. The unamortized original issue discount and debt issuance cost balance of approximately $1,174 is included as an offset against the notes payable and long-term debt balance in the Consolidated Balance Sheet at June 30, 2017.
 
The interest rate on the 2017 Term Loan Facility is, at the Company’s option, either:
 
•
the London Inter-Bank Offered Rate (“LIBOR”) for the relevant interest period plus 5.75% per annum, provided that such LIBOR shall not be lower than 1.00% per annum; or
 
•
the Base Rate (as described below) plus 4.75% 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 1.00% per annum.  Upon a default, the applicable rate of interest under the Secured Credit Facilities may increase by 2.00%.  The LIBOR (including when determining the Base Rate) shall in no event be less than 1.00% per annum.
 
At June 30, 2017, the interest rate on the 2017 Term Loan Facility was 6.96%.
 
The Company has the right to prepay the 2017 Term Loan Facility in full or in part at any time without premium or penalty (except customary breakage costs); provided, however, that upon the occurrence of prepayments relating to certain repricing transactions within the first six months following closing, a 1.0% prepayment premium will be payable. The Company is required to make certain mandatory prepayments, without premium or penalty (except customary breakage costs; provided, however, that upon the occurrence of any repricing transaction in respect of certain mandatory prepayments within the first six months following closing, a 1.0% prepayment premium is payable), including (i) with net proceeds of any issuance or incurrence of indebtedness 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 for each fiscal year of the Company 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 2.00 to 1.00).

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Table of Contents


The 2017 Term Loan Facility (along with interest thereon) is generally secured by a first-priority security interest in substantially all assets of certain U.S. subsidiaries of the Company other than foreign subsidiaries accounts receivable and cash proceeds thereof, as to which the 2017 Term Loan Facility (and the interest thereon) is secured by a second-priority security interest.

Revolving Credit Facilities

Simultaneously with the closing of the sale, the Company amended its Domestic Revolving Credit Facility to reduce the amount available to the Company to $25,000, amended its International Revolving Credit Facility to reduce the amount available to the Company to $10,000, and drew approximately $25,191 in cash and approximately $9,193 in letters of credit against the amended Revolving Credit Facilities.  Deferred fees incurred with establishing the Secured Credit Facilities amounting to approximately $5,622 were charged to discontinued operations during the quarter.
 
The Domestic Revolving Credit Facility and the International Revolving Credit Facility each have a term of five years from the closing and provide for letter of credit sub-limits in amounts of $20,000 and €8,000 (approximately $9,130 at June 30, 2017), 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 $1,739 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. 

The Revolving Credit Facilities require payment of interest only during the term and were substantially drawn as of the date of modification. 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 May 5, 2022.

The interest rate on borrowings under the Domestic Revolving Credit Facility are, at the Company’s option from time to time, either the LIBOR rate for the relevant interest period plus 3.75% per annum or the Base Rate plus 2.75% per annum.  At June 30, 2017, the interest rate was 7.00%.
 
The interest rate on borrowings under the International Revolving Credit Facility 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 4.50% per annum.  At June 30, 2017, the interest rate was 4.10%.
 
The Company will pay a commitment fee calculated at 0.50% annually on the average daily unused portion of the Domestic Revolving Credit Facility, and the Subsidiary will pay a commitment fee calculated at 0.75% annually on the average daily unused portion of the International Revolving Credit Facility.
 
The ability to borrow under each of the Domestic Revolving Credit Facility and the International Revolving Credit Facility is subject to a “borrowing base.” The Domestic Revolving Credit Facility borrowing base is calculated using a formula based upon approximately 85% of receivables that meet or satisfy certain criteria (“Eligible Domestic Receivables”). The International Revolving Credit Facility borrowing base is calculated using a different formula based upon approximately 10% of international receivables that meet or satisfy certain criteria.
 
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 June 30, 2017, the domestic borrowing base was $25,000 and the international borrowing base was €9,156 (approximately $10,460 at June 30, 2017).
 
Generally, the obligations of the Company under the Domestic Revolving Credit Facility are secured by a first-priority security interest in the Eligible Domestic Receivables, cash proceeds and bank accounts of the Company and certain of the Company’s U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and such subsidiaries. The obligations of the Subsidiary under the International Revolving Credit Facility are generally secured by a first-priority security interest in substantially all accounts receivable and cash proceeds thereof, certain bank accounts of the Subsidiary and certain of the Company’s non-U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.
 

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The Company incurred fees and expenses related to the Revolving Credit Facilities aggregating $3,000 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 May 5, 2022.  The unamortized debt issuance cost balances of $2,773 and $1,650 are included in other assets in the consolidated balance sheet at June 30, 2017 and December 31, 2016, respectively.

At June 30, 2017 the Company had $8,164 of outstanding letters of credit and $15,336 of available borrowing capacity under the Domestic Revolving Credit Facility. At June 30, 2017, the Company had $809 of outstanding letters of credit and $9,651 of available borrowing capacity under the International Revolving Credit Facility and its other foreign credit agreements.
 
Other Debt Arrangements
 
The Company’s subsidiary, Hill International (Spain) S.A. (“Hill Spain”), maintained a revolving credit facility with three banks in Spain which initially provided for total borrowing of up to €5,640 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 €2,425 (approximately $2,767) at June 30, 2017. The facility was fully utilized at June 30, 2017. Interest rates at June 30, 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 (approximately $34) at June 30, 2017.  The availability is reduced by €15 on a quarterly basis.  At June 30, 2017, the loan was fully utilized.  The interest rate at June 30, 2017 was 5.37%. The ICO loan expired 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 (approximately $3,131 at June 30, 2017) collateralized by certain overseas receivables.  At June 30, 2017, AED 11,408 was utilized (approximately $3,106).  The interest rate is the one-month Emirates InterBank Offer Rate plus 3.50% (or 4.91% at June 30, 2017) but no less than 5.50%.  This facility allows for letters of guarantee up to AED 200,000 (approximately $54,451 ) of which AED 99,180 (approximately $27,002) was outstanding at June 30, 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 Brazilian Reais (BRL) (approximately $755) at June 30, 2017, with a weighted average interest rate of 5.07% per month at June 30, 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 June 30, 2017, the maximum U.S. dollar equivalent of the commitments was $83,512, of which $35,450 is outstanding.

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 which bears interest at 2.75%, is repayable in 144 equal monthly installments of $6 and matures on May 1, 2027.

 
Note 10 — Supplemental Cash Flow Information
 
The following table provides additional cash flow information (in thousands):
 
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Interest and related financing fees paid
 
$
4,026

 
$
5,924

Income taxes paid
 
$
4,928

 
$
7,390

Increase (decrease) in other current liabilities and decrease (increase) in additional paid-in capital related to ESA Put Options
 
$
(777
)
 
$
2,670

Increase in additional paid-in capital from the issuance of shares of common stock from cashless exercise of stock options
 
$
—

 
$
729



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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 assumed exercise of stock options using the treasury stock method, if dilutive and there are earnings from continuing operations. Dilutive stock options increased average common shares outstanding by approximately 464 and 221 shares for the three month periods ended June 30, 2017 and 2016, respectively and by 562 and 98 shares for the six month period ended June 30, 2017 and 2016, respectively. Options to purchase approximately 2,419 shares and 2,906 shares for the three month periods ended June 30, 2017 and 2016, respectively, and 2,419 shares and 5,631 shares for the six month periods ended June 30, 2017 and 2016, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.
 
Note 12 — Share-Based Compensation
 
At June 30, 2017, the Company had approximately 6,057 options outstanding with a weighted average exercise price of $4.32.  During the six months ended June 30, 2017, the Company granted approximately 716 options which vest over a five-year period. The options granted had a weighted average exercise price of $4.98 and a contractual life of 7.0 years.  The aggregate fair value of the options was approximately $1,412 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 six months ended June 30, 2017 options for approximately 1,293 shares with a weighted average exercise price of $5.48 lapsed and options for approximately 217 shares with a weighted average exercise price of $4.39 were forfeited.
 
During the six months ended June 30, 2017, employees purchased approximately 31 common shares for an aggregate purchase price of approximately $115 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 approximately $1,974 and $599 for the three months ended June 30, 2017 and 2016, respectively, and approximately $2,434 and $1,257 for the six months ended June 30, 2017 and 2016, respectively.
 
Note 13 — Stockholders’ Equity
 
The following table summarizes the changes in stockholders’ equity during the six months ended June 30, 2017 (in thousands):
 
 
 
Total
 
Hill International,
Inc.
Stockholders
 
Noncontrolling
Interest
 
 
 
 
 
 
 
Stockholders’ equity, December 31, 2016
 
$
76,352

 
$
74,358

 
$
1,994

Net earnings
 
41,663

 
41,543

 
120

Other comprehensive earnings
 
(2,202
)
 
(2,066
)
 
(136
)
Comprehensive (loss) earnings
 
39,461

 
39,477

 
(16
)
Additional paid in capital
 
4,138

 
4,138

 
—

Stockholders’ equity, June 30, 2017
 
$
119,951

 
$
117,973

 
$
1,978

 
Note 14 — Income Taxes
 
The effective tax rates for the three months ended June 30, 2017 and 2016 were 39.5% and 50.7%, respectively, and 40.7% and 30.2% for the six months ended June 30, 2017 and 2016, 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. 
 

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The components of (loss) earnings before income taxes and the related income tax expense by the United States and foreign jurisdictions from continuing operations were as follows (in thousands):
 
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
 
 
U.S.
 
Foreign
 
Total
 
U.S.
 
Foreign
 
Total
(Loss) earnings before income taxes
 
$
(1,018
)
 
$
(627
)
 
$
(1,645
)
 
$
(4,578
)
 
$
10,003

 
$
5,425

Income tax expense (benefit), net
 
$
(1,726
)
 
$
1,077

 
$
(649
)
 
$
—

 
$
2,749

 
$
2,749

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
 
 
U.S.
 
Foreign
 
Total
 
U.S.
 
Foreign
 
Total
(Loss) earnings before income taxes
 
$
(4,108
)
 
$
5,828

 
$
1,720

 
$