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.
All amounts included in the following Notes to the Consolidated Financial Statements are in thousands, except per share data.
Note 2 — Liquidity
At September 30, 2019, our principal sources of liquidity consisted of $17,350 of cash and cash equivalents, $209 of available borrowing capacity under the Domestic Revolving Credit Facility, $1,054 of available borrowing capacity under the International Revolving Credit Facility, and $1,076 under other foreign credit agreements. Additional information regarding the Company's credit facilities is set forth in Note 9 - Notes Payable and Long-Term Debt.
The Company believes that it has sufficient liquidity to support the reasonably anticipated cash needs of its operations over the next twelve months from November 6, 2019, the date of this filing. The Company provided cash from operations of $716 during the nine months ended September 30, 2019. The Company's net cash used in operations during 2018 was primarily due to a number of costs related to the financial statement restatement, restructuring and a performance bond that was called. We do not expect these costs to reoccur.
Note 3 — Basis of Presentation
Summary
The accompanying unaudited interim consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") 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, 2018. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. 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 U.S. 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.
Construction Claims Group Sale
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 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. The Construction Claims Group sale closed on May 5, 2017. For a detailed description of the transaction, see "Note 5 Discontinued Operations" in the Company's 2018 Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019.
Reclassification
A reclassification was made in the presentation of the consolidated statements of operations for the three and nine months ended September 30, 2018 for $3,211 and $4,788, respectively, related to the Middle East vacation expense. The expense was reclassified from direct expense to selling, general and administrative expenses to conform to current year presentation.
Another reclassification was made in the presentation of the consolidated statements of cash flow for the nine months ended September 30, 2018. Net borrowings on revolving loans previously reported as $10,226 was broken out between repayments of revolving loans and proceeds from revolving loans of $(29,849) and $40,075, respectively, to conform to current year presentation.
Certain back-office expenses and foreign currency translation gains and losses that had previously been included in the individual regions in the operating profit/(loss) table presentation are currently being included within the corporate costs line item on the operating profit/(loss) tables herein. The related 2018 prior period operating profit (loss) by geographic region and corporate costs have been recast to reflect this change. This change only affects the presentation in the operating profit/(loss) tables and has no impact on total operating profit/(loss) reported.
Other Income, net
During the three months ended September 30, 2019, the Company recognized $649 of income in Other Income, net, related to the settlement of a $1,000 grant received from the Pennsylvania Department of Community and Economic Development (the "PADCED") in May 2015 (the "Grant"), net of $100 of expense related to other non-operating activity. The Grant was used as part of the relocation of Hill's corporate headquarters to the city of Philadelphia where partial or full repayment of the Grant is required if specific conditions were not met, which included maintaining a minimum number of employees throughout 2018, among other conditions, with the possibility of extension at the PADCED's discretion. In July 2019, the PADCED concluded that the Company is required to repay $351 of the Grant since the Company failed to meet its employment commitment; however, the PADCED granted a one-year extension for the Company to meet such commitment through June 30, 2020. The repayment amount is included in other current liabilities in the consolidated balance sheets.
Summary of Significant Accounting Policies
(a) Foreign Currency Translations and Transactions
Assets and liabilities of all foreign operations are translated at period-end rates of exchange while revenues and expenses are translated at the average monthly exchange rates. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholders’ equity entitled accumulated other comprehensive loss until the entity is sold or substantially liquidated. Gains or losses arising from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency), including those resulting from intercompany transactions, are reflected in selling, general and administrative expenses in the consolidated statement of operations. The impact of foreign exchange on long-term intercompany loans, for which repayment has not been scheduled or planned, are recorded in accumulated other comprehensive loss on the consolidated balance sheet.
(b) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and accounts receivable.
The Company maintains its cash accounts with high quality financial institutions. Although the Company believes that the financial institutions with which it does business will be able to fulfill their commitments, there is no assurance that those institutions will be able to continue to do so.
No single client accounted for 10% or more of total revenue for the three and nine months ended September 30, 2019 or 2018.
There was one client in Africa who contributed 10% or more to gross accounts receivable at September 30, 2019 and December 31, 2018, respectively, which represents 19% and 17% of the gross accounts receivable balance at September 30, 2019 and December 31, 2018, respectively.
(c) Allowance for Doubtful Accounts
The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectability of specific accounts and the overall condition of the receivable portfolios. When evaluating the adequacy of the allowance for doubtful accounts, the Company specifically analyzes trade receivables, including retainage receivable, historical bad debts, client credits, client concentrations, client credit worthiness, current economic trends and changes in client payment terms. If the financial condition of clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should the Company determine that it would be able to realize more of its receivables in the future than previously estimated, an adjustment to the allowance would increase earnings in the period such determination was made. The allowance for doubtful accounts is reviewed on a quarterly basis and adjustments are recorded as deemed necessary.
(d) Retainage Receivable
Retainage receivable represents balances billed but not paid by clients pursuant to retainage provisions in certain contracts and will be due upon completion of specific tasks or the completion of the contract.
(e) Income Taxes
The Company estimates income taxes in each of the jurisdictions in which it operates. This process involves estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheets. The Company assesses the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent it believes recovery is not likely, the Company establishes a valuation allowance. To the extent the Company establishes a valuation allowance in a period, it must include an expense within the tax provision in the consolidated statements of operations. The Company has recorded a valuation allowance to reduce the deferred tax asset to an amount that is more likely than not to be realized in future years. If the Company determines in the future that it is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position, that the deferred tax assets subject to the valuation allowance will be realized, then the previously provided valuation allowance will be adjusted.
The Company recognizes a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is more likely than not that the benefit will be ultimately realized. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.
(f) Revenue Recognition
The Company generates revenue primarily from providing professional services to its clients under various types of contracts. In providing these services, the Company may incur reimbursable expenses, which consist principally of amounts paid to subcontractors and other third parties and travel and other job related expenses that are contractually reimbursable from clients. The Company includes reimbursable expenses in computing and reporting its total revenue as long as the Company remains responsible to the client for the fulfillment of the contract and for the overall acceptability of all services provided.
If estimated total costs on any contract project a loss, the Company charges the entire estimated loss to operations in the period the loss becomes known. The cumulative effect of revisions to revenue, estimated costs to complete contracts, including penalties, incentive awards, change orders, claims, anticipated losses, and others are recorded in the accounting period in which the events indicating a loss are known and the loss can be reasonably estimated. These loss projects are re-assessed for each subsequent reporting period until the project is complete. Such revisions could occur at any time and the effects may be material.
See footnote 4, "Revenue from Contracts with Clients," for more detail, regarding how the Company recognizes revenue under each type of its contractual arrangements.
(g) Restricted Cash
Restricted cash primarily represents cash collateral required to be maintained in foreign bank accounts to serve as collateral for letters of credit, bonds or guarantees on certain projects. The cash will remain restricted until the respective project has been completed, which typically is greater than one year.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Cash and cash equivalents
|
|
$
|
17,350
|
|
|
$
|
18,711
|
|
|
Cash - restricted
|
|
5,033
|
|
|
2,945
|
|
|
Cash - restricted, net of current portion
|
|
2,777
|
|
|
1,451
|
|
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
|
|
$
|
25,160
|
|
|
$
|
23,107
|
|
(h) Earnings (loss) per Share
Basic earnings (loss) per common share have been computed using the weighted-average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per common share incorporates the incremental shares issuable upon the assumed exercise of stock options, the assumed vesting of stock and deferred and restricted stock unit awards using the treasury stock method, if dilutive. The Company has outstanding options to purchase approximately 1,879 shares and 1,966 shares at September 30, 2019 and 2018, respectively. In addition, the Company had 511 and 96 restricted and deferred stock units outstanding at September 30, 2019 and 2018, respectively. These awards were excluded from the calculation of diluted earnings (loss) per share for the three and nine months ended September 30, 2019 and 2018 because they were antidilutive.
The following table provides a reconciliation to net earnings (loss) used in the numerator for earnings (loss) per share from continuing operations attributable to Hill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Income (loss) from continuing operations
|
|
$
|
2,507
|
|
|
$
|
(8,484
|
)
|
|
$
|
2,139
|
|
|
$
|
(23,217
|
)
|
|
Less: net earnings - noncontrolling interest
|
|
26
|
|
|
60
|
|
|
176
|
|
|
96
|
|
|
Net income (loss) from continuing operations attributable to Hill
|
|
$
|
2,481
|
|
|
$
|
(8,544
|
)
|
|
$
|
1,963
|
|
|
$
|
(23,313
|
)
|
(i) New Accounting Pronouncements
Changes to U.S. GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs and, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Company or adoption will have minimal impact on its consolidated financial statements.
For additional information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 to the consolidated financial statements in Item 8 of Form 10-K for the year ended December 31, 2018 filed with the SEC on April 1, 2019. See update below.
Recently Adopted Accounting Pronouncements
On January 1, 2019, the Company adopted ASU 2016-2, Leases (Topic 842), which required the Company to recognize lease assets and lease liabilities (related to leases previously classified as operating under previous U.S. GAAP) on its consolidated balance sheet for all leases in excess of one year in duration. The adoption of this ASU impacted the Company’s financial statements in that all existing leases were recorded as right-of-use ("ROU") assets and liabilities on the balance sheet.
The Company elected to adopt the ASU 2016-2 using the modified retrospective method and, therefore, have not recast comparative periods presented in its unaudited consolidated financial statements. The Company elected the package of transition practical expedients for existing leases and therefore the Company has not reassessed the following: lease classification for existing leases, whether any existing contracts contained leases, if any initial direct costs were incurred and whether existing land easements should be accounted for as leases. The Company did not apply the hindsight practical expedient, accordingly, the Company did not use hindsight in its assessment of lease terms. As permitted under ASU 2016-2, the Company elected as accounting policy elections to not recognize ROU assets and related lease liabilities for leases with terms of twelve months or less and to not separate lease and non-lease components, and instead account for the non-lease components together with the lease components as a single lease component.
In connection with the adoption of the new standard, the Company recorded $16,500 of operating lease right of use assets and $22,841 of operating lease liabilities as of January 1, 2019. See Note 14 of this Form 10-Q for additional information and required disclosures.
Under Topic 842, the Company determined if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's determined incremental borrowing rate is a hypothetical rate based on its understanding of what the Company's credit rating would be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received and net of the deferred rent balance on the date of implementation. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise such options.
Also on January 1, 2019, the Company adopted ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. Our equity incentive plans limit share-based awards to employees and directors of the Company, therefore, adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Also on January 1, 2019, the Company adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, which amended certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. We have updated our consolidated financial statements to include a reconciliation of the beginning balance to the ending balance of stockholders’ equity for each period for which a statement of comprehensive income is presented.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326) - Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. This ASU will be effective for the Company commencing January 1, 2020 with early adoption permitted commencing January 1, 2019. The Company is in the process of assessing the impact of this ASU on our consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-4, Intangibles - Goodwill and Other (Topic 350), which removes step 2 from the goodwill impairment test. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units’ fair value. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017, and the prospective transition method should be applied. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements and does not expect this update to have a material impact on the Company's consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("VIE"). The amendments in this ASU for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required by GAAP). These amendments will create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public companies. Early adoption is permitted. The Company is currently determining the impact that adoption of this guidance will have on the financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606, specifically when the collaborative arrangement participant is a customer in the context of a unit-of-account. It provides more comparability in the presentation of revenues for certain transactions between collaborative arrangement participants, including adding unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public companies. Early adoption is permitted. The Company is currently determining the impact that adoption of this guidance will have on the financial statements.
Note 4 — Revenue from Contracts with Clients
The Company recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the Company expects to be entitled in exchange for such goods or services.
Below is a description of the basic types of contracts from which the Company may earn revenue:
Time and Materials Contracts
Under the time and materials (“T&M”) arrangements, contract fees are based upon time and materials incurred. The contracts may be structured as basic time and materials, cost plus a margin or time and materials subject to a maximum contract value (the "cap value"). Due to the potential limitation of the cap value, the economic factors of the contracts subject to a cap value differ from the economic factors of basic T&M and cost plus contracts. The majority of the Company’s contracts are for consulting projects where it bills the client monthly at hourly billing rates. The hourly billing rates are determined by contract terms. Under cost plus contracts, the Company charges its clients for its costs, including both direct and indirect costs, plus a fixed fee or rate. Under time and materials contracts with a cap value, the Company charges the clients for time and materials based upon the work performed however there is a cap or a not to exceed value. There are often instances that a contract is modified to extend the contract value past the cap. As the consideration is variable depending on the outcome of the contract renegotiation, the Company will estimate the total contract price in accordance with the variable consideration guidelines and will only include consideration that it expects to receive from the client. When the Company is reaching the cap value, the contract will be renegotiated, or Hill ceases work when the maximum contract value is reached. The Company will continue to work if it is probable that the contract will be extended. The Company will only include consideration or contract renegotiations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. If the Company continues to work and is uncertain that a contract change order will be processed, the variable consideration will be constrained to the cap until it is probable that the contract will be renegotiated. The Company is only entitled to consideration for the work it has performed, and the cap value is not a guaranteed contract value.
Fixed Price Contracts
Under fixed price contracts, the Company’s clients pay an agreed amount negotiated in advance for a specified scope of work. The Company is guaranteed to receive the consideration to the extent that the Company delivers under the contract. The Company recognizes revenue over a period of time on fixed price contracts using the input method based upon direct costs incurred to date, which are compared to total projected direct costs. Costs are the most relevant measure to determine the transfer of the service to the client. The Company assesses contracts quarterly and will recognize any expected future loss before actually incurring the loss. When the Company is expecting to reach the total value of the contract, the Company will begin to negotiate a change order.
Change Orders and Claims
Change orders are modifications of an original contract. Either the Company or its client may initiate change orders. They may include changes in specifications or design, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Management evaluates when a change order is probable based upon its experience in negotiating change orders, the client’s written approval of such changes or separate documentation of change order costs that are identifiable. Change orders may take time to be formally documented and terms of such change orders are agreed with the client before the work is performed. Sometimes circumstances require that work progresses before an agreement is reached with the client. If the Company is having difficulties in renegotiating the change order, the Company will stop work, record all costs incurred to date, and determine, on a project by project basis, the appropriate final revenue recognition.
Claims are amounts in excess of the agreed contract price that the Company seeks to collect from its clients or others for client-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. Costs related to change orders and claims are recognized when they are incurred. The Company evaluates claims on an individual basis and recognizes revenue it believes is probable to collect.
U.S. Federal Acquisition Regulations
The Company has contracts with the U.S. government that contain provisions requiring compliance with the U.S. Federal Acquisition Regulations (“FAR”). These regulations are generally applicable to all of its federal government contracts and are partially or fully incorporated in many local and state agency contracts. They limit the recovery of certain specified indirect costs on contracts subject to the FAR. Cost-plus contracts covered by the FAR provide for upward or downward adjustments if actual recoverable costs differ from the estimate billed under forward pricing arrangements. Most of the Company's federal government contracts are subject to termination at the convenience of the federal government. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.
Federal government contracts that are subject to the FAR and that are required by state and local governmental agencies to be audited are performed, for the most part, by the Defense Contract Audit Agency (“DCAA”). The DCAA audits the Company’s overhead rates, cost proposals, incurred government contract costs and internal control systems. During the course of its audits, the DCAA may question incurred costs if it believes the Company has accounted for such costs in a manner inconsistent with the requirements of the FAR or Cost Accounting Standards and recommend that its U.S. government corporate administrative contracting officer disallow such costs. Historically, the Company has not incurred significant disallowed costs because of such audits. However, the Company can provide no assurance that the DCAA audits will not result in material disallowances of incurred costs in the future. The Company provides for a refund liability to the extent that it expects to refund some of the consideration received from a client.
Disaggregation of Revenues
The Company has one operating segment, the Project Management Group, which reflects how the Company is being managed. Additional information related to the Company’s operating segment is provided in Note 12 - Segment and Related Information. The Project Management Group provides extensive construction and project management services to construction owners worldwide. The Company considered the type of client, type of contract and geography for disaggregation of revenue. The Company determined that disaggregating by (1) contract type; and (2) geography would provide the most meaningful information to understand the nature, amount, timing, and uncertainty of its revenues. The type of client does not influence the Company’s revenue generation. Ultimately, the Company is supplying the same services of program management, project management, construction management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, labor compliance services and facilities management services. The Company’s contracts are generally long term contracts that are either based upon time and materials incurred or provide for a fixed price. The contract type will determine the level of risk in the contract related to revenue recognition. For purposes of disaggregation of revenue, the contract types have been grouped into: (1) Fixed Price - which include fixed price projects; and, (2) T&M - which include T&M contracts, T&M with a cap and cost plus contracts. The geography of the contracts will depict the level of global economic factors in relation to revenue recognition.
The components of the Company’s revenue by contract type and geographic region for the three and nine months 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Three Months Ended September 30, 2018
|
|
|
|
Fixed Price
|
|
T&M
|
|
Total
|
|
Percent of Total Revenue
|
|
Fixed Price
|
|
T&M
|
|
Total
|
|
Percent of Total Revenue
|
|
United States
|
|
$
|
4,043
|
|
|
$
|
45,893
|
|
|
$
|
49,936
|
|
|
52.3
|
%
|
|
$
|
2,575
|
|
|
$
|
46,559
|
|
|
$
|
49,134
|
|
|
48.2
|
%
|
|
Latin America
|
|
1,662
|
|
|
7
|
|
|
1,669
|
|
|
1.7
|
%
|
|
2,751
|
|
|
—
|
|
|
2,751
|
|
|
2.7
|
%
|
|
Europe
|
|
5,741
|
|
|
4,815
|
|
|
10,556
|
|
|
11.0
|
%
|
|
4,950
|
|
|
5,529
|
|
|
10,479
|
|
|
10.3
|
%
|
|
Middle East
|
|
7,567
|
|
|
17,880
|
|
|
25,447
|
|
|
26.6
|
%
|
|
11,904
|
|
|
18,784
|
|
|
30,688
|
|
|
30.1
|
%
|
|
Africa
|
|
388
|
|
|
6,617
|
|
|
7,005
|
|
|
7.3
|
%
|
|
621
|
|
|
6,091
|
|
|
6,712
|
|
|
6.6
|
%
|
|
Asia/Pacific
|
|
435
|
|
|
622
|
|
|
1,057
|
|
|
1.1
|
%
|
|
782
|
|
|
1,389
|
|
|
2,171
|
|
|
2.1
|
%
|
|
Total
|
|
$
|
19,836
|
|
|
$
|
75,834
|
|
|
$
|
95,670
|
|
|
100.0
|
%
|
|
$
|
23,583
|
|
|
$
|
78,352
|
|
|
$
|
101,935
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Fixed Price
|
|
T&M
|
|
Total
|
|
Percent of Total Revenue
|
|
Fixed Price
|
|
T&M
|
|
Total
|
|
Percent of Total Revenue
|
|
United States
|
|
$
|
11,156
|
|
|
$
|
138,218
|
|
|
$
|
149,374
|
|
|
51.1
|
%
|
|
$
|
8,436
|
|
|
$
|
144,035
|
|
|
$
|
152,471
|
|
|
46.5
|
%
|
|
Latin America
|
|
5,651
|
|
|
363
|
|
|
6,014
|
|
|
2.1
|
%
|
|
7,314
|
|
|
1,207
|
|
|
8,521
|
|
|
2.6
|
%
|
|
Europe
|
|
17,094
|
|
|
15,418
|
|
|
32,512
|
|
|
11.1
|
%
|
|
15,271
|
|
|
15,904
|
|
|
31,175
|
|
|
9.5
|
%
|
|
Middle East
|
|
27,797
|
|
|
51,933
|
|
|
79,730
|
|
|
27.2
|
%
|
|
45,377
|
|
|
61,033
|
|
|
106,410
|
|
|
32.4
|
%
|
|
Africa
|
|
1,559
|
|
|
19,325
|
|
|
20,884
|
|
|
7.1
|
%
|
|
1,264
|
|
|
19,015
|
|
|
20,279
|
|
|
6.2
|
%
|
|
Asia/Pacific
|
|
1,164
|
|
|
2,932
|
|
|
4,096
|
|
|
1.4
|
%
|
|
4,772
|
|
|
4,352
|
|
|
9,124
|
|
|
2.8
|
%
|
|
Total
|
|
$
|
64,421
|
|
|
$
|
228,189
|
|
|
$
|
292,610
|
|
|
100.0
|
%
|
|
$
|
82,434
|
|
|
$
|
245,546
|
|
|
$
|
327,980
|
|
|
100.0
|
%
|
The Company recognizes revenue when it transfers promised goods or services to clients in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company exercises judgment in determining if the contractual criteria are met to determine if a contract with a client exists, specifically in the earlier stages of a project when a formally executed contract may not yet exist. The Company typically has one performance obligation under a contract to provide fully-integrated project management services, and, occasionally, a separate performance obligation to provide facilities management services. Performance obligations are delivered over time as the client receives the service.
The consideration promised within a contract may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the client regarding acknowledgment and/or agreement with the modification, as well as historical experience with the client or similar contractual circumstances. The Company transfers control of its service over time and, therefore, satisfies a performance obligation and recognizes revenue over time by measuring the progress toward complete satisfaction of that performance obligation. The Company’s fixed price projects and T&M contracts subject to a cap value generally use a cost-based input method to measure its progress towards complete satisfaction of the performance obligation as the Company believes this best depicts the transfer of control to the client. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Due to the nature of the work required to be performed under the Company’s performance obligations, estimating total revenue and cost at completion on its long term contracts is complex, subject to many variables and requires significant judgment.
For basic and cost plus T&M contracts, the Company recognizes revenue over time using the output method which measures progress toward complete satisfaction of the performance obligation based upon actual costs incurred, using the right to invoice practical expedient.
Accounts Receivable
Accounts receivable includes amounts billed and currently due from clients and amounts for work performed which have not been billed to date. The billed and unbilled amounts are stated at the net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of client creditworthiness, historical payment experience and the age of outstanding receivables.
Contract Assets and Liabilities
Contract assets include unbilled amounts typically resulting from performance under long-term contracts where the revenue recognized exceeds the amount billed to the client. Retainage receivable is included in contract assets. The current portion of retainage receivable is a contract asset, which prior to the adoption of ASC 606, had been classified within accounts receivable.
The Company’s contract liabilities consist of advance payments and billings in excess of revenue recognized and are reported as deferred revenue in the consolidated balance sheets. The Company classifies billings in excess of revenue recognized as deferred revenue as current or non-current based on the timing of when revenue is expected to be recognized.
The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing of the Company’s performance and client payments. The amount of revenue recognized during the three and nine months ended September 30, 2019 and 2018, respectively that was included in the deferred revenue balance at the beginning of the periods was $571 and $5,103, respectively, and $13,199 and $12,561, respectively.
Remaining Performance Obligations
The remaining performance obligations represent the aggregate transaction price of executed contracts with clients for which work has partially been performed or not started as of the end of the reporting period. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. T&M contracts are excluded from the remaining performance obligation as these contracts are not fixed price contracts and the consideration expected under these contracts is variable as it is based upon hours and costs incurred in accordance with the variable consideration optional exemption. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $95,469. During the following 12 months, approximately 61.4% of the remaining performance obligations are expected to be recognized as revenue with the remaining balance recognized over 1 to 5 years.
Note 5 — Accounts Receivable
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Billed (1)
|
|
$
|
145,602
|
|
|
$
|
155,540
|
|
|
Unbilled (2)
|
|
31,236
|
|
|
32,546
|
|
|
|
|
176,838
|
|
|
188,086
|
|
|
Allowance for doubtful accounts (1)
|
|
(66,263
|
)
|
|
(70,617
|
)
|
|
Accounts receivable, less allowance for doubtful accounts
|
|
$
|
110,575
|
|
|
$
|
117,469
|
|
(1) Includes $41,695 and $42,092 related to amounts due from a client in Africa as of September 30, 2019 and December 31, 2018, respectively.
(2) Amount is net of unbilled reserves.
Note 6 — Intangible Assets
The following table summarizes the Company’s acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
$
|
4,516
|
|
|
$
|
3,587
|
|
|
$
|
4,591
|
|
|
$
|
3,275
|
|
|
Total
|
|
$
|
4,516
|
|
|
$
|
3,587
|
|
|
$
|
4,591
|
|
|
$
|
3,275
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
929
|
|
|
|
|
$
|
1,316
|
|
|
|
Amortization expense related to intangible assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
$
|
113
|
|
|
$
|
209
|
|
|
$
|
347
|
|
|
$
|
784
|
|
The following table presents the estimated amortization expense for the next five years:
|
|
|
|
|
|
|
|
|
|
|
Estimated
Amortization
Expense
|
|
|
|
|
Year ending December 31,
|
|
|
2019 (remaining 3 months)
|
|
$
|
113
|
|
|
2020
|
|
190
|
|
|
2021
|
|
162
|
|
|
2022
|
|
162
|
|
|
2023
|
|
162
|
|
Note 7 — Goodwill
The following table summarizes the changes in the Company’s carrying value of goodwill during 2019:
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
$
|
48,869
|
|
|
Translation adjustments (1)
|
(1,828
|
)
|
|
Balance, September 30, 2019
|
$
|
47,041
|
|
(1) The translation adjustment was calculated based on the foreign currency exchange rates as of September 30, 2019.
The Company performed its 2018 annual impairment test effective July 1, 2018, and noted no impairment. Based on the valuation as of July 1, 2018, the fair value of the Company exceeded its carrying value. The Company also noted no indications of impairment were present at September 30, 2019 requiring reassessment. The Company performs its annual impairment test during the second half of each year unless events or circumstances indicate an impairment may have occurred before that time.
Note 8 — Accounts Payable and Accrued Expenses
Below are the components of accounts payable and accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,487
|
|
|
$
|
30,005
|
|
|
Accrued payroll and related expenses
|
|
29,735
|
|
|
28,915
|
|
|
Accrued subcontractor fees
|
|
13,051
|
|
|
13,447
|
|
|
Accrued agency fees
|
|
323
|
|
|
237
|
|
|
Accrued legal and professional fees
|
|
1,847
|
|
|
2,277
|
|
|
Other accrued expenses (1)
|
|
2,717
|
|
|
5,155
|
|
|
|
|
$
|
74,160
|
|
|
$
|
80,036
|
|
(1) Includes amounts payable of $3,870 related to the Profit Improvement Plan as of December 31, 2018. There were no such payables at September 30, 2019.
Note 9 — Notes Payable and Long-Term Debt
The table below reflects the Company's notes payable and long-term debt, which includes credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate (1)
|
|
Balance Outstanding as of
|
|
Loan
|
|
Maturity
|
|
Interest Rate Type
|
|
September 30,
2019
|
December 31,
2018
|
|
September 30,
2019
|
December 31,
2018
|
|
Secured Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
Hill International, Inc. - Société Générale 2017 Term Loan Facility
|
|
06/20/2023
|
|
Variable
|
|
7.95%
|
7.62%
|
|
$
|
29,325
|
|
$
|
29,550
|
|
|
Hill International, Inc. - Société Générale Domestic Revolving Credit Facility
|
|
05/04/2022
|
|
Variable
|
|
6.36%
|
6.31%
|
|
17,650
|
|
14,400
|
|
|
Hill International N.V.. - Société Générale International Revolving Credit Facility
|
|
05/04/2022
|
|
Variable
|
|
4.17%
|
N/A
|
|
1,418
|
|
—
|
|
|
Unsecured Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
Hill International, Inc. - First Abu Dhabi Bank ("FAB") PJSC Overdraft Credit Facility (2)
|
|
04/18/2020
|
|
Variable
|
|
5.58%
|
5.58%
|
|
2,177
|
|
2,461
|
|
|
Hill International Brasil S.A. - Revolving Credit Facility (3)
|
|
12/12/2019
|
|
Fixed
|
|
3.35%
|
3.35%
|
|
359
|
|
—
|
|
|
Unsecured Notes Payable and Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
Hill International Spain SA-Bankia S.A. & Bankinter S.A.(4)
|
|
12/31/2021
|
|
Fixed
|
|
2.21%
|
2.17%
|
|
1,147
|
|
1,594
|
|
|
Hill International Spain SA - IberCaja Banco. S.A. (4)
|
|
12/31/2019
|
|
Variable
|
|
3.45%
|
3.41%
|
|
48
|
|
198
|
|
|
Philadelphia Industrial Development Corporation Loan
|
|
03/31/2027
|
|
Fixed
|
|
2.79%
|
2.75%
|
|
497
|
|
542
|
|
|
Total notes payable and long-term debt, gross
|
|
|
|
|
|
|
|
|
$
|
52,621
|
|
$
|
48,745
|
|
|
Less: unamortized discount and deferred financing costs related to Société Générale 2017 Term Loan Facility
|
|
|
|
|
|
|
|
|
(675
|
)
|
(794
|
)
|
|
Notes payable and long-term debt
|
|
|
|
|
|
|
|
|
$
|
51,946
|
|
$
|
47,951
|
|
|
Current portion of notes payable
|
|
|
|
|
|
|
|
|
$
|
3,447
|
|
$
|
3,538
|
|
|
Current portion of unamortized debt discount and deferred financing costs
|
|
|
|
|
|
|
|
|
$
|
(181
|
)
|
$
|
(174
|
)
|
|
Current maturities of notes payable and long-term debt
|
|
|
|
|
|
|
|
|
$
|
3,266
|
|
$
|
3,364
|
|
|
Notes payable and long-term debt, net of current maturities
|
|
|
|
|
|
|
|
|
$
|
48,680
|
|
$
|
44,587
|
|
(1) Interest rates for variable interest rate debt are reflected on a weighted average basis through September 30, 2019 since inception.
(2) Credit facility lender was formerly known as National Bank of Abu Dhabi. There is no stated maturity date, however, the loan is subject to annual review in April of each year, or at any other time as determined by FAB. Therefore, the amount outstanding is reflected within the current maturities of notes payable and long-term debt. Balances outstanding are reflected in U.S. dollars based on the conversion rates from AED as of September 30, 2019 and December 31, 2018. The Company had $954 of availability under the credit facility as of September 30, 2019.
(3) The unsecured Hill International Brasil S.A. revolving credit facilities were previously held with two banks in Brazil under four separate arrangements and were subject to automatic renewal on a monthly basis. In October 2018, three of the credit facilities were not renewed. The Company had $122 of availability under the credit facility as of September 30, 2019. The amounts outstanding and available are based on conversion rates from Brazilian Real as of September 30, 2019 and December 31, 2018.
(4) Balances outstanding are reflected in U.S. dollars based on the conversion rates from Euros as of September 30, 2019 and December 31, 2018.
Secured Credit Facilities
The Company's secured credit facilities with Société Générale under the 2017 Term Loan and the Domestic Revolving Credit Facility (collectively, the "U.S. Credit Facilities") and under the International Revolving Credit Facility 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%. The Company was in compliance with this financial covenant at September 30, 2019.
The unamortized debt issuance costs under the Domestic and International Revolving Credit Facilities were $1,458 and $1,879 at September 30, 2019 and December 31, 2018, respectively, and were included in other assets in the consolidated balance sheet.
Commitment fees are calculated at 0.50% annually on the average daily unused portion of the Domestic Revolving Credit Facility, and are calculated at 0.75% annually on the average daily unused portion of the International Revolving Credit Facility.
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.
At September 30, 2019, the Company had $7,141 of outstanding letters of credit and $209 of available borrowing capacity under the Domestic Revolving Credit Facility, based on the maximum borrowing capacity of $25,000. At September 30, 2019, the Company had $2,458 of outstanding letters of credit and $1,054 of available borrowing capacity under the International Revolving Credit Facility. The availability under the International Revolving Credit Facility as of September 30, 2019 was reduced from the maximum borrowing capacity of €9,156 ($9,986 as of September 30, 2019) to €4,520 ($4,930 as of September 30, 2019).
Other Financing Arrangements
On May 1, 2019, subsequent to the maturity of the Company's previous commercial premium financing arrangement in February 28, 2019 with AFCO Premium Credit LLC ("AFCO"), the Company entered into a new financing agreement for the renewal of its corporate insurance policies with AFCO for $3,032. The terms of the arrangement include a $258 down payment, followed by monthly payments to be made over an eleven-month period at a 4.57% interest rate through March 31, 2020.
As of September 30, 2019 and December 31, 2018, the balances payable to AFCO for these arrangements was $1,527 and $474, respectively, and is reflected in other current liabilities on the Company's consolidated balance sheets.
Note 10 — Share-Based Compensation
The Company recognized total share-based compensation expense in selling, general and administrative expenses in the consolidated statement of operations totaling approximately $1,212 and an expense reduction of $47 for the three months ended September 30, 2019 and 2018, respectively, and $2,254 and $741 for the nine months ended September 30, 2019 and 2018. The Company's related share-based compensation is comprised of the following:
Restricted Stock Units
During the nine months ended September 30, 2019, the Company granted certain employees and executive officers equity awards in the form of restricted stock units ("RSU") that are subject to a combination of time and performance-based conditions under the 2017 Equity Compensation Plan (the "2017 Plan"), totaling 758 RSU's. No such units were granted during the three months ended September 30, 2019 and for the three and nine months ended September 30, 2018. Each RSU entitles each grantee one unit of the Company's common stock. The time-based RSU's vest annually over a three-year period on each anniversary date of the grant. Any unvested time-based RSU's will be forfeited if the grantee separates from the Company prior the vesting date. The related compensation expense is recorded based on a weighted average price per share of $3.23 and was deemed as equity-classified awards.
The number of common shares to be issued under the performance-based RSU's will be determined based on three levels of performance metrics based on the Company's earnings and will be assessed on an annual basis for the years ended December 31, 2019, 2020 and 2021. If the Company meets the performance metrics for any one of the measurement periods, such units will vest on the next anniversary date of the grant date. All vested RSU's will be settled on the third anniversary of the grant date. Any unvested RSU's are subject to forfeiture if the grantee separates from the Company prior to each vesting date. During the three and nine months ended September 30, 2019, the Company determined it was not probable that the target performance metric would be met and, therefore, did not record any share-based compensation expense related to such RSU's.
Deferred Stock Units ("DSU")
DSU's issued under the 2017 Plan entitle each participant to receive one share of the Company's common stock for each DSU that will vest immediately upon separation from the Company. The compensation expense related to these units was determined based on the stock price of the Company's common stock on the grant date of the DSU's.
During the three and nine months ended September 30, 2019, 29 and 245 DSU's were issued, respectively. Of the total issued, 9 and 225 of the total DSU's issued during the three and nine months ended September 30, 2019, respectively, were issued to the Company's board of directors (the "Board") as a portion of their annual retainer. An additional 20 DSU's were issued as part of an employee's compensation and are scheduled to vest ratably over a three-year period, subject to time-based conditions. These DSU's remain unvested as of September 30, 2019. The related compensation expense is recorded based on a weighted average price per share of $2.74. No DSU's were issued during the three and nine months ended September 30, 2018.
Stock Options
At September 30, 2019, the Company had approximately 1,879 stock options outstanding with a weighted average exercise price of $3.98. The Company granted 500 stock options during the nine months ended September 30, 2019, which vest over a three-year period, with a 5-year contractual life, and had an exercise price $3.13. The aggregate fair value of the options was approximately $440 using the Black-Scholes valuation model. The weighted average assumptions used to calculate fair value were based on an expected life of 3.5 years, a volatility of 49.4% and a risk-free interest rate of 1.87%.
During the nine months ended September 30, 2019, options for approximately 564 shares with a weighted average exercise price of $4.53 lapsed.
Common Stock Issued to Interim Chief Executive Officer ("ICEO")
In 2017, the Board approved a monthly grant of Company stock valued at $80 per month to ICEO during his term of service from May 2017 through September 2018. At the end of each month during such period, the ICEO was entitled to $80 worth of Company stock based on the closing price of the Company's common stock on the last trading day of the month. During the three and nine months ended September 30, 2018, the ICEO accumulated 53 and 138 shares, respectively. The Company reduced share-based compensation expense by $166 and increased share-based compensation expense by $399 for the three and nine months ended September 30, 2018, respectively, related to these monthly grants. Since the total number and value of the shares were not determined until the end of his service in September 2018, the share-based compensation expense related to these shares was reflected in accrued expenses and was reclassed to equity when the shares were delivered to the ICEO during the fourth quarter of 2018.
Note 11 — Income Taxes
The Company calculates the interim tax expense based on an annual effective tax rate ("AETR"). The AETR represents the Company’s estimated effective tax rate for the year based on full year projection of tax expense, divided by the projection of full year pretax book income/(loss) among the various foreign tax jurisdictions, adjusted for discrete transactions occurring during the period. The effective tax rates for the three months ended September 30, 2019 and 2018 were (15.7)% and 5.1% , respectively, and 51.2% and (14.4)% for the nine months ended September 30, 2019 and 2018, respectively.
The Company’s effective tax rate for the three months ended September 30, 2019 changed from the comparable period of 2018, primarily due to the mix of pretax earnings in jurisdictions with different jurisdictional tax rates, as well as not having the ability to benefit from losses in jurisdictions that have a history of negative earnings.
The 2017 Tax Act reduced the U.S. statutory tax rate from 35% to 21% beginning in 2018. The 2017 Tax Act requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and introduces a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-Taxed Income ("GILTI") beginning in 2018.
The reserve for uncertain tax positions amounted to $3,378 and $2,988 at September 30, 2019 and December 31, 2018, 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. The Company recorded tax related interest and penalties of $158 and $140 for the three and nine months ended September 30, 2019, respectively. There was no such expense recorded for the three months and nine months ended September 30, 2018.
The Company recognized an income tax benefit of $1,343, resulting from adjustments to reconcile the prior year provision amounts to the tax returns filed during the three and nine months ended September 30, 2019.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC 740, Income Taxes. In making this determination, management assesses all available evidence, both positive and negative, at the balance sheet date. This includes, but is not limited to, recent earnings, internally-prepared income projections, and historical financial performance.
Note 12 —Segment and Related Information
The Company operates as one reporting segment which reflects how the Company is managed, which provides construction and project management services to construction owners worldwide. Such services include program management, project management, construction management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, labor compliance services (collectively, "integrated project management") and facilities management services.
The following tables present certain information for operations:
Total Revenue by Geographic Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
49,936
|
|
|
52.3
|
%
|
|
$
|
49,134
|
|
|
48.2
|
%
|
|
$
|
149,374
|
|
|
51.1
|
%
|
|
$
|
152,471
|
|
|
46.5
|
%
|
|
Latin America
|
|
1,669
|
|
|
1.7
|
%
|
|
2,751
|
|
|
2.7
|
%
|
|
6,014
|
|
|
2.1
|
%
|
|
8,521
|
|
|
2.6
|
%
|
|
Europe
|
|
10,556
|
|
|
11.0
|
%
|
|
10,479
|
|
|
10.3
|
%
|
|
32,512
|
|
|
11.1
|
%
|
|
31,175
|
|
|
9.5
|
%
|
|
Middle East
|
|
25,447
|
|
|
26.6
|
%
|
|
30,688
|
|
|
30.1
|
%
|
|
79,730
|
|
|
27.2
|
%
|
|
106,410
|
|
|
32.4
|
%
|
|
Africa
|
|
7,005
|
|
|
7.3
|
%
|
|
6,712
|
|
|
6.6
|
%
|
|
20,884
|
|
|
7.1
|
%
|
|
20,279
|
|
|
6.2
|
%
|
|
Asia/Pacific
|
|
1,057
|
|
|
1.1
|
%
|
|
2,171
|
|
|
2.1
|
%
|
|
4,096
|
|
|
1.4
|
%
|
|
9,124
|
|
|
2.8
|
%
|
|
Total
|
|
$
|
95,670
|
|
|
100.0
|
%
|
|
$
|
101,935
|
|
|
100.0
|
%
|
|
$
|
292,610
|
|
|
100.0
|
%
|
|
$
|
327,980
|
|
|
100.0
|
%
|
Consulting Fee Revenue by Geographic Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
33,442
|
|
|
44.1
|
%
|
|
$
|
34,173
|
|
|
42.1
|
%
|
|
$
|
100,236
|
|
|
43.2
|
%
|
|
$
|
105,239
|
|
|
40.2
|
%
|
|
Latin America
|
|
1,668
|
|
|
2.2
|
%
|
|
2,744
|
|
|
3.4
|
%
|
|
6,011
|
|
|
2.6
|
%
|
|
8,504
|
|
|
3.2
|
%
|
|
Europe
|
|
9,989
|
|
|
13.2
|
%
|
|
9,258
|
|
|
11.4
|
%
|
|
31,073
|
|
|
13.4
|
%
|
|
28,673
|
|
|
11.0
|
%
|
|
Middle East
|
|
23,328
|
|
|
30.8
|
%
|
|
26,909
|
|
|
33.1
|
%
|
|
71,663
|
|
|
30.9
|
%
|
|
95,142
|
|
|
36.3
|
%
|
|
Africa
|
|
6,421
|
|
|
8.5
|
%
|
|
6,089
|
|
|
7.5
|
%
|
|
19,198
|
|
|
8.3
|
%
|
|
18,543
|
|
|
7.1
|
%
|
|
Asia/Pacific
|
|
899
|
|
|
1.2
|
%
|
|
2,058
|
|
|
2.5
|
%
|
|
3,601
|
|
|
1.6
|
%
|
|
5,693
|
|
|
2.2
|
%
|
|
Total
|
|
$
|
75,747
|
|
|
100.0
|
%
|
|
$
|
81,231
|
|
|
100.0
|
%
|
|
$
|
231,782
|
|
|
100.0
|
%
|
|
$
|
261,794
|
|
|
100.0
|
%
|
For the three and nine months ended September 30, 2019, the United States was the only country to account for 10% or more of total revenue. For the three and nine months ended September 30, 2018, the United States and United Arab Emirates were the only countries to account for 10% or more of total revenue.
Operating Profit (Loss) by Geographic Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
8,306
|
|
|
$
|
8,451
|
|
|
$
|
22,459
|
|
|
$
|
26,559
|
|
|
Latin America
|
|
(563
|
)
|
|
279
|
|
|
(813
|
)
|
|
935
|
|
|
Europe (1)
|
|
1,303
|
|
|
1,629
|
|
|
4,359
|
|
|
5,465
|
|
|
Middle East (1)
|
|
4,982
|
|
|
6,007
|
|
|
14,579
|
|
|
11,900
|
|
|
Africa
|
|
1,241
|
|
|
1,870
|
|
|
4,262
|
|
|
7,772
|
|
|
Asia/Pacific (1)
|
|
216
|
|
|
1,010
|
|
|
(84
|
)
|
|
1,297
|
|
|
Corporate (2)
|
|
(12,382
|
)
|
|
(26,915
|
)
|
|
(36,516
|
)
|
|
(70,362
|
)
|
|
Total
|
|
$
|
3,103
|
|
|
$
|
(7,669
|
)
|
|
$
|
8,246
|
|
|
$
|
(16,434
|
)
|
(1) includes Hill's share of loss (profit) of equity method affiliates on the Consolidated Statements of Operations.
(2) includes foreign exchange expense of $1,839 and $1,824 for the three and nine months ended September 30, 2019, respectively and $3,830 and $8,936 for the three and nine months ended September 30, 2018, respectively.
Depreciation and Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Project Management
|
|
$
|
836
|
|
|
$
|
762
|
|
|
$
|
2,400
|
|
|
$
|
2,793
|
|
|
Corporate
|
|
14
|
|
|
164
|
|
|
35
|
|
|
640
|
|
|
Total
|
|
$
|
850
|
|
|
$
|
926
|
|
|
$
|
2,435
|
|
|
$
|
3,433
|
|
Total Revenue By Client Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal government
|
|
$
|
4,311
|
|
|
4.5
|
%
|
|
$
|
4,329
|
|
|
4.2
|
%
|
|
$
|
13,398
|
|
|
4.6
|
%
|
|
$
|
12,124
|
|
|
3.7
|
%
|
|
U.S. state, regional and local governments
|
|
31,222
|
|
|
32.6
|
%
|
|
34,047
|
|
|
33.4
|
%
|
|
94,193
|
|
|
32.2
|
%
|
|
103,759
|
|
|
31.6
|
%
|
|
Foreign governments
|
|
24,962
|
|
|
26.1
|
%
|
|
27,039
|
|
|
26.5
|
%
|
|
74,845
|
|
|
25.6
|
%
|
|
94,476
|
|
|
28.8
|
%
|
|
Private sector
|
|
35,175
|
|
|
36.8
|
%
|
|
36,520
|
|
|
35.9
|
%
|
|
110,174
|
|
|
37.6
|
%
|
|
117,621
|
|
|
35.9
|
%
|
|
Total
|
|
$
|
95,670
|
|
|
100.0
|
%
|
|
$
|
101,935
|
|
|
100.0
|
%
|
|
$
|
292,610
|
|
|
100.0
|
%
|
|
$
|
327,980
|
|
|
100.0
|
%
|
Property, Plant and Equipment, Net, by Geographic Location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,365
|
|
|
$
|
8,416
|
|
|
Latin America
|
|
717
|
|
|
692
|
|
|
Europe
|
|
487
|
|
|
503
|
|
|
Middle East
|
|
828
|
|
|
962
|
|
|
Africa
|
|
111
|
|
|
105
|
|
|
Asia/Pacific
|
|
89
|
|
|
109
|
|
|
Total
|
|
$
|
11,597
|
|
|
$
|
10,787
|
|
Note 13 — Commitments and Contingencies
Legal Proceedings
From time to time, the Company is a defendant or plaintiff in various legal proceedings which arise in the normal course of business. As such the Company is required to assess the likelihood of any adverse outcomes to these proceedings as well as potential ranges of probable losses. A determination of the amount of the provision required for commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each proceeding. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease the Company’s earnings in the period the changes are made. It is the opinion of management, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Knowles Limited (“Knowles”), a subsidiary of the Company, is a party to an arbitration proceeding instituted on July 8, 2014 in which Knowles claimed that it was entitled to payment for services rendered to Celtic Bioenergy Limited (“Celtic”). The arbitrator decided in favor of Knowles. The arbitrator’s award was appealed by Celtic to the U.K. High Court of Justice, Queen’s Bench Division, Technology and Construction Court (“Court”). On March 16, 2017, the Court (1) determined that certain relevant facts had been deliberately withheld from the arbitrator by an employee of Knowles and (2) remitted the challenged parts of the arbitrator’s award back to the arbitrator to consider the award in possession of the full facts. In May 2019, Celtic claimed breach of contract and/or negligence within the arbitration. The Company is evaluating the impact of the judgement of the Court.
In September 2017, the Board appointed a special committee of independent directors (the “Special Committee”) to conduct a review of the need for, and causes of, the restatement of the Company’s financial statements. The review was performed with the assistance of independent outside counsel and was completed in April 2018. The review discovered facts that indicated certain former employees of the Company violated Company policies related to accounting for foreign currency exchange transactions. The Company self-reported these facts to the SEC in April 2018 and received a subpoena from the SEC in June 2018 and a second subpoena from the SEC in September 2019. The Company has cooperated and continues to cooperate with the SEC with respect to the SEC’s investigation.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements included a $3,750 irrevocable standby letter of credit as of December 31, 2018 that the Company was required to provide as part of the May 5, 2017 sale of the Construction Claims Group in order to secure certain of the Company's indemnification obligations for twelve months following the sale. The standby letter of credit reduced the Company's available borrowing capacity under the Domestic Revolving Credit Facility as of December 31, 2018 by the amount of the letter of credit. The Company met all of its obligations under the terms of the Stock Purchase Agreement and the full amount was released by the Purchaser on May 31, 2019 which increased the amount available under the Domestic Revolving Credit Facility.
Loss on Performance Bond
On February 8, 2018, the Company received notice from the First Abu Dhabi Bank ("FAB", formerly known as the National Bank of Abu Dhabi) that Public Authority of Housing Welfare of Kuwait submitted a claim for payment on a Performance Guarantee issued by the Company for approximately $7,938 for a project located in Kuwait. FAB subsequently issued, on behalf of the Company, a payment on February 15, 2018. The Company is taking legal action to recover the full Performance Guarantee amount. On September 20, 2018 the Kuwait First Instance Court dismissed the Company's case. As a result, the Company fully reserved the performance guarantee payment above in the first quarter of 2018 and it is presented as "Loss on Performance Bond" on the consolidated statements of operations. The Company filed an appeal before the Kuwait Court of Appeals seeking referral of the matter to a panel of experts for determination. On April 21, 2019, the Court of Appeals ruled to refer the matter to the Kuwait Experts Department. Hearings with the Kuwait Experts Department were held during July and September 2019. A final report from the panel of experts is currently expected to be issued prior to the next court hearing in the matter scheduled for January 7, 2020.
Other
The Company has identified a potential tax liability related to certain foreign subsidiaries’ failure to comply with laws and regulations of the jurisdictions, outside of their home country, in which their employees provided services. The Company has estimated the potential liability to be approximately $1,086, which is included in other liabilities in the consolidated balance sheet at September 30, 2019.
Note 14 — Operating Leases
The Company leases office space, equipment and vehicles throughout the world. Many of the Company's operating leases include one or more options to renew at the Company's sole discretion. The lease renewal option terms generally range from 1 month to 5 years for office leases. The determination of whether to include any renewal options is made by the Company at lease inception when establishing the term of the lease. Leases with an initial term of 12 months or less are not recorded in the consolidated balance sheet as of September 30, 2019.
Rent expense for operating leases is recognized on a straight-line basis over the lease term from the lease commencement date through the scheduled expiration date. Rent expense of approximately $2,277 and $2,253 for the three months ended September 30, 2019 and 2018, respectively, and $6,636 and $6,743 for the nine months ended September 30, 2019 and 2018, respectively, is included in selling, general and administrative and direct expenses in the consolidated statements of operations. Of the $2,277 in operating lease expense for the three and nine months ended September 30, 2019, $427 and $1,490 was associated with leases with an initial term of 12 months or less and variable costs, respectively.
Some of the Company's lease arrangements require periodic increases in the Company's base rent that may be subject to certain economic indexes, among other items. In addition, these leases may require the Company to pay property taxes, utilities and other costs related to several of its leased office facilities.
The Company subleases certain real estate to third parties. The sublease income recognized for the three and nine months ended September 30, 2019 was $141 and $427, respectively.
The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
Total Operating Lease Payments
|
|
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
6,943
|
|
|
2020
|
|
5,848
|
|
|
2021
|
|
4,502
|
|
|
2022
|
|
3,882
|
|
|
2023
|
|
3,000
|
|
|
Thereafter
|
|
5,475
|
|
|
Total minimum lease payments (1) (2)
|
|
29,650
|
|
|
Less amount representing imputed interest
|
|
4,582
|
|
|
Present value of lease obligations
|
|
$
|
25,068
|
|
|
Weighted average remaining lease term (years)
|
|
5.28
|
|
|
Weighted average discount rate
|
|
6.28
|
%
|
(1) Partially includes rent expense amounts payable in various foreign currencies and are based on the spot foreign currency exchange rate as of September 30, 2019, where applicable.
(2) Includes lease agreements and extensions that have been executed, but has not yet commenced, as of September 30, 2019.