Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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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
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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)
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Delaware | | 20-0953973 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
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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.
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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.
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:
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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.” |
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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. |
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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. |
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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”. |
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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. |
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F. | During the restatement process, the Company identified other transactions that had been recorded to incorrect accounts and/or in improper amounts. |
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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.
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.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Form 10-Q
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:
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• | The markets for the Company's services; |
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• | Projections of revenues and earnings, anticipated contractual obligations, funding requirements or other financial items; |
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• | Statements concerning the Company's plans, strategies and objectives for future operations; and |
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• | 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:
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• | The risks set forth in Item 1A, “Risk Factors,” in the Company's most recent Annual Report on Form 10K/A; |
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• | Unfavorable global economic conditions may adversely impact its business; |
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• | Backlog, which is subject to unexpected adjustments and cancellations, may not be fully realized as revenue; |
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• | The Company may incur difficulties in implementing the Profit Improvement Plan; |
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• | The Company's expenses may be higher than anticipated; |
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• | Modifications and termination of client contracts; |
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• | Control and operational issues pertaining to business activities that the Company conducts pursuant to joint ventures with other parties; |
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• | Difficulties that may incur in implementing the Company's acquisition strategy; and |
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• | 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:
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• | Unexpected delays in collections from clients, particularly those located in the Middle East; |
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• | 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; |
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• | 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 |
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• | 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.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
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| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
| | (unaudited) | | |
Assets | | |
| | |
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Assets | | | | |
Cash and cash equivalents | | $ | 16,738 |
| | $ | 25,637 |
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Cash - restricted | | 4,470 |
| | 4,312 |
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Accounts receivable, less allowance for doubtful accounts of $66,941 and $71,082 | | 160,656 |
| | 164,844 |
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Accounts receivable - affiliates | | 8,402 |
| | 5,712 |
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Prepaid expenses and other current assets | | 7,770 |
| | 7,751 |
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Income tax receivable | | 4,723 |
| | 3,554 |
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Current assets held for sale | | — |
| | 54,651 |
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Total current assets | | 202,759 |
| | 266,461 |
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Property and equipment, net | | 14,880 |
| | 16,389 |
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Cash - restricted, net of current portion | | 1,160 |
| | 313 |
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Retainage receivable | | 18,112 |
| | 17,225 |
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Acquired intangibles, net | | 4,965 |
| | 6,006 |
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Goodwill | | 51,942 |
| | 50,665 |
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Investments | | 4,466 |
| | 3,501 |
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Deferred income tax assets | | 3,695 |
| | 3,200 |
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Other assets | | 5,500 |
| | 4,224 |
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Non-current assets held for sale | | — |
| | 32,091 |
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Total assets | | $ | 307,479 |
| | $ | 400,075 |
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Liabilities and Stockholders’ Equity | | | | |
Current maturities of notes payable and long-term debt | | $ | 4,532 |
| | $ | 1,983 |
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Accounts payable and accrued expenses | | 87,384 |
| | 85,680 |
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Income taxes payable | | 9,691 |
| | 4,874 |
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Current portion of deferred revenue | | 5,334 |
| | 12,943 |
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Other current liabilities | | 9,982 |
| | 8,157 |
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Current liabilities held for sale | | — |
| | 25,888 |
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Total current liabilities | | 116,923 |
| | 139,525 |
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Notes payable and long-term debt, net of current maturities | | 32,374 |
| | 142,120 |
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Retainage payable | | 1,071 |
| | 961 |
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Deferred income taxes | | 2,670 |
| | 560 |
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Deferred revenue | | 15,866 |
| | 22,804 |
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Other liabilities | | 18,624 |
| | 12,666 |
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Non-current liabilities held for sale | | — |
| | 5,087 |
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Total liabilities | | 187,528 |
| | 323,723 |
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Commitments and contingencies | |
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Stockholders’ equity: | | | | |
Preferred stock, $0.0001 par value; 1,000 shares authorized, none issued | | — |
| | — |
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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 |
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Additional paid-in capital | | 194,491 |
| | 190,353 |
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Accumulated deficit | | (39,802 | ) | | (81,349 | ) |
Accumulated other comprehensive loss | | (6,681 | ) | | (4,611 | ) |
| | 148,014 |
| | 104,399 |
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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 |
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Noncontrolling interests | | 1,978 |
| | 1,994 |
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Total equity | | 119,951 |
| | 76,352 |
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Total liabilities and stockholders’ equity | | $ | 307,479 |
| | $ | 400,075 |
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See accompanying notes to consolidated financial statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
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| | (As restated) | |
| | (As restated) |
Revenues | | $ | 125,436 |
| | $ | 132,709 |
| | $ | 241,556 |
| | $ | 269,608 |
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Direct expenses | | 86,807 |
| | 92,354 |
| | 165,316 |
| | 185,655 |
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Gross profit | | 38,629 |
| | 40,355 |
| | 76,240 |
| | 83,953 |
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Selling, general and administrative expenses | | 40,074 |
| | 34,323 |
| | 73,537 |
| | 72,116 |
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Share of (profit) loss of equity method affiliates | | (82 | ) | | 31 |
| | (48 | ) | | 16 |
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Operating (loss) profit | | (1,363 | ) | | 6,001 |
| | 2,751 |
| | 11,821 |
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Interest and related financing fees, net | | 282 |
| | 576 |
| | 1,031 |
| | 1,204 |
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(Loss) Earnings before income taxes | | (1,645 | ) | | 5,425 |
| | 1,720 |
| | 10,617 |
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Income tax (benefit) expense | | (649 | ) | | 2,749 |
| | 700 |
| | 3,205 |
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(Loss) Earnings from continuing operations | | (996 | ) | | 2,676 |
| | 1,020 |
| | 7,412 |
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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 |
| | — |
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Total gain (loss) from discontinued operations | | 44,894 |
| | (574 | ) | | 40,643 |
| | (1,817 | ) |
Net earnings | | 43,898 |
| | 2,102 |
| | 41,663 |
| | 5,595 |
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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 |
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Basic (loss) earnings per common share from continuing operations | | $ | (0.02 | ) | | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.14 |
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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 |
| | — |
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Basic earnings per common share - Hill International, Inc. | | $ | 0.84 |
| | $ | 0.04 |
| | $ | 0.80 |
| | $ | 0.11 |
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Basic weighted average common shares outstanding | | 51,952 | | 51,727 |
| | 51,906 |
| | 51,679 |
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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 |
| | — |
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Diluted earnings per common share - Hill International, Inc. | | $ | 0.84 |
| | $ | 0.04 |
| | $ | 0.79 |
| | $ | 0.11 |
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Diluted weighted average common shares outstanding | | 51,952 |
| | 51,948 |
| | 52,468 |
| | 51,777 |
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See accompanying notes to consolidated financial statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS
(In thousands)
(Unaudited)
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| | 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 |
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Foreign currency translation adjustment, net of tax | | (644 | ) | | 581 |
| | (2,202 | ) | | 578 |
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Other, net | | — |
| | 22 |
| | — |
| | 56 |
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Comprehensive earnings (loss) | | 43,254 |
| | 2,705 |
| | 39,461 |
| | 6,229 |
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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 |
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See accompanying notes to consolidated financial statements.
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 |
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Loss from discontinued operations | | 11,552 |
| | 1,817 |
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Gain on sale of discontinued operations, net of taxes (see note 2) | | (52,195 | ) | | — |
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Earnings from continuing operations | | 1,020 |
| | 7,412 |
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Adjustments to reconcile net earnings to net cash provided by (used in): | | | | |
Depreciation and amortization | | 3,255 |
| | 4,209 |
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Provision for bad debts | | 215 |
| | 3,370 |
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Amortization of deferred loan fees | | 597 |
| | 889 |
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Deferred tax benefit | | 332 |
| | (312 | ) |
Stock based compensation | | 2,435 |
| | 1,175 |
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Unrealized foreign exchange losses on intercompany balances | | 1,122 |
| | 2,117 |
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Changes in operating assets and liabilities: | | | | |
Restricted cash | | (995 | ) | | 565 |
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Accounts receivable | | 3,973 |
| | 3,485 |
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Accounts receivable - affiliate | | (2,684 | ) | | (2,321 | ) |
Prepaid expenses and other current assets | | 343 |
| | 1,567 |
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Income taxes receivable | | (832 | ) | | (410 | ) |
Retainage receivable | | 414 |
| | (12,714 | ) |
Other assets | | (4,080 | ) | | 6,211 |
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Accounts payable and accrued expenses | | (7,651 | ) | | (11,261 | ) |
Income taxes payable | | (5,691 | ) | | (3,532 | ) |
Deferred revenue | | (14,470 | ) | | 7,374 |
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Other current liabilities | | 2,631 |
| | 2,196 |
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Retainage payable | | 108 |
| | 530 |
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Other liabilities | | 9,042 |
| | 1,545 |
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Net cash (used in) provided by continuing operations | | (10,916 | ) | | 12,095 |
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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 |
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| | | | |
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.
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.
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.
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 |
| | |
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 |
| | |
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.
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 |
|
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.
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 |
|
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.
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.
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.
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 |
|
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.
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).
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.
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 |
|
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.
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 |
| | $ | |