Hill International, Inc. - Quarter Report: 2016 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended March 31, 2016

 

or

 

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

 

For the transition period

from                                          to                                        

 

Commission File Number: 001-33961

 

HILL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer		o		Accelerated Filer		x
Non-Accelerated Filer		o		Smaller Reporting Company		o

 

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

 

There were 51,715,976 shares of the Registrant’s Common Stock outstanding at April 30, 2016.

 

 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

 

Index to Form 10-Q

 

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	5
	Consolidated Balance Sheets at March 31, 2016 (unaudited) and December 31, 2015	5
	Consolidated Statements of Earnings for the three months ended March 31, 2016 and 2015 (unaudited)	6
	Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2016 and 2015 (unaudited)	7
	Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (unaudited)	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
Part II	OTHER INFORMATION	34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Funds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5	Other Information	34
Item 6.	Exhibits	34
Signatures

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. Examples of forward-looking statements in this report include, but are not limited to, statements regarding management’s expectation that past due accounts receivable from Oman will be collected in the third quarter.

 

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

 

Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements include:

 

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

 

·              Modifications and termination of client contracts;

 

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

 

·              Difficulties we may incur in implementing our acquisition strategy;

 

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

 

·              Unexpected adjustments and cancellations related to our backlog.

 

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

 

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

 

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

 

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

 

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

 

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

 

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PART I — FINANCIAL INFORMATION

Item 1.   Financial Statements.

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

		March 31, 2016			December 31, 2015
		(unaudited)
Assets
Cash and cash equivalents		$	21,035		$	24,089
Cash - restricted		4,041			4,435
Accounts receivable, less allowance for doubtful accounts of $64,730 and $63,748		243,093			243,417
Accounts receivable - affiliates		9,354			5,205
Prepaid expenses and other current assets		10,379			10,299
Income taxes receivable		4,391			4,146
Total current assets		292,293			291,591
Property and equipment, net		22,901			23,751
Cash - restricted, net of current portion		275			259
Retainage receivable		2,919			2,638
Acquired intangibles, net		13,780			14,659
Goodwill		76,503			74,893
Investments		5,544			8,386
Deferred income tax assets		19,709			19,724
Other assets		5,399			6,662
Total assets		$	439,323		$	442,563
Liabilities and Stockholders’ Equity
Current maturities of notes payable and long-term debt		$	4,411		$	4,357
Accounts payable and accrued expenses		107,606			112,457
Income taxes payable		5,650			9,064
Deferred revenue		10,746			11,310
Other current liabilities		9,332			5,860
Total current liabilities		137,745			143,048
Notes payable and long-term debt, net of current maturities		141,865			140,626
Retainage payable		2,195			1,929
Deferred income taxes		16,872			16,341
Deferred revenue		10,070			11,919
Other liabilities		9,852			10,661
Total liabilities		318,599			324,524
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value; 1,000 shares authorized, none issued		—			—
Common stock, $0.0001 par value; 100,000 shares authorized, 58,675 shares and 58,335 shares issued at March 31, 2016 and December 31, 2015		6			6
Additional paid-in capital		190,361			188,869
Retained earnings		2,655			1,205
Accumulated other comprehensive loss		(45,642		)	(46,866		)
		147,380			143,214
Less treasury stock of 6,959 shares and 6,743 shares at March 31, 2016 and
December 31, 2015, at cost		(29,974		)	(29,245		)
Hill International, Inc. share of equity		117,406			113,969
Noncontrolling interests		3,318			4,070
Total equity		120,724			118,039
Total liabilities and stockholders’ equity		$	439,323		$	442,563

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31,
		2016			2015
Consulting fee revenue		$	157,305		$	151,141
Reimbursable expenses		18,916			19,127
Total revenue		176,221			170,268
Cost of services		94,063			86,429
Reimbursable expenses		18,916			19,127
Total direct expenses		112,979			105,556
Gross profit		63,242			64,712
Selling, general and administrative expenses		57,725			58,923
Share of (profit) loss of equity method affiliates		(15		)	183
Operating profit		5,532			5,606
Interest and related financing fees, net		3,397			3,574
Earnings before income taxes		2,135			2,032
Income tax expense		681			1,184
Net earnings		1,454			848
Less: net earnings - noncontrolling interests		4			146
Net earnings attributable to Hill International, Inc.		$	1,450		$	702
Basic earnings per common share - Hill International, Inc.		$	0.03		$	0.01
Basic weighted average common shares outstanding		51,631			50,373
Diluted earnings per common share - Hill International, Inc.		$	0.03		$	0.01
Diluted weighted average common shares outstanding		51,722			50,637

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

(In thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2016			2015
Net earnings		$	1,454		$	848
Foreign currency translation adjustment, net of tax		434			(9,430		)
Other, net		34			(59		)
Comprehensive earnings (loss)		1,922			(8,641		)
Comprehensive loss attributable to noncontrolling interests		(752		)	(1,164		)
Comprehensive earnings (loss) attributable to Hill International, Inc.		$	2,674		$	(7,477	)

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2016			2015
Cash flows from operating activities:
Net earnings		$	1,454		$	848
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		2,656			2,440
Provision for bad debts		1,634			1,905
Amortization of deferred loan fees		295			—
Deferred income tax expense		129			(1,549		)
Stock based compensation		668			761
Changes in operating assets and liabilities, net:
Restricted cash		524			(1,539		)
Accounts receivable		(304		)	(22,533		)
Accounts receivable - affiliate		(4,149		)	(1,939		)
Prepaid expenses and other current assets		125			(1,190		)
Income taxes receivable		(83		)	(796		)
Retainage receivable		(281		)	33
Other assets		4,519			(1,618		)
Accounts payable and accrued expenses		(7,492		)	14,191
Income taxes payable		(3,885		)	839
Deferred revenue		(3,123		)	2,785
Other current liabilities		3,302			(1,540		)
Retainage payable		263			219
Other liabilities		(865		)	654
Net cash used in operating activities		(4,613		)	(8,029		)
Cash flows from investing activities:
Payments for purchase of property and equipment		(172		)	(5,234		)
Net cash used in investing activities		(172		)	(5,234		)
Cash flows from financing activities:
Payments on term loans		(314		)	(300		)
Net borrowings on revolving loans		1,202			12,566
Dividends paid to noncontrolling interest		—			(173		)
Proceeds from stock issued under employee stock purchase plan		10			2
Proceeds from exercise of stock options		86			—
Net cash provided by financing activities		984			12,095
Effect of exchange rate changes on cash		747			(3,171		)
Net decrease in cash and cash equivalents		(3,054		)	(4,339		)
Cash and cash equivalents — beginning of period		24,089			30,124
Cash and cash equivalents — end of period		$	21,035		$	25,785

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC.AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — The Company and Liquidity

 

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

 

Since 2011, the amount of CFR attributable to operations in the Middle East and Africa has grown from approximately 32% in 2011 to approximately 53% of total consolidated CFR in 2016.  There has been significant political upheaval and civil unrest in this region, most notably in Libya where we had substantial operations prior to the civil unrest.  In 2012, due to the overthrow of the Libyan government and subsequent civil war, the Company reserved a $59,937,000 receivable from the Libyan Organization for Development of Administrative Centres (“ODAC”).  In 2013 and 2014, the Company received payments totaling approximately $9,511,000, but this shortfall of cash flows from ODAC has put a considerable strain on its liquidity.  As a result, it has had to rely heavily on debt and equity transactions to fund its operations.  See Note 3 for a further discussion of issues related to our liquidity.

 

Note 2 — Basis of Presentation

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In the opinion of management, these statements include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the consolidated financial statements. The consolidated financial statements include the accounts of Hill and its wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

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

 

Note 3 — Accounts Receivable

 

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

 

		March 31, 2016			December 31, 2015
Billed		$	268,060		$	267,592
Retainage, current portion		15,009			13,660
Unbilled		24,754			25,913
		307,823			307,165
Allowance for doubtful accounts		(64,730		)	(63,748		)
Total		$	243,093		$	243,417

 

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The Company has open but inactive contracts with the Libyan Organization for the Development and Administrative Centres (“ODAC”).  Due to the civil unrest which commenced in Libya in February 2011, the Company suspended its operations in and demobilized substantially all of its personnel from Libya.  At March 31, 2016, the Libya Receivable was approximately $48,587,000 which continues to be fully reserved.  It is management’s intention to continue to pursue collection of monies owed to the Company by ODAC and, if subsequent payments are received, the Company will reflect such receipts, net of any third party obligations related to the collections, as reductions of SG&A expenses.

 

During 2015, the Company experienced a 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 Transportation and Communications (the “MOTC”) in Oman.  Throughout the original term of the contract, the Company was paid timely and regularly in accordance with the terms of the contract.  The original contract term was to expire in November 2014.  In October 2014, the Company applied for a twelve-month extension of time amendment (the “first extension”) which was subsequently approved in March 2016.  The Company continued to work on the Oman Airport project.  During the early part of the first extension, MOTC paid the Company on account for work performed.  The Company began to experience delays in payment during the second quarter of 2015 when MOTC commenced its formal review and certification of the Company’s invoices.  In October 2015, the MOTC paid the Company for work performed in April and May 2015.  In December 2015, the Company began discussions with the MOTC on a second extension of time amendment, which was approved in March 2016, and has since commenced additional work, which management expects to last approximately 18 months.  Beginning in March 2016, the MOTC resumed payments, and the Company received approximately $15,000,000. At March 31, 2016, accounts receivable from Oman totaled $37,389,000. In April 2016, the Company received approximately $1,810,000 against the accounts receivable.  Management expects to collect the remaining past-due accounts receivable in the third quarter of 2016.

 

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

 

Note 4 — Intangible Assets

 

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

 

		March 31, 2016						December 31, 2015
		Gross						Gross
		Carrying			Accumulated			Carrying			Accumulated
		Amount			Amortization			Amount			Amortization
Client relationships		$	34,975		$	23,290		$	34,891		$	22,668
Acquired contract rights		9,693			9,058			12,256			11,287
Trade names		2,818			1,358			2,704			1,237
Total		$	47,486		$	33,706		$	49,851		$	35,192
Intangible assets, net		$	13,780					$	14,659

 

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

 

		Three Months Ended March 31,
		2016			2015
		$	1,285		$	1,420

 

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

 

		Estimated
		Amortization
Year ending December 31,		Expense
2016 (remaining 9 months)		$	3,088
2017		3,152
2018		2,038
2019		1,764
2020		1,267

 

Note 5 — Goodwill

 

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

 

		Project			Construction
		Management			Claims			Total
Balance, December 31, 2015		$	49,739		$	25,154		$	74,893
Additions		—			—			—
Translation adjustments		1,791			(181		)	1,610
Balance, March 31, 2016		$	51,530		$	24,973		$	76,503

 

Note 6 — Accounts Payable and Accrued Expenses

 

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

 

		March 31, 2016			December 31, 2015
Accounts payable		$	36,242		$	44,200
Accrued payroll and related expenses		53,782			50,724
Accrued subcontractor fees		5,073			5,905
Accrued agency fees		6,289			6,564
Accrued legal and professional fees		955			1,186
Other accrued expenses		5,265			3,878
		$	107,606		$	112,457

 

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Note 7 — Notes Payable and Long-Term Debt

 

Outstanding debt obligations are as follows (in thousands):

 

		March 31, 2016			December 31, 2015
2014 Term Loan Facility		$	112,901		$	112,906
2014 Domestic Revolving Credit Facility		17,500			17,500
2014 International Revolving Credit Facility		11,957			10,715
Borrowings under revolving credit facilities with a consortium of banks in Spain		3,114			3,013
Borrowings from Philadelphia Industrial Development Corporation		697			710
Other notes payable		107			139
		146,276			144,983
Less current maturities		4,411			4,357
Notes payable and long-term debt, net of current maturities		$	141,865		$	140,626

 

The Company and its subsidiary Hill International N.V. (the “Subsidiary”) are parties to a credit agreement with Société Générale (the “Agent”), TD Bank, N.A. and HSBC Bank USA, N.A. (collectively, the “U.S. Lenders”) consisting of a term loan facility of $120,000,000 (the “Term Loan Facility”) and a $30,000,000 U.S. dollar-denominated facility available to the Company (the “U.S. Revolver,” together with the Term Loan Facility, the “U.S. Credit Facilities”) and a credit agreement with the Agent (the “International Lender”) providing a €11,765,000 ($15,000,000 at closing and $13,334,000 at March 31, 2016) credit facility which is available to the Subsidiary (the “International Revolver” and together with the U.S. Revolver, the “Revolving Credit Facilities” and, together with the U.S. Credit Facilities, the “Secured Credit Facilities”).  The U.S. Revolver and the International Revolver include sub-limits for letters of credit amounting to $25,000,000 and $10,000,000, respectively.

 

The Secured Credit Facilities contain customary default provisions, representations and warranties, and affirmative and negative covenants, and require the Company to comply with certain financial and reporting covenants.  The financial covenants consist of a Maximum Consolidated Net Leverage Ratio and an Excess Account Concentration requirement.  The Consolidated Net Leverage Ratio is the ratio of (a) consolidated total debt (minus cash of up to $10,000,000 held in the aggregate) to consolidated earnings before interest, taxes, depreciation, amortization and share-based compensation for the trailing twelve months.  The Excess Account Concentration covenant  permits the U. S. Lenders and the International Lender to increase the interest rates by 2.0% if, as of the last day of any fiscal quarter, either (a) the total of accounts receivable from all clients within any country not listed as a Permitted Country as defined in the Secured Credit Facilities (other than the United Arab Emirates) that are more than 120 days old (relative to the invoice date) constitute more than 10% of the total outstanding accounts receivable or (b) accounts receivable from any individual client located in the United Arab Emirates that are more than 120 days old (relative to the invoice date) constitute more than 14% of the total outstanding accounts receivable; provided that, in each case, the accounts receivable due from clients located in Libya that exist as of the Closing Date shall be excluded for all purposes of this covenant. The interest rate will be reset as soon as the accounts receivable over 120 days decline below the 10% or 14% levels.  At March 31, 2016, no client’s accounts receivable exceeded the proscribed limits.

 

The following compares the Maximum Consolidated Net Leverage Ratio to the actual consolidated net leverage ratio:

 

Period Ended		Not to exceed		Actual
March 31, 2016		3.00 to 1.00		2.65

 

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.

 

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Term Loan Facility

 

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

 

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

 

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

 

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

 

At both March 31, 2016 and 2015, the interest rate on the Term Loan was 7.75%.

 

The Company has the right to prepay the Term Loan Facility in full or in part at any time without premium or penalty; provided, however that upon the occurrence of prepayments relating to certain repricing transactions within the first year following closing, a 1.0% prepayment premium will be payable.  The Company is required to make mandatory prepayments of the Term Loan Facility, without premium or penalty, (i) with net proceeds of any issuance or incurrence of indebtedness (other than that permitted under the Term Loan Facility) by the Company after the closing, (ii) with net proceeds from certain asset sales outside the ordinary course of business, and (iii) with 50% of the excess cash flow (as defined in the agreement) for each fiscal year of the Borrowers commencing with the first full fiscal year ending after closing (which percentage would be reduced to 25% if the Consolidated Net Leverage Ratio is equal to or less than 2.25 to 1.00 or reduced to 0% if the Consolidated Net Leverage Ratio is equal to or less than 1.50 to 1.00).

 

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

 

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

 

The Company incurred fees and expenses related to the Term Loan Facility aggregating $7,066,000 which have been deferred.  The deferred fees are being amortized on a straight-line basis, which approximates the effective interest method, to interest and related financing fees, net over a six-year period which ends on September 30, 2020.  Unamortized balances of $5,299,000 and $5,594,000 are included as an offset against the Term Loan balances in the consolidated balance sheets at March 31, 2016 and December 31, 2015, respectively.

 

Revolving Credit Facilities

 

The interest rate on borrowings under the U.S. Revolver will be, at the Company’s option from time to time, either the LIBOR for the relevant interest period plus 3.75% per annum or the Base Rate plus 2.75% per annum.  At March 31, 2016 and 2015, the interest rates were 6.25% and 6.00%, respectively.

 

The interest rate on borrowings under the International Revolver will be the European Inter-Bank Offered Rate, or “EURIBOR,” for the relevant interest period (or at a substitute rate to be determined to the extent EURIBOR is not available) plus 4.00% per annum.  At March 31, 2016 and 2015, the interest rates were 4.00% and 4.00%, respectively.

 

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

 

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

 

The Company or the Subsidiary, as applicable, will be required to make mandatory prepayments under their respective Revolving Credit Facilities to the extent that the aggregate outstanding amount thereunder exceeds the then-applicable borrowing base, which payments will be made without penalty or premium.  At March 31, 2016, the domestic borrowing base was $30,000,000 and the international borrowing base was €11,765,000 (approximately $13,334,000 at March 31, 2016).

 

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

 

The Revolving Credit Facilities have a term of five years and require payment of interest only during the term.  Under the Revolving Credit Facilities, outstanding loans may be repaid in whole or in part at any time, without premium or penalty, subject to certain customary limitations, and will be available to be re-borrowed from time to time through expiration on September 30, 2019.

 

The Company incurred fees and expenses related to the Revolving Credit Facilities aggregating $3,000,000 which has been deferred. The deferred fees are being amortized on a straight-line basis, which approximates the effective interest method, to interest expense and related financing fees, net over a five-year period which ends on September 30, 2019.  Unamortized balances of $2,100,000 and $2,250,000 are included in other assets in the consolidated balance sheet at March 31, 2016 and December 31, 2015, respectively.

 

At March 31, 2016 the Company had $8,103,000 of outstanding letters of credit and $4,397,000 of available borrowing capacity under the U.S. Revolver.

 

At March 31, 2016, the Company had $1,052,000 of outstanding letters of credit and $4,131,000 of available borrowing capacity under the International Revolver and its other foreign credit agreements (See “Other Debt Arrangements” below for more information).

 

Other Debt Arrangements

 

In connection with the move of its corporate headquarters to Philadelphia, Pennsylvania, The Company received a loan from the Philadelphia Industrial Corporation in the amount of $750,000 which bears interest at 2.75%, is repayable in 144 equal monthly installments of $6,121 and matures on May 1, 2027. At March 31, 2016, total borrowings outstanding were $697,000.

 

The Company’s subsidiary, Hill International (Spain) S.A. (“Hill Spain”), maintains a revolving credit facility with six banks (the “Financing Entities”) in Spain which initially provided for total borrowings of up to €5,640,000 with interest at 6.50% on outstanding borrowings.  Total availability under this facility was reduced to 50.0% at December 31, 2015.  At March 31, 2016, the total facility was approximately €2,670,000 (approximately $3,026,000) and borrowings outstanding were €2,657,000 (approximately $3,012,000).  The amount being financed (“Credit Contracts”) by each Financing Entity varies from €189,000 (approximately $214,000) and €769,000 (approximately $872,000). To guarantee Hill Spain’s obligations resulting from the Credit Contracts, Hill Spain provided a guarantee in favor of each one of the Financing Entities and, additionally, and solely in the case of unremedied failure to make payment, and at the request of each of the Financing Entities, shall grant a first ranking pledge over a given percentage of corporate shares of Hill International

 

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Brasil Participacoes Ltda. for the principal, interest, fees, expenses or any other amount owed by virtue of the Credit Contracts, coinciding with the percentage of credit of each Financing entity with respect to the total outstanding borrowings under this facility. The facility expires on December 17, 2016.

 

Hill Spain maintains an Instituto de Credito Oficial (“ICO”) loan with Bankia Bank in Spain for €90,000 (approximately $102,000) at March 31, 2016. The availability is reduced €15,000 on a quarterly basis. At March 31, 2016, total borrowings outstanding were €90,000 (approximately $102,000). The interest rate at March 31, 2016 was 6.50%. The ICO loan expires on August 10, 2017.

 

The Company maintains a credit facility with the National Bank of Abu Dhabi which provides for total borrowings of up to AED 11,500,000 (approximately $3,131,000 at March 31, 2016) collateralized by certain overseas receivables.  The interest rate is the one-month Emirates InterBank Offer Rate plus 3.00% (or 4.41% at March 31, 2016) but no less than 5.50%.  This facility was modified in June 2015 to increase availability under Letters of Guarantee to allow for up to AED 200,000,000 (approximately $54,451,000 at March 31, 2016) of which AED 81,374,000 (approximately $22,155,000) was outstanding at March 31, 2016. The credit facility is subject to periodic review by the bank with the next review scheduled for May 7, 2016. The Company fully expects that  this facility will be renewed by the bank.

 

Engineering S.A. maintains four unsecured revolving credit facilities with two banks in Brazil aggregating 2,380,000 Brazilian Reais (approximately $661,000 at March 31, 2016), with a weighted average interest rate of 4.96% per month at March 31, 2016.  There were no borrowings outstanding on any of these facilities which are renewed automatically every three months.

 

The Company also maintains relationships with other foreign banks for the issuance of letters of credit, letters of guarantee and performance bonds in a variety of foreign currencies.  At March 31, 2016, the maximum U.S. dollar equivalent of the commitments was $89,498,000 of which $37,775,000 is outstanding.

 

Note 8 — Supplemental Cash Flow Information

 

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

 

		Three Months Ended March 31,
		2016			2015
Interest and related financing fees paid		$	3,003		$	2,802
Income taxes paid		$	3,191		$	906

 

Note 9 — 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.  Dilutive stock options increased average common shares outstanding by approximately 91,000 shares and 264,000 shares for the three-month periods ended March 31, 2016 and 2015.  Options to purchase 2,590,000 shares and 6,524,000 shares were excluded from the calculation of diluted earnings per share for the three-month periods ended March 31, 2016 and 2015, respectively, because they were antidilutive.

 

Note 10 — Share-Based Compensation

 

At March 31, 2016, the Company had 6,336,648 options outstanding with a weighted average exercise price of $4.11.  During the three months ended March 31, 2016, the Company granted 25,101 options which vest over a five-year period. The options have a weighted average exercise price of $3.21 and a weighted-average contractual life of 6.2 years.  The aggregate fair value of the options was $34,900 calculated using the Black-Scholes valuation model. The weighted average assumptions used to calculate fair value were: expected life—4.2 years; volatility—53.14% and risk-free interest

 

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rate—1.26%. During the three months ended March 31, 2016, options for 987,366 shares with a weighted average exercise price of $6.99 lapsed.

 

During the three months ended March 31, 2016, employees purchased 3,804 common shares for an aggregate purchase price of approximately $10,000 pursuant to the Company’s 2008 Employee Stock Purchase Plan.

 

The Company recognized share-based compensation expense in selling, general and administrative expenses in the consolidated statement of operations totaling $658,000 and $761,000 for the three months ended March 31, 2016 and 2015, respectively.

 

Note 11 — Stockholders’ Equity

 

The following table summarizes the changes in stockholders’ equity during the three months ended March 31, 2016 (in thousands):

 

					Hill International,  Inc.			Noncontrolling
		Total			Stockholders			Interest
Stockholders’ equity, December 31, 2015		$	118,039		$	113,969		$	4,070
Net earnings		1,454			1,450			4
Other comprehensive earnings (loss)		468			1,224			(756		)
Comprehensive earnings (loss)		1,922			2,674			(752		)
Additional paid in capital		1,492			1,492			—
Acquisition of treasury stock		(729		)	(729		)	—
Stockholders’ equity, March 31, 2016		$	120,724		$	117,406		$	3,318

 

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

 

Note 12 — Income Taxes

 

The effective tax rates for the three months ended March 31, 2016 and 2015 were            31.9% and 58.3%, respectively.  The Company’s effective tax rate represents the Company’s effective tax rate for the year based on projected income and mix of income among the various foreign tax jurisdictions, adjusted for discrete transactions occurring during the period.  In addition, for the three months ended March 31, 2015, the Company recognized an income tax expense resulting from adjustments to agree the prior year’s book amounts to the actual amounts per the tax returns totaling $85,000. The Company’s effective tax rate in both years is higher than it otherwise would be primarily as a result of not recording an income benefit related to the U.S. net operating loss.

 

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

 

		Three Months Ended March 31, 2016									Three Months Ended March 31, 2015
		U.S.			Foreign			Total			U.S.			Foreign			Total
(Loss) earnings before income taxes		$	(8,526	)	$	10,661		$	2,135		$	(10,636	)	$	12,668		$	2,032
Income tax expense, net		$	—		$	681		$	681		$	—		$	1,184		$	1,184

 

The reserve for uncertain tax positions amounted to $939,000 and $996,000 at March 31, 2016 and December 31, 2015, respectively, and is included in “Other liabilities” in the consolidated balance sheet at those dates.

 

The Company’s policy is to record income tax related interest and penalties in income tax expense. At both March 31, 2016 and December 31, 2015, potential interest and penalties related to uncertain tax positions amounting to $500,000 was included in the balance above.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

 

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Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC740, Income Taxes. They consider both positive and negative evidence. In making this determination, management assesses all of the evidence available at the time including recent earnings, internally-prepared income projections, and historical financial performance.

 

Note 13 — Business Segment Information

 

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

 

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

 

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

 

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

 

Selected information by business segment and geographical area is summarized below (in thousands):

 

Consulting Fee Revenue (“CFR”)

 

		Three Months Ended March 31,
		2016					2015
Project Management		$	116,579		74.1	%	$	112,117		74.2	%
Construction Claims		40,726			25.9		39,024			25.8
Total		$	157,305		100.0	%	$	151,141		100.0	%

 

Total Revenue

 

		Three Months Ended March 31,
		2016					2015
Project Management		$	134,370		76.3	%	$	129,995		76.3	%
Construction Claims		41,851			23.7		40,273			23.7
Total		$	176,221		100.0	%	$	170,268		100.0	%

 

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Operating Profit

 

		Three Months Ended March 31,
		2016			2015
Project Management		$	12,005		$	12,788
Share of profit (loss) of equity method affiliate		15			(183		)
Total Project Management		12,020			12,605
Construction Claims		2,873			2,333
Corporate		(9,361		)	(9,332		)
Total		$	5,532		$	5,606

 

Depreciation and Amortization Expense

 

		Three Months Ended March 31,
		2016			2015
Project Management		$	1,822		$	1,636
Construction Claims		778			759
Subtotal segments		2,600			2,395
Corporate		56			45
Total		$	2,656		$	2,440

 

Consulting Fee Revenue by Geographic Region

 

		Three Months Ended March 31,
		2016					2015
U.S./Canada		$	39,259		25.0	%	$	35,257		23.3	%
Latin America		6,092			3.9		7,809			5.2
Europe		21,142			13.4		20,112			13.3
Middle East		76,060			48.4		74,274			49.1
Africa		6,854			4.4		7,063			4.7
Asia/Pacific		7,898			4.9		6,626			4.4
Total		$	157,305		100.0	%	$	151,141		100.0	%
U.S.		$	38,605		24.5	%	$	34,423		22.8	%
Non-U.S.		118,700			75.5		116,718			77.2
Total		$	157,305		100.0	%	$	151,141		100.0	%

 

For the quarter ended March 31, 2016, consulting fee revenue for the United Arab Emirates amounted to $33,109,000 representing 21.0% of the total. No other country except for the United States accounted for over 10% of consolidated consulting fee revenue.

 

For the quarter ended March 31, 2015, consulting fee revenue for the United Arab Emirates amounted to $25,288,000 representing 16.7% of the total and Saudi Arabia consulting fee revenue amounted to $15,748,000 representing 10.4% of the total. No other country except for the United States accounted for over 10% of consolidated consulting fee revenue.

 

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Total Revenue by Geographic Region

 

		Three Months Ended March 31,
		2016					2015
U.S./Canada		$	52,728		29.9	%	$	49,340		29.0	%
Latin America		6,102			3.5		7,813			4.6
Europe		21,920			12.4		21,414			12.6
Middle East		79,653			45.2		76,762			45.1
Africa		7,829			4.4		8,199			4.8
Asia/Pacific		7,989			4.6		6,740			3.9
Total		$	176,221		100.0	%	$	170,268		100.0	%
U.S.		$	52,065		29.5	%	$	48,475		28.5	%
Non-U.S.		124,156			70.5		121,793			71.5
Total		$	176,221		100.0	%	$	170,268		100.0	%

 

For the quarter ended March 31, 2016, total revenue for the United Arab Emirates amounted to $34,769,000 representing 19.7% of the total. No other country except for the United States accounted for over 10% of consolidated total revenue.

 

For the quarter ended March 31, 2015, total revenue for the United Arab Emirates amounted to $25,527,000 representing 15.0% of the total. No other country except for the United States accounted for over 10% of consolidated total revenue.

 

Consulting Fee Revenue By Client Type

 

		Three Months Ended March 31,
		2016					2015
U.S. federal government		$	2,550		1.6	%	$	2,456		1.6	%
U.S. state, regional and local governments		23,048			14.7		20,091			13.3
Foreign governments		52,566			33.4		54,547			36.1
Private sector		79,141			50.3		74,047			49.0
Total		$	157,305		100.0	%	$	151,141		100.0	%

 

Total Revenue By Client Type

 

		Three Months Ended March 31,
		2016					2015
U.S. federal government		$	2,940		1.7	%	$	3,012		1.8	%
U.S. state, regional and local governments		35,320			20.0		31,155			18.3
Foreign governments		56,319			32.0		58,138			34.1
Private sector		81,642			46.3		77,963			45.8
Total		$	176,221		100.0	%	$	170,268		100.0	%

 

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