UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

Form 10-K
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                       to                      
Commission file number 001-33961  
HILL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-0953973
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Commerce Square
 
 
2005 Market Street, 17th Floor
 
 
Philadelphia, PA
 
19103
(Address of principal executive offices)
 
(Zip Code)
  Registrant’s telephone number, including area code:
(215) 309-7700
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common stock, par value $0.0001 per share
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
Yes  o   No  ý
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 
Yes  o   No  ý
 
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  o   No  ý
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 
Yes o   No  ý
 
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large Accelerated Filer  o
 
Accelerated Filer  x
Non-Accelerated Filer  o
 
Smaller reporting company  o
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No  ý
 
The aggregate market value of shares of common stock held by non-affiliates on June 30, 2018 was approximately $325,297,432 . As of March 28, 2019 , there were 55,659,356 shares of the Registrant’s Common Stock outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Proxy Statement for its 2019 Annual Meeting of Stockholders ("2019 Proxy Statement") are incorporated by reference in Part III.




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


2


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



3


Item 1. Business.
 
General
 
Hill International, Inc., with approximately 2,700 professionals in more than 50 offices worldwide, provides project management, construction management and other consulting services primarily to the building, transportation, environmental, energy and industrial markets. The terms “Hill”, the “Company”, “we”, “us” and “our” refer to Hill International, Inc.
 
We compete for business based on a variety of factors such as technical capability, global resources, price, reputation and past experience, including client requirements for substantial experience in similar projects. We have developed significant long-standing relationships, which bring us repeat business and would be very difficult to replicate. We believe we have an excellent reputation for attracting and retaining professionals. In addition, we believe there are high barriers to entry for new competitors especially in the project management market.

The Company provides fee-based construction management services to our clients, leveraging our construction expertise to identify potential trouble, difficulties and sources of delay on a construction project before they develop into costly problems. Our experienced professionals are capable of managing all phases of the construction process from concept through completion, including cost and budget controls, scheduling, estimating, expediting, inspection, contract administration and management of contractors, subcontractors and suppliers.

Our clients are typically billed a negotiated multiple of the actual direct cost of each professional assigned to a project and we are reimbursed for our out-of-pocket expenses. We believe our fee-based consulting has significant advantages over traditional general contractors. Specifically, because we do not assume project completion risk, our fee-based model eliminates many of the risks typically associated with providing “at risk” construction services.

Amounts throughout the remainder of this document are in thousands unless otherwise noted.
 
Our Strategy
 
Our strategy emphasizes the following key elements:
 
Increase Revenues from Our Existing Clients. We have long-standing relationships with a number of public and private sector entities. Meeting our clients’ diverse needs in managing construction risk and generating repeat business from our clients to expand our project base is one of our key growth strategies. We accomplish this objective by providing a broad range of project management consulting services in a wide range of geographic areas that support our clients during every phase of a project, from concept through completion. We believe that nurturing our existing client relationships expands our project base through repeat business.
Capitalize Upon the Continued Spend in the Markets We Serve. We believe that the demand for project management services will grow with increasing construction and infrastructure spending in the markets we serve. We believe that our reputation and experience combined with our broad platform of service offerings will enable us to capitalize on increases in demand for our services. In addition, we strategically open new offices to expand into new geographic areas and we aggressively hire individuals with significant contacts to accelerate the growth of these new offices and to strengthen our presence in existing markets.
Strengthen Professional Resources . Our biggest asset is the people that work for Hill. We intend to continue spending significant time recruiting and retaining the best and the brightest to improve our competitive position. Our independent status has attracted top project management talent with varied industry experience. We believe maintaining and bolstering our team will enable us to continue to grow our business.  

Reporting Segments
 
The Company operates in a single reporting segment, known as the Project Management Group which provides fee-based construction management services to our clients, leveraging our construction expertise to identify potential trouble, difficulties and sources of delay on a construction project before they develop into costly problems. Our experienced professionals are capable of managing all phases of the construction process from concept through completion, including cost and budget controls, scheduling, estimating, expediting, inspection, contract administration and management of contractors, subcontractors and suppliers.

4



Clients

Our clients consist primarily of the United States federal, state and local governments, other national governments, and the private sector. The following table sets forth our breakdown of revenue attributable to these categories of clients for the years ended December 31, 2018 , 2017 and 2016 :
 
Revenue By Client Type
 
 
2018
 
2017
 
2016
U.S. federal government
 
$
16,610

 
3.9
%
 
$
15,105

 
3.1
%
 
$
12,050

 
2.3
%
U.S. state, regional and local governments
 
136,904

 
31.9
%
 
156,183

 
32.3
%
 
155,976

 
30.2
%
Foreign governments
 
117,361

 
27.4
%
 
133,655

 
27.6
%
 
170,567

 
33.1
%
Private sector
 
157,804

 
36.8
%
 
178,793

 
37.0
%
 
177,419

 
34.4
%
Total
 
$
428,679

 
100.0
%
 
$
483,736

 
100.0
%
 
$
516,012

 
100.0
%

The following table sets forth the percentage of our revenue contributed by each of our five largest clients for the years ended December 31, 2018 , 2017 and 2016 :
 
 
2018
 
2017
 
2016
Largest client
 
6.0
%
 
6.0
%
 
9.0
%
2nd largest client
 
5.0
%
 
6.0
%
 
5.0
%
3rd largest client
 
4.0
%
 
4.0
%
 
5.0
%
4th largest client
 
3.0
%
 
3.0
%
 
4.0
%
5th largest client
 
3.0
%
 
3.0
%
 
4.0
%
Top 5 largest clients
 
21.0
%
 
22.0
%
 
27.0
%
 
Business Development
 
The process for acquiring business from each of our categories of clients is principally the same, by participating in a competitive request-for-proposal (“RFP”) process, with the primary difference among clients being that the process for public sector clients is significantly more formal and complex than for private sector clients as a result of government procurement rules and regulations that govern the public-sector process.
 
Although a significant factor in our business development consists of our standing in our industry, including existing relationships and reputation based on performance on completed projects, our marketing department undertakes a variety of activities in order to expand our exposure to potential new clients. These activities include media relations, advertising, promotions, market sector initiatives and maintaining our website and related web marketing. Media relations include placing articles that feature us and our personnel in trade publications and other media outlets. Our promotions include arranging speaking engagements for our personnel, participation in trade shows and other promotional activities. Market sector initiatives are designed to broaden our exposure to specific sectors of the construction industry by, for example, participating in or organizing industry seminars.
 
Doing business with governments is complex and requires the ability to comply with intricate regulations and satisfy periodic audits. We believe that the ability to understand these requirements and to successfully conduct business with government agencies is a barrier to entry for smaller, less experienced competitors. Most government contracts, including those with foreign governments, are subject to termination by the government, to government audits and to continued appropriations. For the years ended December 31, 2018 , 2017 and 2016 , revenue from U.S. and foreign government contracts represented approximately 63.2% , 63.0% and 65.6% of our total revenue, respectively.
 
We are required from time to time to obtain various permits, licenses and approvals in order to conduct our business in many of the jurisdictions where we operate. Our business of providing project management services is not subject to significant regulation by state, federal or foreign governments.


5


Contracts

The Company adopted Accounting Standards Update ("ASU") 2014-09 on January 1, 2018. Under Accounting Standards Codification ("ASC") 606, the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for such goods or services.

The price provisions of our customer contracts can be grouped into two broad categories: Time and materials and fixed price. 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"). Under fixed price contracts, the Company’s clients pay an agreed upon 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. See Note 4 in Part II item 8 "Financial Statements and Supplementary Data ," in this Form 10-K for more information

Consulting Fee Revenue

We believe an important performance measure is consulting fee revenue (“CFR”). The professionals we deploy to execute contracts are occasionally subcontractors. We generally bill our clients the actual cost of these subcontractors and recognize this cost as both revenue and direct expense. CFR refers to our revenue excluding amounts paid or due to subcontractors. We believe CFR is an important measure because it represents the revenue on which we earn gross profit, whereas total revenue includes subcontractors on which we generally pass through the cost and earn minimal or no gross profit.
 
Backlog
 
We believe an important indicator of our future performance is our backlog of uncompleted projects under contract or awarded. Our backlog represents management’s estimate of the amount of contracts and awards in hand that we expect to recognize as CFR in future periods. Our backlog is evaluated by management on a project-by-project basis and is reported for each period shown based upon the binding nature of the underlying contract, commitment or letter of intent, and other factors, including the economic, financial and regulatory viability of the project and the likelihood of the contract being extended, renewed or canceled.
 
Our backlog is important to us in anticipating and planning for our operational needs. Backlog is not a measure defined in U.S. generally accepted accounting principles ("U.S. GAAP"), and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog.
 
Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur.  Further, substantially all of our contracts with our clients may be terminated at will, in which case the client would only be obligated to us for services provided through the termination date. Reductions of our backlog as a result of contract terminations and modifications may be offset by additions to the backlog.

We adjust backlog to reflect project cancellations, deferrals and revisions in scope and cost (both upward and downward) known at the reporting date. Future contract modifications or cancellations, however, may increase or reduce backlog and future revenue.

The following tables show our backlog by geographic region:
 
 
Total Backlog
 
12-Month Backlog
As of December 31, 2018
 
 

 
 

 
 

 
 

United States
 
$
429,237

 
58.0
%
 
$
110,012

 
42.4
%
Latin America
 
22,495

 
3.0
%
 
11,871

 
4.6
%
Europe
 
83,974

 
11.3
%
 
32,489

 
12.5
%
Middle East
 
116,913

 
15.9
%
 
71,267

 
27.5
%
Africa
 
69,941

 
9.4
%
 
26,710

 
10.3
%
Asia/Pacific
 
17,713

 
2.4
%
 
7,134

 
2.7
%
Total
 
$
740,273

 
100.0
%
 
$
259,483

 
100.0
%


6


 
 
Total Backlog
 
12-Month Backlog
As of December 31, 2017
 
 

 
 

 
 

 
 

United States
 
$
449,621

 
53.2
%
 
116,975

 
37.5
%
Latin America
 
13,350

 
1.6
%
 
8,789

 
2.8
%
Europe
 
45,446

 
5.4
%
 
29,887

 
9.6
%
Middle East
 
250,956

 
29.6
%
 
126,965

 
40.6
%
Africa
 
67,491

 
8.0
%
 
23,111

 
7.4
%
Asia/Pacific
 
18,935

 
2.2
%
 
6,500

 
2.1
%
Total
 
$
845,799

 
100.0
%
 
$
312,227

 
100.0
%

At December 31, 2018 , our backlog was $740,273 , compared to $845,799 at December 31, 2017 . The reduction in backlog is primarily due to execution of the prior backlog and the cancellation or substantial reduction of scope of work for certain projects, primarily in the Middle East. All of these projects were initially contracted in years prior to 2018.

Competition
 
The project management industry is highly competitive. We compete for contracts, primarily on the basis of technical capability, with numerous entities, including other construction management companies, design or engineering firms, general contractors, management consulting firms and other entities. Compared to us, many of these competitors are larger, well-established companies that have broader geographic scope and greater financial and other resources. During 2018 , some of our largest project management competitors included: AECOM, ARCADIS N.V., Jacobs Engineering Group, Inc., WSP Parsons Brinckerhoff, Inc., Turner Construction Co., HNTB, and Dar Group.
 
Insurance
 
We maintain insurance covering general and professional liability, involving bodily injury and property damage. We have historically enjoyed a favorable loss ratio in all lines of insurance and our management considers our present limits of liability, deductibles and reserves to be adequate. We endeavor to reduce or eliminate risk through the use of quality assurance/control, risk management, workplace safety and similar methods to eliminate or reduce the risk of losses on a project.

Management

We are led by an experienced management team with significant experience in the construction industry. Additional information about our executive officers follows.

Executive Officers
Name
 
Age
 
Position
Raouf S. Ghali
 
57

 
Chief Executive Officer
Michael V. Griffin
 
65

 
Regional President, Americas
William H. Dengler, Jr.
 
52

 
Executive Vice President and Chief Administrative Officer
Todd Weintraub
 
55

 
Chief Financial Officer
Abdo E. Kardous
 
59

 
Regional President, Middle East
J. Charles Levergood
 
57

 
Senior Vice President of Business Development, Americas
 
 
RAOUF S. GHALI has been a member of our Board of Directors since August 2016 and our Chief Executive Officer since October 2018. Prior to that, he was our Chief Operating Officer from January 2015 to October 2018, President of our Project Management Group (International) from January 2005 to January 2015, Senior Vice President in charge of project management operations in Europe, North Africa and the Middle East from 2001 to 2004, and Vice President from 1993 to 2001. Prior to joining us, he worked for Walt Disney Imagineering from 1988 to 1993.  Mr. Ghali earned both a B.S. in business administration and economics and an M.S. in business organizational management from the University of LaVerne.
 

7


MICHAEL V. GRIFFIN has been our Regional President, Americas since September 2017. Mr. Griffin started his career with Hill in 1981. Prior to joining us, Mr. Griffin worked for the City of Philadelphia in the Department of Public Property. He has more than 40 years of construction industry experience and has managed or overseen the delivery of a wide variety of technically complex facilities and projects. He has proven expertise in the planning, design and construction of major building, transportation and heavy civil construction projects. He earned both a B.E. and a M.E. in civil engineering from Villanova University, and a MBA in finance from La Salle University. He is a registered Professional Engineer in Pennsylvania, New Jersey, New York and Maryland.
 
WILLIAM H. DENGLER, JR. has been our Executive Vice President and Chief Administrative Officer since November 2018. Prior to that, he was Executive Vice President and General Counsel from August 2016 to November 2016, Senior Vice President and General Counsel from 2007 to 2016, Vice President and General Counsel from 2002 to 2007, and Corporate Counsel from 2001 to 2002. Mr. Dengler also serves as corporate secretary to Hill and its subsidiaries. Prior to joining Hill, Mr. Dengler served as Assistant Counsel to former New Jersey Governors Donald DiFrancesco and Christine Todd Whitman from 1999 to 2001. Mr. Dengler earned his B.A. in political science from McDaniel College and his J.D. from Rutgers University School of Law at Camden. He is licensed to practice law in New Jersey, as well as before the U.S. Court of Appeals for the Third Circuit and the U.S. Supreme Court.

TODD WEINTRAUB has been our Chief Financial Officer since November 2018. Mr. Weintraub has nearly 30 years of experience, including serving as CFO, Corporate Controller, Director of Accounting and Accounting Manager for six publicly traded companies. In addition, Mr. Weintraub has served on the Board of Directors for multiple companies, including International Matex Tank Terminals, Atlantic Aviation, Macquarie Renewable Energy Holdings, Hawaii Gas and Parking Company of America, where he was Chair. As CFO, Mr. Weintraub has been a key contributor whose companies have produced above market shareholder returns. He has a proven track record of implementing effective financial controls and operational improvements, deploying growth capital, executing mergers and acquisitions, managing a portfolio of operating businesses, optimizing capital structure and performing capital markets activities and investor relations. Mr. Weintraub graduated Magna Cum Laude from Siena College in 1990.
 
ABDO E. KARDOUS assumed the post of Regional President, Middle East in April 2018. Mr. Kardous joined Hill in 1997 as part of the Grand Mosque team, was promoted to Vice President in our Dubai office, and then named SVP Middle East. He was key to establishing Hill’s presence across the Gulf Cooperation Council before serving as Hill’s Senior Vice President and Managing Director for the Asia/Pacific Region. Mr. Kardous is a member of both the Chartered Institute of Building (CIOB) and Association for Project Management (API), and has recently served on the Advisory Board of the Chicago based Council of Tall Buildings and Urban Habitat (CTBUH). He holds a B.S., Magna Cum Laude, in Civil Engineering, from the University of Maryland and an M.S. in Civil Engineering from the University of California, Berkley. Mr. Kardous brings more than 30 years of experience to the Middle East region, with expertise in the design, procurement, construction, and delivery of multi-billion-dollar projects in the residential, hospitality, energy, infrastructure, and marine sectors, among others. He was also named Hill Internationals' Project Manager of the Year in 2001.

J CHARLES LEVERGOOD is our Senior Vice President of Business Development, Americas. Mr. Levergood brings 32 years of experience in strategic business development, marketing and sales, consulting services, and construction management for multi-billion-dollar pursuits. Prior to joining Hill, he worked for 13 years at Jacobs Engineering Group in a variety of positions, most recently as Vice President of Mega Sales and Global Strategy for Jacobs’ Global Buildings and Infrastructure group. Mr. Levergood also served as Vice President with Parsons Brinckerhoff and earlier as Director of Marketing with HNTB. Mr. Levergood earned his B.S.C.E. in Civil Engineering from Bucknell University and his M.S.C.E. in Civil Engineering from Purdue University. He is a registered professional engineer in Indiana, Maryland, Virginia, and the District of Columbia.

Employees
 
At February 28, 2019, we had 2,664 professionals. Of these professionals, 2,570 worked in our Project Management Group and 94 worked in our Corporate offices. Our personnel included 2,304 full-time employees, 107 part-time employees, 199 independent external contractors and 54 external contractors provided by third-party agencies. We are not a party to any collective bargaining agreements.
 
Access to Company Information
 
We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the United States Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet site at www.sec.gov that contains periodic reports, proxy statements, information statements and other information regarding issuers that file electronically.
 

8


We make available, free of charge, through our website or by responding to requests addressed to our Legal Department, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed by us with the SEC pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act, as amended. These reports are available as soon as practicable after such material is filed with or furnished to the SEC. Our primary website is www.hillintl.com . We post the charters for our audit, compensation and governance and nominating committees, corporate governance principles and code of ethics in the “Investors” section of our website. The information contained on our website, or on other websites linked to our website, is not part of this document.

Item 1A. Risk Factors.
 
Our business involves a number of risks and uncertainties, some of which are beyond our control. The risks and uncertainties described below could individually or collectively have a material adverse effect on our business, financial condition, results of operations and cash flows. While these are not the only risks and uncertainties we face, we believe that the more significant risks and uncertainties are as follows:
 
Risks Affecting the Business
 
Acts of terrorism, political, governmental and social upheaval and threats of armed conflicts in or around various areas in which we operate could limit or disrupt markets and our operations, including disruptions resulting from the evacuation of personnel, cancellation of contracts or the loss of personnel.

Acts of terrorism, political, governmental and social upheaval and threats of armed conflicts in or around various areas in which we operate could limit or disrupt markets and our operations, including disruptions resulting from the evacuation of personnel, cancellation of contracts or the loss of personnel, and may affect timing and collectability of our accounts receivable. Such events may cause further disruption to financial and commercial markets and may generate greater political and economic instability in some of the geographic areas in which we operate.

We may be unable to collect amounts owed to us, which could have a material adverse effect on our liquidity, results of operations and financial condition.

Accounts receivable represent the largest asset on our balance sheet. While we take steps to evaluate and manage the credit risks relating to our clients, economic downturns or other events can adversely affect the markets we serve and our clients ability to pay, which could reduce our ability to collect all amounts due from clients. If our clients delay in paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, results of operations, and financial condition.
 
Our business is sensitive to oil and gas prices, and fluctuations in oil and gas prices may negatively affect our business.
 
Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. Significant drops in oil or gas prices have led, and could lead to further slowdowns, in construction in oil and gas producing regions, which has had and could continue to have a material adverse effect on our business, results of operations, financial condition and cash flows.
 
Unfavorable global economic conditions could adversely affect our business, liquidity and financial results.
 
The markets that we serve are subject to fluctuation based on general global economic conditions and other factors. Unfavorable global economic conditions could adversely affect our business and results of operations, primarily by limiting our access to credit and disrupting our clients’ businesses. The reduction in financial institutions’ willingness or ability to lend has increased the cost of capital and reduced the availability of credit. Although we currently believe that the financial institutions with which we do business will be able to fulfill their commitments to us, there is no assurance that those institutions will be able or willing to continue to do so, which could have a material adverse impact on our business. Changes in general market conditions in the locations where we work may adversely affect our clients’ level of spending, ability to obtain financing, and ability to make timely payments to us for our services, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding, results of operations and liquidity.
 

9


We may be unable to win new contract awards if we cannot provide clients with letters of credit, bonds or other forms of guarantees.
 
In certain international regions, primarily the Middle East, it is industry practice for clients to require letters of credit, bonds, bank guarantees or other forms of guarantees. These letters of credit, bonds or guarantees indemnify our clients if we fail to perform our obligations under our contracts. We currently have relationships with various domestic and international banking institutions to assist us in providing clients with letters of credit or guarantees. In the event there are limitations in worldwide banking capacity, we may find it difficult to find sufficient bonding capacity to meet our future bonding needs. Failure to provide credit enhancements on terms required by a client may result in our inability to compete or win a project.
 
International operations and doing business with foreign governments expose us to legal, political, operational and economic risks in different countries and currency exchange rate fluctuations could adversely affect our financial results.
 
There are risks inherent in doing business internationally, including:
 
Lack of developed legal systems to enforce contractual rights;
Foreign governments may assert sovereign or other immunity if we seek to assert our contractual rights thus depriving us of any ability to seek redress against them;
Greater difficulties in managing and staffing foreign operations;
Differences in employment laws and practices which could expose us to liabilities for payroll taxes, pensions and other expenses;
Inadequate or failed internal controls, processes, people, and systems associated with foreign operations;
Increased logistical complexity;
Increased selling, general and administrative expenses associated with managing a larger and more global business;
Greater risk of uncollectible accounts and longer collection cycles;
Currency exchange rate fluctuations;
Restrictions on the transfer of cash from certain foreign countries;
Imposition of governmental controls;
Political and economic instability;
Changes in U.S. and other national government policies affecting the markets for our services and our ability to do business with certain foreign governments or their political leaders;
Conflict between U.S. and non-U.S. law;
Changes in regulatory practices, tariffs and taxes;
Less established bankruptcy and insolvency procedures;
Potential non-compliance with a wide variety of non-U.S. laws and regulations; and
General economic, political and civil conditions in these foreign markets.
 
Any of these and other factors could have a material adverse effect on our business, results of operations, financial condition or cash flows.
 
We operate in many different jurisdictions and we could be adversely affected by any violations of the U.S. Foreign Corrupt Practices Act or similar worldwide and local anti-corruption laws.
 
The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar worldwide and local anti-corruption laws in other jurisdictions, generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. The policies also are applicable to agents through which we do business in certain non-U.S. jurisdictions. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, we cannot assure you that our internal control policies and procedures always will protect us from improper or criminal acts committed by our employees or agents. Our continued expansion outside the U.S., including in developing countries, could increase the risk of such violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business, subject us to fines, penalties and restrictions and otherwise result in a material adverse effect on our results of operations or financial condition. All of our acquired businesses are subject to our internal policies. However, because our internal policies are more restrictive than some local laws or customs where we operate, we may be at an increased risk for violations while we train our new employees to comply with our internal policies and procedures.
 

10


Our business sometimes requires our employees to travel to and work in high security risk countries, which may result in employee injury, repatriation costs or other unforeseen costs.
 
Many of our employees often travel to and work in high security risk countries around the world that are undergoing or that may undergo political, social and economic upheavals resulting in war, civil unrest, criminal activity or acts of terrorism. For example, we have had and expect to continue to have significant projects in the Middle East and Africa. As a result, we may be subject to costs related to employee injury, repatriation or other unforeseen circumstances. Further, circumstances in these countries could make it difficult or impossible to attract and retain qualified employees, which could have a material adverse effect on our operations.

We depend on government contracts for a significant portion of our revenue. Our inability to win profitable government contracts could harm our operations and adversely affect our net earnings.
 
Our inability to win profitable government contracts could harm our operations and adversely affect our net earnings. Government contracts are typically awarded through a heavily regulated procurement process. Some government contracts are awarded to multiple competitors, causing increases in overall competition and pricing pressure. In turn, the competition and pricing pressure may require us to make sustained post-award efforts to reduce costs under these contracts. If we are not successful in reducing the amount of costs, our profitability on these contracts may be negatively impacted. In addition, some of our federal government contracts require U.S. government security clearances. If we or certain of our personnel were to lose these security clearances, our ability to continue performance of these contracts or to win new contracts requiring such clearances may be negatively impacted.
 
We depend on long-term government contracts, many of which are funded on an annual basis. If appropriations are not made in subsequent years of a multiple-year contract, we will not realize all of our potential revenue and profit from that project.
 
Most government contracts are subject to the continuing availability of legislative appropriation. Legislatures typically appropriate funds for a given program on a year-by-year basis, even though contract performance may take more than one year. As a result, at the beginning of a program, the related contract is only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent fiscal year. These appropriations and the timing of payment of appropriated amounts may be influenced by, among other things, the state of the economy, budgetary and other political issues affecting the particular government and its appropriations process, competing priorities for appropriation, the timing and amount of tax receipts and the overall level of government expenditures. If appropriations are not made in subsequent years on government contracts, then we will not realize all of our potential revenue and profit from those contracts.
 
We depend on contracts that may be terminated by our clients on short notice, which may adversely impact our ability to recognize all of our potential revenue and profit from the projects.
 
Substantially all of our contracts are subject to termination by the client either at its convenience or upon our default. If one of our clients terminates a contract at its convenience, then we typically are able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent us from recognizing all of our potential revenue and profit from that contract. If one of our clients terminates the contract due to our default, we could be liable for excess costs incurred by the client in re-procuring services from another source, as well as other costs.
 
Our contracts with governmental agencies are subject to audit, which could result in adjustments to reimbursable contract costs or, if we are charged with wrongdoing, possible temporary or permanent suspension from participating in government programs.
 
Our books and records are subject to audit by the various governmental agencies we serve and by their representatives. These audits can result in adjustments to reimbursable contract costs and allocated overhead. In addition, if as a result of an audit, we or one of our subsidiaries is charged with wrongdoing or the government agency determines that we or one of our subsidiaries is otherwise no longer eligible for federal contracts, then we or, as applicable, that subsidiary, could be temporarily suspended or, in the event of convictions or civil judgments, could be prohibited from bidding on and receiving future government contracts for a period of time. Furthermore, as a United States government contractor, we are subject to increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities, the results of which could have a material adverse effect on our operations.


11


We submit change orders to our clients for work we perform beyond the scope of some of our contracts. If our clients do not approve these change orders, our net earnings could be adversely impacted.
 
We submit change orders under some of our contracts, typically for payment for work performed beyond the initial contractual requirements. The clients may not approve or may contest these change orders and we cannot assure you that these claims will be approved in whole, in part or at all. If these claims are not approved, our net earnings could be adversely impacted.
 
Our backlog of uncompleted projects under contract or awarded is subject to unexpected adjustments and cancellations, including the amount, if any, of future appropriations by the applicable contracting governmental agency, and it may not be indicative of our future revenue and profits.
 
The inability to obtain financing or governmental approvals, changes in economic or market conditions or other unforeseen events, such as terrorist acts or natural disasters, could lead to us not realizing any revenue under some or all of these contracts. We cannot assure you that the backlog attributed to any of our uncompleted projects under contract will be realized as revenue or, if realized, will result in profits.
 
Many projects may remain in our backlog for an extended period of time because of the size or long-term nature of the contract. In addition, from time to time projects are scaled back or canceled. These types of backlog reductions adversely affect the revenue and profit that we ultimately receive. Included in our backlog is the maximum amount of all indefinite delivery/indefinite quantity (“ID/IQ”), or task order, contracts, or a lesser amount if we do not reasonably expect to be issued task orders for the maximum amount of such contracts. A significant amount of our backlog is derived from ID/IQ contracts and we cannot provide any assurance that we will in fact be awarded the maximum amount of such contracts.
 
Our dependence on subcontractors, partners and specialists could adversely affect our business.
 
We rely on third-party subcontractors as well as third-party strategic partners and specialists to complete our projects. To the extent that we cannot engage such subcontractors, partners or specialists or cannot engage them on a competitive basis, our ability to complete a project in a timely fashion or at a profit may be impaired. If we are unable to engage appropriate strategic partners or specialists in some instances, we could lose the ability to win some contracts. In addition, if a subcontractor or specialist is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition or over-commitment of its resources, we may be required to purchase the services from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services were needed.
 
If our partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation or reduced profits.
 
We sometimes enter into joint venture agreements and other contractual arrangements with outside partners to jointly bid on and execute a particular project. The success of these joint projects depends on the satisfactory performance of the contractual obligations of both our partners and us. If any of our partners fails to satisfactorily perform its contractual obligations, we may be required to make additional investments and provide additional services to complete the project. If we are unable to adequately address our partner’s performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation or reduced profits.
 
The project management business is highly competitive and if we fail to compete effectively, we may miss new business opportunities or lose existing clients and our revenues may decline.
 
The project management industry is highly competitive. We compete for contracts, primarily based on technical capability, with numerous entities, including other construction management companies, design or engineering firms, general contractors, management consulting firms and other entities. Compared to us, many of these competitors are larger, well-established companies that have broader geographic scope and greater financial and other resources. If we cannot compete effectively with our competitors, or if the costs of competing, including the costs of retaining and hiring professionals, become too expensive, our revenue growth and financial results may differ materially from our expectations.


12


We have acquired and may continue to acquire businesses as strategic opportunities arise and may be unable to realize the anticipated benefits of those acquisitions, or if we are unable to take advantage of strategic acquisition situations, our ability to expand our business may be slowed or curtailed.
 
In the past, we have acquired companies related to the project management business and we may continue to expand and diversify our operations with additional acquisitions as strategic opportunities arise. If the competition for acquisitions increases, or if the cost of acquiring businesses or assets becomes too expensive, the number of suitable acquisition opportunities may decline, the cost of making an acquisition may increase or we may be forced to agree to less advantageous acquisition terms for the companies that we are able to acquire. Alternatively, at the time an acquisition opportunity presents itself, internal and external pressures (including, but not limited to, borrowing capacity under our credit facilities or the availability of alternative financing), may cause us to be unable to pursue or complete an acquisition. Our ability to grow our business, particularly through acquisitions, may depend on our ability to raise capital by selling equity or debt securities or obtaining additional debt financing. There can be no assurance that we will be able to obtain financing when we need it or on terms acceptable to us.
 
In addition, managing the growth of our operations will require us to continually increase and improve our operational, financial and human resources management and our internal systems and controls. If we are unable to manage growth effectively or to successfully integrate acquisitions or if we are unable to grow organically, that could have a material adverse effect on our business.

Systems and information technology interruption and breaches in data security could adversely impact our ability to operate and our operating results.
 
We are heavily reliant on computer, information and communications technology and related systems in order to properly operate. From time to time, we experience system interruptions and delays. In the event we are unable to regularly deploy software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency and effectiveness of our systems, the operation of such systems could be interrupted or delayed, or our data security could be breached. In addition, our computer and communications systems and operations could be damaged or interrupted by natural disasters, power loss, telecommunications failures, acts of war or terrorism, acts of God, computer viruses, physical or electronic security breaches. Any of these or other events could cause system interruptions, delays and loss of critical data including private data. While we have taken steps to address these concerns by implementing sophisticated network security, training and internal control measures, there can be no assurance that a system failure or loss or data security breach will not materially adversely affect our business, financial condition and operating results.

We are required to provide Performance Guarantees to our clients on some of our projects. If claims are made by our clients on the Performance Guarantees, the result could have a material adverse impact on our business, financial condition, results of operations and cash flows.

We are often required to provide a Performance Guarantee to our clients on projects. The guarantees provide monetary compensation to the client should we fail to perform our obligations under the contract. Some of these Performance Guarantees are unconditional in that the client can request and receive payment at any time, for any reason. Historically, payments have not been unconditionally claimed from our clients. Performance Guarantee claims made by clients could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

Brexit may impact our business in Europe.

The June 2016 referendum result in the United Kingdom to exit the European Union (commonly known as “Brexit”), and the subsequent commencement of the official withdrawal process by the United Kingdom government in March 2017, has created uncertainties affecting business operations in the United Kingdom and the European Union. Until the terms of the United Kingdom's potential exit from the European Union in 2019 are determined, including any transition period, it is difficult to predict its impact. It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which our businesses are subject, impact trade between the United Kingdom and the European Union and other parties, and create economic and political uncertainty in the region.


13


New legal requirements in connection with climate change could adversely affect our operating results.

Our business and results of operations could be adversely affected by the passage of new climate change, defense, environmental, infrastructure and other laws, policies and regulations. Growing concerns about climate change and greenhouse gases, such as those adopted under the United Nations COP-21 Paris Agreement or the EPA Clean Power Plan, may result in the imposition of additional environmental regulations for our clients' projects in the buildings, transportation, environmental, energy and industrial markets worldwide. For example, legislation, international protocols, regulation or other restrictions on emissions regulations could increase the costs of projects for our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services. We cannot predict when or whether any of these various proposals may be enacted or what their effect will be on us or on our customers.

Risks Related to Ownership of Our Common Stock
 
We have identified material weaknesses in our internal control over financial reporting and determined that our disclosure controls and procedures were not effective which could, if not remediated, result in additional material misstatements in our financial statements.
 
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over our financial reporting, as defined in Rules 13a-15(e) and 13a-15(f), respectively, under the Securities Exchange Act of 1934, as amended. As disclosed in Item 9A of this Annual Report on Form 10-K, management has identified several material weaknesses in our internal control over financial reporting and has determined that our disclosure controls and procedures were not effective. A material weakness is defined as a deficiency, or combination of significant deficiencies, in internal control over financial reporting, such that there is a more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses, our management concluded that the Company did not maintain effective disclosure controls and procedures and internal control over financial reporting as of December 31, 2018 .

We have developed and have begun to implement a remediation plan designed to address these material weaknesses in internal control over financial reporting and ineffective disclosure controls and procedures. If our remedial measures are insufficient, or if additional material weaknesses or significant deficiencies in our internal controls are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could materially and adversely affect our business and results of operations or financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the weaknesses or deficiencies, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in investor confidence.
 
The NYSE could suspended trading of our common stock and may delist our common stock from trading on its exchange, which could limit investors’ ability to make transactions in our common stock and subject us to additional trading restrictions.

On August 13, 2018, the NYSE announced the suspension of trading of our common stock due to non-compliance with Section 802.01E of the NYSE’s Listed Company Manual and announced that it was initiating proceedings to delist our common stock.  As a result of the suspension, our common stock began trading on August 14, 2018 under the symbol “HILI” on the OTC Pink, which is operated by OTC Markets Group Inc. The Company filed a Request for Review (the “Review Request”) to a Committee of the Board of Directors of NYSE Regulation (the “Committee”) with respect to the NYSE’s determination to initiate delisting proceedings. The Company expected that the Committee would hold a hearing on the Review Request on or after 25 business days from the date of filing the Review Request. The Company became current in its periodic reports filed with the Securities and Exchange Commission on October 12, 2018 and as a result, the New York Stock Exchange lifted its suspension on the trading of the Company’s common stock. Trading of the Company’s common stock resumed effective Thursday, October 18, 2018, under the Company’s previous ticker symbol, “HIL,” and delisting proceedings against the Company ceased.

If the NYSE were to delists our common stock from listing on its exchange and we are not able to list our common stock on another national securities exchange, we expect our common stock would be quoted on an over-the-counter market, such as the OTC Pink. If this were to occur, we could face significant material adverse consequences, including:

a limited availability of market quotations for our common stock;
reduced liquidity for our common stock;
a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
a limited amount of news and analyst coverage; and

14


a decreased ability to issue additional securities or obtain additional financing in the future.

Future sales of our common and preferred stock may depress the price of our common stock.
 
As of March 28, 2019 , there were 55,659 shares of our common stock outstanding. An additional 1,943 shares of our common stock may be issued upon the exercise of options held by employees, management and directors. We also have the authority, as determined by our Board of Directors, to issue up to 1,000 shares of preferred stock and additional options to purchase 3,321 shares of our common stock without stockholder approval. Future issuances or sales of our common stock could have an adverse effect on the market price of our common stock.
 
Because we have no current plans to pay cash dividends on our common stock, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
 
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants of our Secured Credit Facilities and may be limited by future indebtedness incurred by our subsidiaries or us. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

We are able to issue shares of preferred stock with greater rights than our common stock.
 
Our Board of Directors is authorized to issue one or more series of preferred stock from time to time without any action on the part of our stockholders. Our Board of Directors also has the power, without stockholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights and preferences over our common stock with respect to dividends and other terms. If we issue preferred stock in the future that has a preference over our common stock with respect to the payment of dividends or other terms, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected.
 
Provisions in our organizational documents and Delaware law could discourage potential acquisition proposals, could delay or prevent a change in control of the Company that our stockholders may consider favorable and could adversely affect the market value of our common stock.
 
Provisions in our organizational documents and Delaware law could discourage potential acquisition proposals, could delay or prevent a change in control of the Company that our stockholders may consider favorable and could adversely affect the market value of our common stock. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

Our Board of Directors is expressly authorized to make, alter or repeal our bylaws;
Our Board of Directors is divided into three classes of service with staggered three-year terms. This means that only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms;
Our Board of Directors is authorized to issue preferred stock without stockholder approval;
Only our Board of Directors, our Chairman of the Board, our Chief Executive Officer or the holders of not less than 25% of our outstanding common stock and entitled to vote may call a special meeting of stockholders;
Our bylaws require advance notice for stockholder proposals and director nominations;
Our bylaws limit the removal of directors and the filling of director vacancies; and
We will indemnify officers and directors against losses that may incur in connection with investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures.
 
These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in control of the Company.
 

15


In addition, Section 203 of the Delaware General Corporation Law imposes certain restrictions on mergers and other business combinations between the Company and any holder of 15% or more of our outstanding common stock. This provision is applicable to Hill and may have an anti-takeover effect that may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in the stockholder’s best interest. In general, Section 203 could delay for three years and impose conditions upon “business combinations” between an “interested shareholder” and Hill, unless prior approval by our Board of Directors is given. The term “business combination” is defined broadly to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. An “interested shareholder,” in general, would be a person who, together with affiliates and associates, owns or within three years did own, 15% or more of a corporation’s voting stock.
 
A small group of stockholders owns a large quantity of our common stock, thereby potentially exerting significant influence over the Company.

This concentration of ownership could significantly influence matters requiring stockholder approval and could delay, deter or prevent a change in control of the Company or other business combinations that might otherwise be beneficial to our other stockholders. Accordingly, this concentration of ownership may impact the market price of our common stock. In addition, the interest of our significant stockholders may not always coincide with the interest of the Company’s other stockholders. In deciding how to vote on such matters, they may be influenced by interests that conflict with our other stockholders.

Item 1B.           Unresolved Staff Comments.
 
None.
 

16


Item 2.                    Properties.
 
Our executive and certain operating offices are currently located at One Commerce Square, 2005 Market Street, 17th Floor, Philadelphia, Pennsylvania 19103. We lease all of our office space and do not own any real property. The telephone number at our executive office is (215) 309-7700. In addition to our executive offices, we have approximately 60 operating leases for office facilities throughout the world.
 
Our principal worldwide office locations and the geographic regions in which we reflect their operations are:
 
United States
 
Europe
 
Middle East
Boston, MA
 
Amsterdam, Netherlands
 
Abu Dhabi, UAE
Cleveland, OH
 
Athens, Greece
 
Doha, Qatar
Columbus, OH
 
Belgrade, Serbia
 
Dubai, UAE
Hartford, CT
 
Bucharest, Romania
 
Jeddah, Saudi Arabia
Houston, TX
 
Dusseldorf, Germany
 
Manama, Bahrain
Irvine, CA
 
Frankfurt, Germany
 
Muscat, Oman
Irving, TX
 
Istanbul, Turkey
 
Riyadh, Saudi Arabia
Jacksonville, FL
 
Lisbon, Portugal
 
 
Miami, FL
 
London, UK
 
Africa
New York, NY
 
Madrid, Spain
 
Algiers, Algeria
New Orleans, LA
 
Pristina, Kosovo
 
Cairo, Egypt
Ontario, CA
 
Warsaw, Poland
 
Casablanca, Morocco
Orlando, FL
 
Wroclaw, Poland
 
Tripoli, Libya
Philadelphia, PA (Headquarters)
 
 
 
 
Phoenix, AZ
 
Latin America
 
Asia/Pacific
Pittsburgh, PA
 
Bogota, Colombia
 
Astana City, Kazakhstan
San Francisco, CA
 
Mexico City, Mexico
 
Gurgaon, India
San Jose, CA
 
Sao Paulo, Brazil
 
Hong Kong, China
Seattle, WA
 
 
 
Mumbai, India
Spokane, WA
 
 
 
 
Toledo, OH
 
 
 
 
Woodbridge, NJ
 
 
 
 
Washington, DC
 
 
 
 
 
Item 3.                    Legal Proceedings .
 
General Litigation
 
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 these 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.


17


In 2013, M.A. Angeliades, Inc. (“Plaintiff”) filed a complaint with the Supreme Court of New York against the Company and the New York City Department of Design and Construction (“DDC”) regarding payment of approximately $8,771 for work performed as a subcontractor to the Company plus interest and other costs. On October 5, 2015, pursuant to a settlement agreement, Hill paid Plaintiff approximately $2,596, including interest amounting to $1,056, of which $448 had been previously accrued and $608 was charged to expense for the year ended December 31, 2015. The Plaintiff resolved its remaining issues regarding change orders and compensation for delay with DDC. On January 16, 2016, Plaintiff filed a Motion to amend its complaint against the Company claiming that the amounts paid by the Company do not reconcile with the amounts Plaintiff believes the Company received from DDC despite DDC’s records reflecting the same amount as the Company’s. On August 8, 2016, the Plaintiff’s Motion was granted and the parties resolved the matter and entered into a confidential settlement and general release on August 17, 2018. The settlement was accrued for and reflected in the Company's balance sheet and the statement of operations as of and for the year ended December 31, 2017.
 
Knowles Limited (“Knowles”), a subsidiary of the Company’s former Construction Claims Group, is a party to an arbitration proceeding instituted on July 8, 2014 in which Knowles claimed that it was entitled to payment for services rendered to Celtic Bioenergy Limited (“Celtic”). The arbitrator decided in favor of Knowles. The arbitrator’s award was appealed by Celtic to the U.K. High Court of Justice, Queen’s Bench Division, Technology and Construction Court (“Court”). On March 16, 2017, the Court (1) determined that certain relevant facts had been deliberately withheld from the arbitrator by an employee of Knowles and (2) remitted the challenged parts of the arbitrator’s award back to the arbitrator to consider the award in possession of the full facts. The Company is evaluating the impact of the judgment of the Court.

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. The Company has cooperated and continues to cooperate with the SEC with respect to the SEC’s investigation.

Loss on Performance Bond

The Company is often required to provide a Performance Guarantee to our customers on projects. The guarantees provide monetary compensation to the customer should we fail to perform our obligations under the contract. Some of these Performance Guarantees are unconditional in that the customer can request and receive payment at any time, for any reason. Historically, payments have not been unconditionally claimed from our customers. Performance Guarantee claims made by customers could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

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 $7,927 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. The Company has filed an appeal before the Kuwait Court of Appeals. As a result of the First Instance Court decision, 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.

Item 4.         Mine Safety Disclosures.
 
Not applicable.



18


PART II

Item 5.       Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
Our common stock has historically been traded on the New York Stock Exchange (“NYSE”) under the trading symbol “HIL.” On August 13, 2018, the NYSE suspended the trading of our common stock and commenced proceedings to delist our common stock due to our failure to be current in our periodic reporting obligations with the SEC. As a result, on August 14, 2018, our common stock commenced trading on the OTC Pink Marketplace under the symbol “HILI”. As a result of becoming current in periodic reports filed with the Securities Exchange Commission, the New York Stock Exchange lifted its suspension on the trading of the Company’s common stock, and the Company’s common stock resumed trading on Thursday, October 18, 2018, under the Company’s previous ticker symbol, “HIL,” and the New York Stock Exchange is no longer pursuing delisting proceedings against the Company.
 
Stockholders
 
As of December 31, 2018 , there were approximately 63 holders of record of our common stock. However, a single record stockholder account may represent multiple beneficial owners, including owners of shares in street name accounts. There are approximately 2,400 beneficial owners of our common stock.
 
Dividends
 
We have not paid any dividends on our common stock. The payment of dividends in the future will be contingent upon our earnings, if any, capital requirements and general financial condition of our business. Our Secured Credit Facilities currently limit the payment of dividends.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The table setting forth this information is included in Part III — Item 12 ("Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters") of this Form 10-K.

Recent Sales of Unregistered Securities
 
None.
 
Performance Graph
 
The performance graph and table below compare the cumulative total return of our common stock for the period from December 31, 2013 to 2018 with the comparable cumulative total returns of the Russell 2000 Index (of which the Company was a component stock) and a peer group which consists of the following eight companies:  AECOM (ACM), Fluor Corporation (FLR), Granite Construction Incorporated (GVA), Jacobs Engineering Group Inc. (JEC), KBR, Inc. (KBR), NV5 Global, Inc. (NVEE), Tutor Perini Corporation (TPC), and Tetra Tech, Inc. (TTEK). 

19


CHART-051F6BD95E3B5F64A65.JPG
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Hill International, Inc.
 
$
100.00

 
$
97.22

 
$
98.23

 
$
110.10

 
$
137.89

 
$
78.03

Russell 2000 Index
 
100.00

 
103.52

 
97.62

 
116.59

 
131.88

 
115.85

Peer Group
 
100.00

 
95.28

 
104.84

 
147.03

 
187.14

 
174.98


Item 6.       Selected Financial Data.
 
The following is selected financial data from our audited consolidated financial statements for each of the last five years. This data should be read in conjunction with our consolidated financial statements (and related notes) appearing in Item 8 of this report and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” On January 1, 2018, the Company adopted Accounting Standards Update 2014-09 on a modified retrospective basis, which allowed revenue for 2018 to be recognized according to the new Accounting Standards Codification ("ASC") 606 and previous years reported revenue to remain in accordance with the standard that was replaced, ASC 605. See Note 4 - "Revenue from Contracts with Clients" to our consolidated financial statements for additional information. On May 5, 2017, the sale of the Construction Claims Group was finalized, which is reported as discontinued operations for each year presented. See Note 5 - "Discontinued Operations" to our consolidated financial statements for additional information. The data presented below is in thousands, except for (loss) earnings per share data.
 

20


 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Income Statement Data:
 
 

 
 

 
 

 
 

 
 

Total revenue
 
$
428,679

 
$
483,736

 
$
516,012

 
$
544,760

 
$
489,348

Direct expenses
 
297,988

 
336,883

 
358,943

 
373,544

 
322,733

Gross profit
 
130,691

 
146,853

 
157,069

 
171,216

 
166,615

Selling, general and administrative expenses
 
148,038

 
151,186

 
170,682

 
172,649

 
146,265

Share of (profit) loss of equity method affiliates
 
(4,322
)
 
(3,777
)
 
37

 
237

 

Less: Loss on performance bond
 
7,938

 

 

 

 

Operating profit (loss)
 
(20,963
)
 
(556
)
 
(13,650
)
 
(1,670
)
 
20,350

Interest and related financing fees, net
 
5,310

 
3,031

 
2,355

 
3,611

 
3,099

(Loss) earnings before income taxes
 
(26,273
)
 
(3,587
)
 
(16,005
)
 
(5,281
)
 
17,251

Income tax expense
 
4,239

 
3,103

 
5,955

 
5,833

 
9,997

(Loss) earnings from continuing operations
 
(30,512
)
 
(6,690
)
 
(21,960
)
 
(11,114
)
 
7,254

Discontinued Operations:
 
 
 
 
 
 
 
 
 
 
Loss from discontinued operations
 
(863
)
 
(14,479
)
 
(11,776
)
 
(2,564
)
 
(18,627
)
Gain on disposal of discontinued operations , net of tax
 

 
48,713

 

 

 

  Total gain (loss) from discontinued operations
 
(863
)
 
34,234

 
(11,776
)
 
(2,564
)
 
(18,627
)
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
(31,375
)
 
27,544

 
(33,736
)
 
(13,678
)
 
(11,373
)
Less: net earnings - noncontrolling interests
 
86

 
178

 
76

 
823

 
1,304

Net earnings (loss) attributable to Hill International, Inc.
 
$
(31,461
)
 
$
27,366

 
$
(33,812
)
 
$
(14,501
)
 
$
(12,677
)
 
 
 
 
 
 


 
 
 
 
Basic (loss) earnings per common share from continuing operations
 
$
(0.56
)
 
$
(0.13
)
 
$
(0.43
)
 
$
(0.24
)
 
$
0.13

Basic loss per common share from discontinued operations
 
(0.01
)
 
(0.28
)
 
(0.22
)
 
(0.05
)
 
(0.42
)
Basic gain on disposal of discontinued operation, net of tax
 

 
0.93

 

 

 

Basic earnings (loss) per common share - Hill International, Inc.
 
$
(0.57
)
 
$
0.52

 
$
(0.65
)
 
$
(0.29
)
 
$
(0.29
)
Basic weighted average common shares outstanding
 
54,769

 
52,175

 
51,724

 
50,874

 
44,370

Diluted (loss) earnings per common share from continuing operations
 
$
(0.56
)
 
$
(0.13
)
 
$
(0.43
)
 
$
(0.24
)
 
$
0.13

Diluted loss per common share from discontinued operations
 
(0.01
)
 
(0.28
)
 
(0.22
)
 
(0.05
)
 
(0.42
)
Diluted gain on disposal of discontinued operation, net of tax
 

 
0.93

 

 

 

Diluted earnings (loss) per common share - Hill International, Inc.
 
$
(0.57
)
 
$
0.52

 
$
(0.65
)
 
$
(0.29
)
 
$
(0.29
)
Diluted weighted average common shares outstanding
 
54,769

 
52,175

 
51,724

 
50,874

 
44,370


21



 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Discontinued Operations Data:
 
 

 
 

 
 

 
 

 
 

Revenue
 
$

 
$
62,149

 
$
169,252

 
$
168,029

 
$
153,839

Operating (loss) profit
 
(863
)
 
(4,975
)
 
3,970

 
10,753

 
9,842

Interest and related financing fees, net
 

 
8,858

 
11,271

 
11,053

 
27,386

Gain (Loss) before income taxes
 
(863
)
 
47,610

 
(7,301
)
 
(300
)
 
(17,544
)
Gain (Loss) from discontinued operations
 
$
(863
)
 
$
34,234

 
$
(11,776
)
 
$
(2,564
)
 
$
(18,627
)
 

 
 
 
As of December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Selected Balance Sheet Data:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
18,711

 
$
21,353

 
$
25,637

 
$
24,089

 
$
30,124

Accounts receivable, net
 
117,469

 
128,133

 
164,844

 
187,721

 
146,035

Current assets held for sale
 

 

 
54,651

 
60,092

 
53,393

Current assets
 
183,095

 
198,411

 
266,461

 
295,723

 
257,294

Assets held for sale
 

 

 
32,091

 
36,199

 
37,649

Total assets
 
264,769

 
293,295

 
400,075

 
426,455

 
396,072

Current liabilities held for sale
 

 

 
25,888

 
27,350

 
28,779

Current liabilities
 
109,039

 
125,874

 
139,525

 
144,596

 
139,968

Liabilities held for sale
 

 

 
5,087

 
6,730

 
3,787

Total debt
 
47,951

 
37,782

 
144,103

 
144,983

 
121,524

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
Hill International, Inc. share of equity
 
$
93,840

 
$
109,075

 
$
74,358

 
$
101,577

 
$
106,710

Noncontrolling interests
 
605

 
1,595

 
1,994

 
2,360

 
9,944

Total equity
 
$
94,445

 
$
110,670

 
$
76,352

 
$
103,937

 
$
116,654



Item 7.       Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

The following discussion should be read in conjunction with the other sections of this report, including the Financial Statements and supplementary Data, contained in Part II, Item 8 of this Annual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in Part I, “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A.“Risk Factors.” We assume no obligation to update any of these forward-looking statements.

Overview
 
We earn revenue by deploying professionals to provide services to our clients, including project management, construction management and related consulting. These services are primarily delivered on a “cost plus” or “time and materials” basis in which we bill negotiated hourly or monthly rates or a negotiated multiple of the direct cost of these professionals, plus actual out-of-pocket expenses. Our direct expenses are the actual cost of these professionals, including payroll and benefits. We also provide services under fixed price contracts or time and materials contracts with a cap.


22


The professionals we deploy are occasionally subcontractors. We generally bill the actual cost of these subcontractors and recognize this cost as both revenue and direct expense. CFR refers to our revenue excluding amounts paid or due to subcontractors. We believe CFR is an important measure because it represents the revenue on which we earn gross profit, whereas total revenue includes subcontractors on which we generally pass through the cost and earn minimal or no gross profit.

We compete for business based on a variety of factors such as technical capability, global resources, price, reputation and past experience, including client requirements for substantial experience in similar projects. We have developed significant long-standing relationships, which bring us repeat business and would be very difficult to replicate. We believe we have an excellent reputation for attracting and retaining professionals. In addition, we believe there are high barriers to entry for new competitors especially in the project management market.

Selling, general and administrative expenses (“SG&A”) consist primarily of personnel costs that are not billable and corporate or regional costs such as sales, business development, proposals, operations, finance, human resources, legal, marketing, management and administration.

Discontinued operations includes the results of our former Construction Claims Group, which was sold on May 5, 2017.

The Company operates in a single reporting segment, known as the Project Management Group which provides fee-based construction management services to our clients, leveraging our construction expertise to identify potential trouble, difficulties and sources of delay on a construction project before they develop into costly problems. Our experienced professionals are capable of managing all phases of the construction process from concept through completion, including cost and budget controls, scheduling, estimating, expediting, inspection, contract administration and management of contractors, subcontractors and suppliers.
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements contained in this Annual Report on Form 10-K were prepared in accordance with U.S. GAAP. While there are a number of accounting policies, methods and estimates that affect the consolidated financial statements as described in Note 3 to the consolidated financial statements, areas that are particularly significant are discussed below. We believe our assumptions are reasonable and appropriate, however actual results may be materially different than estimated.
 
Revenue Recognition
 
We generate revenue primarily from providing professional services to our clients under various types of contracts. We evaluate contractual arrangements to determine how to recognize revenue. Below is a description of the basic types of contracts from which we 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 our contracts are for consulting projects where we bill the client monthly at hourly billing rates. The hourly billing rates are determined by contract terms. Under cost plus contracts, we charge our clients for our costs, including both direct and indirect costs, plus a fixed fee or rate.

Under time and materials contracts with a cap value, we charge our clients for time and materials based upon the work performed subject to 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, we estimate the total contract price in accordance with the variable consideration guidelines and only include consideration we expect to receive. When we expect to reach the cap value, we generally renegotiate the contract or cease work when the maximum contract value is reached. We continue to work if it is probable that the contract will be extended. We only include consideration on 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 we continue to work and are uncertain that a contract change order will be processed, the variable consideration will be constrained until it is probable that the contract will be renegotiated. We are only entitled to consideration for the work we have performed, and the cap value is not a guaranteed contract value.


23


Fixed Price Contracts

Under fixed price contracts, our clients pay an agreed amount negotiated in advance for a specified scope of work. We are guaranteed to receive the consideration to the extent that we deliver under the contract. We recognize 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. We assess contracts quarterly and may recognize any expected future loss before actually incurring the loss. When we expect to reach the total consideration under the contract, we begin to negotiate a change order.

Change Orders and Claims

Change orders are modifications of an original contract that effectively change the provisions of the contract without adding new provisions. Either we or our 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 we are having difficulties in renegotiating the change order, we will stop work if possible, 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 we seek to collect from 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.
 
Allowance for Doubtful Accounts
 
We make ongoing estimates relating to the collectability of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our clients to make required payments.  Estimates used in determining accounts receivable allowances are based on our evaluation of specific client accounts and contracts involved and the financial condition of our clients. The factors we consider in our evaluations include, but are not limited to, client type (U.S. federal and other national governments, state and local governments or private sector), historical contract performance, historical collection and delinquency trends, client credit worthiness, and general economic and political conditions.  At December 31, 2018 and 2017 , the allowance for doubtful accounts was $71,277 and $72,850 , respectively. The allowance for doubtful accounts balance included approximately $42,758 and $46,191 related to our receivables in Libya at December 31, 2018 and 2017 , respectively.
 
Goodwill and Acquired Intangible Assets
 
Goodwill represents the excess of the consideration paid over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value may be below its carrying amount. We test goodwill annually for impairment during the third fiscal quarter. To determine the fair value of our reporting unit, we use the discounted cash flow method and the quoted price method, weighting the results of each method.

Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth, the period over which cash flows will occur, and determination of the weighted average cost of capital, among other things. Based on the valuation as of July 1, 2018 , the fair value of the Company exceeded its carrying value. Changes in these estimates and assumptions could materially affect our determination of fair value and/or goodwill impairment. Changes in future market conditions, our business strategy, or other factors could impact upon the future value of our project management operations, which could result in future impairment charges .
 
We amortize acquired intangible assets over their estimated useful lives and review the long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any.  In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate.

24


 
Income Taxes
 
We make judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings.  These judgments and interpretations affect the provision for income taxes, deferred tax assets and liabilities and the valuation allowance. We evaluate the deferred tax assets to determine on the basis of objective factors whether the net assets will be realized through future years’ taxable income. In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required.
 
We will recognize 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” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. 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.
 
Stock Options
 
We recognize compensation expense for all stock-based awards. These awards have included awards of common stock, deferred stock units and stock options. While fair value may be readily determinable for awards of stock and deferred stock units, market quotes are not available for long-term, nontransferable stock options because these instruments are not traded. We currently use the Black-Scholes option pricing model to estimate the fair value of options. Option valuation models require the input of highly subjective assumptions, including but not limited to stock price volatility, expected life and stock option exercise behavior.
 
Contingencies
 
Estimates are inherent in the assessment of our exposure to insurance claims that fall below policy deductibles and to litigation and other legal claims and contingencies, as well as in determining our liabilities for incurred but not reported insurance claims.  Significant judgments by us and reliance on third-party experts are utilized in determining probable and/or reasonably estimable amounts to be recorded or disclosed in our financial statements. The results of any changes in accounting estimates are reflected in the financial statements of the period in which the changes are determined. We do not believe that material changes to these estimates are reasonably likely to occur.



25


2018 Business Overview

Consolidated Results
(In thousands)
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Income Statement Data:
 
 

 
 

 
 

Revenue
 
$
428,679

 
$
483,736

 
$
516,012

Direct expenses
 
297,988

 
336,883

 
358,943

Gross profit
 
130,691

 
146,853

 
157,069

Selling, general and administrative expenses
 
148,038

 
151,186

 
170,682

Plus: Share of (profit) loss of equity method affiliates
 
(4,322
)
 
(3,777
)
 
37

Less: Loss on performance bond
 
7,938

 

 

Operating profit (loss)
 
(20,963
)
 
(556
)
 
(13,650
)
Interest and related financing fees, net
 
5,310

 
3,031

 
2,355

Loss before income taxes
 
(26,273
)
 
(3,587
)
 
(16,005
)
Income tax expense
 
4,239

 
3,103

 
5,955

Loss from continuing operations
 
(30,512
)
 
(6,690
)
 
(21,960
)
Discontinued operations:
 
 
 
 
 
 
Loss from discontinued operations
 
(863
)
 
(14,479
)
 
(11,776
)
Gain on disposal of discontinued operations, net of tax
 

 
48,713

 

Total gain (loss) from discontinued operations
 
(863
)
 
34,234

 
(11,776
)
Net income (loss)
 
(31,375
)
 
27,544

 
(33,736
)
Less: net earnings - noncontrolling interests
 
86

 
178

 
76

Net income (loss) attributable to Hill International, Inc.
 
$
(31,461
)
 
$
27,366

 
$
(33,812
)


Results of Operations
 
Year Ended December 31, 2018 Compared to
Year Ended December 31, 2017
 
Total Revenue:
 
 
 
2018
 
2017
 
Change
United States
 
$
205,149

 
47.9
%
 
$
227,581

 
47.1
%
 
$
(22,432
)
 
(9.9
)%
Latin America
 
11,503

 
2.7
%
 
11,772

 
2.4
%
 
(269
)
 
(2.3
)%
Europe
 
41,259

 
9.6
%
 
43,179

 
8.9
%
 
(1,920
)
 
(4.4
)%
Middle East
 
133,690

 
31.2
%
 
169,964

 
35.1
%
 
(36,274
)
 
(21.3
)%
Africa
 
26,600

 
6.2
%
 
23,100

 
4.8
%
 
3,500

 
15.2
 %
Asia/Pacific
 
10,478

 
2.4
%
 
8,140

 
1.7
%
 
2,338

 
28.7
 %
Total
 
$
428,679

 
100.0
%
 
$
483,736

 
100.0
%
 
$
(55,057
)
 
(11.4
)%

CFR was $337,244 and $383,495 of the total revenue for the twelve months ended December 31, 2018 and 2017, respectively, which was approximately 78.7% and 79.3% of total revenues, respectively.

The decrease in revenue and the corresponding decrease in CFR for the twelve months ended December 31, 2018 compared to the same period in 2017 was primarily due to the following:

26



United States:

The Northeast United States had a decline in revenue of approximately $16,955 due to the slowdown of a large University project and a project related to Hurricane Sandy as these projects close out. The Mid-Atlantic United States had a decline in revenue of approximately $7,676 mostly due to certain roadway projects coming to an end. These declines were partially offset by the addition of some new work and increased scope of work for ongoing projects in other areas of the United States.

Middle East:

Saudi Arabia had a decline of revenue of approximately $21,830 primarily due to the slow down of King Abdullah project as it nears completion and the close out of Jabal Omar project. Also, Oman had a decline in revenue of approximately $13,768 primarily due to the slow down of a major airport project as it nears completion and the closeout of a major hotel project.

Gross Profit:
 
 
2018
 
2017
 
Change
 
 
 
 
 
 
Gross Margin % of Total
Revenue
 
 
 
 
 
Gross Margin % of Total
Revenue
 
 
 
 
United States
 
$
60,237

 
46.1
%
 
29.4
%
 
$
66,117

 
45.1
%
 
29.1
%
 
$
(5,880
)
 
(8.9
)%
Latin America
 
4,799

 
3.7
%
 
41.7
%
 
4,723

 
3.2
%
 
40.1
%
 
76

 
1.6
 %
Europe
 
15,083

 
11.5
%
 
36.6
%
 
13,524

 
9.2
%
 
31.3
%
 
1,559

 
11.5
 %
Middle East
 
36,046

 
27.6
%
 
27.0
%
 
48,221

 
32.8
%
 
28.4
%
 
(12,175
)
 
(25.2
)%
Africa
 
10,997

 
8.4
%
 
41.3
%
 
10,284

 
7.0
%
 
44.5
%
 
713

 
6.9
 %
Asia/Pacific
 
3,529

 
2.7
%
 
33.7
%
 
3,984

 
2.7
%
 
48.9
%
 
(455
)
 
(11.4
)%
Total
 
$
130,691

 
100.0
%
 
30.5
%
 
$
146,853

 
100.0
%
 
30.4
%
 
$
(16,162
)
 
(11.0
)%

The change in gross margin as a percentage of revenue for the twelve months ended December 31, 2018 compared to the same period in 2017 was primarily due to the following:

Europe:
The Increase in gross margin percent of revenue is primarily related to the cancellation of a large project in Germany at the end of 2017. The project had relied on subcontractors to perform the work which lowered the margins in 2017.

Middle East:
The gross margin percent of revenue decrease was mostly attributable to the Oman airport project which experienced a slight reduction in overall projected margins in 2018.

Asia/Pacific
The gross margin percent of revenue decrease in 2018 is attributable to using subcontractors to complete work on a large project in Afghanistan.

Selling, General and Administrative Expenses:

2018 contained significant costs related to our profit improvement plan and restatement of approximately $19,800. We believe these costs are largely behind us and will have a minimal impact going forward. Our selling, general and administrative expense for 2018 excluding these items, on a proforma basis, would have been approximately $120 million. This estimate excludes any gain or loss on foreign exchange activity. We believe this level of selling, general and administrative costs is sustainable going forward.


27


The decrease from 2017 to 2018 was mostly the result of $6,177 decrease in indirect labor costs due to staff reductions related to the our profit improvement plan, an approximately $4,823 decrease in unapplied labor costs in the Middle East and United States, and a net bad debt recovery in Libya due to the reversal of a previously written off account receivable of approximately $3,248. The bad debt reversal was due to our client in Libya paying the Libyan taxing authority on our behalf. These reductions were largely offset by increases in foreign currency translation losses of approximately $6,033 due to a weakened Euro, Turkish Lira and Brazilian Real when compared to last year, a $3,140 expense related to a former executive and, approximately $2,140 due to increased resources utilized to bring the Company current with its SEC financial filings and other profit improvement plan costs. SG&A expenses represented approximately 34.4% and 31.3% of revenue for the years ended December 31, 2018 and 2017, respectively.

Interest and related financing fees, net
 
Interest and related financing fees, net, included interest expense of $5,642 , net of $(333 ) in interest income, and interest expense of $3,614 , net of $(583) in interest income, respectively for the years ended December 31, 2018 and 2017 . The increase in interest expense in 2018 as compared with 2017 is mainly due to expense related to debt that was paid off as part of the Construction Claims Group sale being allocated to discontinued operations during the twelve months ended December 31, 2017. All interest charges in 2018 have been recorded within continuing operations.

Income Taxes
 
The effective income tax rates for 2018 , and 2017 were (16.1)%   and (86.5)% respectively. The differences between the federal statutory rate and the effective tax rate are caused by several items including the Tax Cuts and Jobs Act of 2017, the difference between the U.S. federal statutory rates and the foreign tax rates, the impact of losses in jurisdictions that cannot be benefited and the impact of miscellaneous expense items that are not deductible for tax purposes.


Year Ended December 31, 2017 Compared to
Year Ended December 31, 2016
 
Total Revenues:
 
 
 
2017
 
2016
 
Change
United States
 
$
227,581

 
47.1
%
 
$
204,035

 
39.5
%
 
$
23,546

 
11.5
 %
Latin America
 
11,772

 
2.4
%
 
18,775

 
3.6
%
 
(7,003
)
 
(37.3
)%
Europe
 
43,179

 
8.9
%
 
41,062

 
8.0
%
 
2,117

 
5.2
 %
Middle East
 
169,964

 
35.1
%
 
213,613

 
41.4
%
 
(43,649
)
 
(20.4
)%
Africa
 
23,100

 
4.8
%
 
24,037

 
4.7
%
 
(937
)
 
(3.9
)%
Asia/Pacific
 
8,140

 
1.7
%
 
14,490

 
2.8
%
 
(6,350
)
 
(43.8
)%
Total
 
$
483,736

 
100.0
%
 
$
516,012

 
100.0
%
 
$
(32,276
)
 
(6.3
)%

The decrease in revenue for the twelve months ended December 31, 2017 compared to the same period in 2016 was primarily due to the decrease in the Middle East as a result of the closeout of projects in United Arab Emirates of $26,564 and Saudi Arabia of $6,167 and a decrease in activity of the Muscat International Airport project in Oman. In addition, Asia Pacific had a decrease of $6,350 primarily from a decrease in activity of large projects in Afghanistan and India. Latin America had a revenue decline primarily due to weaker economic conditions in Brazil. These reductions were partially offset by increases in the United States primarily in the Western region, were revenue increased approximately $16,759 due to the addition of new projects.


28


Gross Profit:

 
 
2017
 
2016
 
Change
 
 
 
 
 
 
% of
Revenue
 
 
 
 
 
% of
Revenue
 
 
 
 
United States
 
$
66,117

 
45.1
%
 
29.1
%
 
$
60,464

 
38.4
%
 
29.6
%
 
$
5,653

 
9.3
 %
Latin America
 
4,723

 
3.2
%
 
40.1
%
 
7,304

 
4.7
%
 
38.9
%
 
(2,581
)
 
(35.3
)%
Europe
 
13,524

 
9.2
%
 
31.3
%
 
13,465

 
8.6
%
 
32.8
%
 
59

 
0.4
 %
Middle East
 
48,221

 
32.8
%
 
28.4
%
 
60,079

 
38.3
%
 
28.1
%
 
(11,858
)
 
(19.7
)%
Africa
 
10,284

 
7.0
%
 
44.5
%
 
8,770

 
5.6
%
 
36.5
%
 
1,514

 
17.3
 %
Asia/Pacific
 
3,984

 
2.7
%
 
48.9
%
 
6,987

 
4.4
%
 
48.2
%
 
(3,003
)
 
(43.0
)%
Total
 
$
146,853

 
100.0
%
 
30.4
%
 
$
157,069

 
100.0
%
 
30.4
%
 
$
(10,216
)
 
(6.5
)%

The decrease in gross profit was primarily due to the winding down of major projects in the Middle East, Asia Pacific and Latin America regions. These decreases were partially offset by increases in gross profit in the United States related to new work in the Western Region.

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

SG&A expenses represented 31.3% and 33.1% of revenues in 2017 and 2016, respectively.

SG&A expenses decreased $19,496 from $170,682 in 2016 to $151,186 in 2017. The decrease was primarily due to decreases in the Middle East as a result of a $10,696 decrease in bad debt expense due to the large increase in reserves for certain accounts receivable in the Middle East during 2016 and a $3,663 decrease primarily due to non productive labor costs reduction related to the closeout of projects. In addition, there was a $10,336 decrease in Europe and a $4,207 decrease in Africa primarily related to a reduction in foreign currency translation expense. Partially offsetting these decreases were cost increases primarily due to expenses related to the Company’s profit improvement plan of approximately $5,019, increased severance costs of approximately $7,078 and restatement expenses of approximately $1,440.

 
Operating Profit (Loss):
 
 
 
2017
 
2016
 
Change
 
 
 
 
% of
Revenue
 
 
 
% of
Revenue
 
 
 
 
United States
 
$
23,191

 
10.2
 %
 
$
17,742

 
8.7
 %
 
$
5,449

 
30.7
 %
Latin America
 
(3,190
)
 
(27.1
)%
 
1,702

 
9.1
 %
 
(4,892
)
 

Europe
 
3,221

 
7.5
 %
 
(8,285
)
 
(20.2
)%
 
11,506

 

Middle East
 
21,096

 
12.4
 %
 
15,992

 
7.5
 %
 
5,104

 
31.9
 %
Africa
 
(752
)
 
(3.3
)%
 
(7,083
)
 
(29.5
)%
 
6,331

 
(89.4
)%
Asia/Pacific*
 
(1,378
)
 
(16.9
)%
 
1,097

 
7.6
 %
 
(2,475
)
 

Corporate
 
(42,744
)
 

 
(34,815
)
 

 
(7,929
)
 
22.8
 %
Total
 
$
(556
)
 
(0.1
)%
 
$
(13,650
)
 
(2.6
)%
 
$
13,094

 

*includes Hill's share of loss (profits) of equity method affiliates on the Consolidated Statements of Operations.

Operating loss decreased primarily due to an increase in operating profit in the United States as a result of increased revenues in the Western region from new work. The Middle East contributed to the decrease in the operating loss primarily from decreases in unapplied labor, bad debt and foreign currency translation expense. Europe also contributed to the decrease in operating loss due to a decrease in foreign currency translation expense. The decrease was partially offset by an increase in Corporate expenses primarily due to the profit improvement plan, restatement expenses and increased severance costs. Corporate expenses increased by $7,929, and represented 8.8% of total revenue in 2017 compared to 6.7% of total revenue in 2016.


29


Interest and related financing fees, net
 
Net interest and related financing fees increased $676 to $3,031 in 2017 as compared with $2,355 in 2016 due to the establishment of new credit facilities and long term financing after the Construction Claims Group sale.
 
Income Taxes
 
In 2017, income tax expense was $3,103 compared to $5,955 in 2016. The effective income tax rates for 2017 and 2016 were (86.5)%  and (37.2)%, respectively. The differences between the federal statutory rate and the effective tax rate are caused by several items including the difference between the U.S. federal statutory rates and the foreign tax rates, the impact of the Tax Cuts
and Jobs Act of 2017, the interaction of losses between continuing and discontinuing operation and other miscellaneous items.

In 2016, the Company’s effective tax rate differed from the U.S. federal statutory rate primarily as a result of the inability to record an income tax benefit related to the U.S. net operating loss and increases caused by various foreign withholding taxes .
 
Net Income (Loss) Attributable to Hill

Net income attributable to Hill International, Inc. for 2017 was $27,366, or $0.52 per diluted common share as compared to a 2016 loss of $33,812, or $0.65 per diluted common share. Net loss from continuing operations for 2017 was $6,690, or $0.13 per diluted share, compared to net loss from continuing operations of $21,960, or $0.43 per diluted share, in 2016.

Liquidity and Capital Resources
 
Our primary cash obligations are our payroll and our project subcontractors. Our primary source of cash is receipts from clients. We generally pay our employees semi-monthly in arrears and invoice our clients monthly in arrears. Our clients generally remit payment approximately two months, on average, after invoice date. This creates a lag between the time we pay our employees and the time we receive payment from our clients. We bill our clients for any subcontractors used and pay those subcontractors after receiving payment from our clients, so no such timing lag exists for the payments we make to subcontractors.
We utilize cash on hand and our revolving credit facilities to fund the working capital requirement caused by the lag discussed above and other operating needs. We believe our expected cash receipts from clients, together with current cash on hand and revolving credit facilities, are sufficient to support the reasonably anticipated cash needs of our operations over the next twelve months.

The Company believes that it has sufficient liquidity to support the reasonably anticipated cash needs of its operations over the next twelve months from the date of this filing. Concurrent with the 2017 sale of the Company’s claims business, management recognized the need to significantly reduce its selling, general and administrative costs given the reduced scale of the remaining business. Management developed and announced a Profit Improvement Plan (“PIP”) to address this need. Management recognized that the Company would incur costs during 2017 and 2018 to execute this plan, including consulting fees, severance and retention costs. The Company also experienced significantly higher costs in both years due to the financial restatement and in 2018 due to a performance bond being called. The combination of these events resulted in over $25 million of expenses in 2018 in excess of what management would consider typical. The operating loss and cash used in 2018 were primarily due to these expenses.

As of the date of these financial statements the PIP has been fully implemented and the associated expenses are substantially completed. The financial restatement was completed in 2018. With significantly reduced selling, general and administrative expenses already implemented, the financial restatement completed and the absence of expenses related to these items, as well as management’s expectation that performance bonds will not be called, management believes that cash provided by operations will be sufficient to meet its cash obligations over the next twelve months.

At December 31, 2018 , our primary sources of liquidity consisted of $18,711 cash and cash equivalents, of which $17,184 was on deposit in foreign locations, and $3,880 of available borrowing capacity under our various credit facilities. We also have 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 December 31, 2018 , we had approximately $68,946 of availability under these arrangements.

Sources of Additional Capital
 
A significant increase in our current backlog may require us to obtain additional financing. If additional financing is required in the future due to an increase in backlog or changes in strategic or operating plans, we cannot provide any assurance that any other sources of financing will be available, or if available, that the financing will be on terms acceptable to us.

30


 
Cash Flows
 
 
Years ended December 31,
 
 
2018
 
Change
 
2017 (1)
 
Change
 
2016 (1)
 
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
(25,897
)
 
$
(14,886
)
 
$
(11,011
)
 
$
(19,840
)
 
$
8,829

Net cash (used in) provided by investing activities
 
(3,072
)
 
(129,396
)
 
126,324

 
130,374

 
(4,050
)
Net cash provided by (used in) financing activities
 
21,427

 
137,245

 
(115,818
)
 
(113,210
)
 
(2,608
)
Effect of foreign exchange rate changes on cash
 
3,729

 
6,566

 
(2,837
)
 
(2,145
)
 
(692
)
Net (decrease) increase in cash,cash equivalents and restricted cash
 
$
(3,813
)
 
 
 
$
(3,342
)
 
 
 
$
1,479

(1) Net cash (used in)/provided by operating activities includes reclassification of the aggregated restricted cash balances under total current assets and total assets as a result of the adoption of ASU 2016-18, Restricted Cash, which addresses the classification and presentation of changes in restricted cash on the consolidated statement of cash flows.

Operating Activities
 
The decrease in cash from operations during 2018 was due primarily to payment of a performance bond as discussed in Section 3, “Legal Proceedings”, an increase in cash paid to vendors, an increase in taxes paid and a decrease in cash collected from clients, net of cash paid to billable employees and subcontractors.

The increase in cash paid to vendors was due primarily to a higher level of non-recurring costs in 2018 related to our profit improvement plan and our financial restatement. The increase in taxes paid resulted mostly from tax paid to Libya following an audit. This tax payment was largely offset by collection of a portion of an account receivable from Libya. See Item 8, “Financial Statements and Supplementary Data”, note 6 for further information on this arrangement. The decreases in cash collected from clients and cash paid to billable employees and subcontractors was due to a lower revenue level as discussed in “Results of Operations.”

Cash used by discontinued operations was $863 , $12,634 and $7,943 in 2018, 2017 and 2016, respectively.

Cash held in restricted accounts primarily as collateral for the issuance of performance and advance payment bonds, letters of credit and escrow remained relatively unchanged at December 31, 2018 and 2017 was $4,396 and $4,407 , respectively.

We manage our operating cash flows by managing the working capital accounts in total. The primary elements of our working capital are accounts receivable, prepaid and other current assets, accounts payable and deferred revenue. 
 
From year to year, the components of our working capital accounts may reflect significant changes. The changes are due primarily to the timing of cash receipts and payments with our working capital accounts combined with changes in our receivables and payables relative to the changes in our overall business. 

Investing Activities
 
During 2018, cash was used in investing activities for the purchase of fixed assets as well as the purchase of the final interests in Engineering S.A. in Brazil. Net cash provided by investing activities in 2017 was $126,324 as a result of the disposition of the discontinued operations during the second quarter of 2017 (see item 8, "Financial Statements and Supplementary Data," Note 5).
 
Financing Activities
 
Net cash provided by financing activities during 2018 was primarily from $10,609 of net borrowings on revolving loans and $11,720 of proceeds from stock issued due to the exercise of stock option during the year. Net cash used in financing activities during 2017 was primarily due to the $117,494 pay-off of our 2014 term loan, $25,940 in net payments against our revolving credit facilities and payments of $4,038 for fees associated with our 2017 Credit Facility. These payments were partially offset by $30,000 of proceeds from our new term loans.
 

31


New Accounting Pronouncements
 
For 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 hereof.
 
Quarterly Fluctuations
 
Our operating results vary from period to period as a result of the timing of projects and assignments. We do not believe that our business is seasonal.
 
Inflation
 
Although we are subject to fluctuations in the local currencies of the countries in which we operate, we do not believe that inflation will have a significant effect on our results of operations or our financial position.

Off-Balance Sheet Arrangements
 
The following table provides information with respect to off-balance sheet arrangements with domestic and foreign banks for the issuance of performance bonds, advance payment guarantees and other letters of credit that are scheduled to expire in 2019 and beyond. The total amount of these arrangements in the following table includes amounts issued in various foreign currencies and are based on the foreign currency exchange rates as of December 31, 2018 , where applicable.
 
 
 
Total (1)
 
2019
 
2020-2021
 
2022-2023
 
2024 and later
Performance bonds (2)
 
$
38,350

 
$
20,413

 
$
13,349

 
$
2,378

 
$
2,210

Advance payment guarantee (2)
 
13,499

 
5,572

 
2,855

 
5,072

 

Bid or tender bonds (3)
 
8,405

 
8,309

 
96

 

 

Letters of credit (4)
 
3,750

 
3,750

 

 

 

Other (5)
 
3,668

 
2,540

 
1,128

 

 

 
 
$
67,672

 
$
40,584

 
$
17,428

 
$
7,450

 
$
2,210

 
(1)
At December 31, 2018 , the Company had provided cash collateral amounting to $2,945 for certain of these items. That collateral is reflected in restricted cash on the consolidated balance sheet. See Note 15 to our consolidated financial statements for further information regarding these arrangements.
(2)
Represents guarantee of service performance bonds and advance payments through domestic and international banks required under certain client contracts.
(3)
Represents tender and bid bonds issued through international banks as part of the bidding process for new work to assure our client that we will enter into the service contract.
(4)
Comprised of an indemnity escrow required as part of the Construction Claims Group sale.
(5)
Includes a $1.0 rental bond for a tenant improvement obligation we will be required to fund as part of our arrangement with the sublessee for a portion of our space in Corporate Headquarters. The sublease agreement was executed during the year ended December 31, 2018 , but has not yet commenced.
 

32


Contractual Obligations
 
The following table reflects contractual debt obligations under our notes payable and credit facilities, fees paid on our off-balance sheet arrangements and minimum cash rental payments due for our operating lease obligations over the next five years and thereafter as of December 31, 2018 :
 
 
Total
 
2019
 
2020-2021
 
2022-2023
 
2024 and thereafter
Principal and repayment of notes payable and credit facilities (1)
 
$
47,951

 
$
3,364

 
$
1,438

 
$
42,921

 
$
228

Interest expense on notes payable and credit facilities (2) (5)
 
16,033

 
4,109

 
7,966

 
3,947

 
11

Fees paid on off-balance sheet arrangements (3) (5)
 
2,127

 
1,170

 
700

 
220

 
37

Operating lease obligations (4) (5)
 
26,476

 
5,755

 
8,552

 
5,337

 
6,832