EDGAR 10-K Filing

Company CIK: 1287808
Filing Year: 2021
Filename: 1287808_10-K_2021_0001287808-21-000008.json

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ITEM 1. BUSINESS
Item 1. Business
General
Hill International, Inc., a Delaware corporation organized in 2006, with more than 2,700 professionals in approximately 70 offices worldwide, provides project management, construction management and other consulting services primarily to the building, transportation, environmental, energy and industrial markets.
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 project and 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.
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, 2020 and 2019:
Revenue By Client Type
2020 2019
U.S. federal government $ 17,942 4.9 % $ 18,967 5.0 %
U.S. state, regional and local governments 118,845 32.2 % 124,504 33.1 %
Foreign governments 99,906 27.1 % 91,683 24.4 %
Private sector 131,831 35.8 % 141,283 37.5 %
Total $ 368,524 100.0 % $ 376,437 100.0 %
For the years ended December 31, 2020 and 2019, revenue from U.S. and foreign government contracts represented approximately 64.2% and 62.5% of our total revenue, respectively.
The following table sets forth the percentage of our revenue contributed by each of our five largest clients for the years ended December 31, 2020 and 2019:
2020 2019
Largest client 4.9 % 3.8 %
2nd largest client 3.8 % 3.6 %
3rd largest client 3.1 % 3.4 %
4th largest client 3.1 % 3.1 %
5th largest client 3.0 % 2.6 %
Top 5 largest clients 17.9 % 16.5 %
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.
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.
Contracts
The Company recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the Company expects to be entitled in exchange for such goods or services.
The price provisions of our client 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 - Revenue from Contracts with Clients 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 as a component of total revenue. Beginning with the year ended December 31, 2019, we excluded backlog from indefinite delivery/indefinite quantity ("ID/IQ") contracts in circumstances where the work has not yet been approved by the client. ID/IQ contracts require us to deliver an indefinite amount of service over a pre-determined period of time. Estimated future CFR from ID/IQ contracts is only included in our total backlog if the work has been approved starting in 2019. Management evaluated all backlog existing prior to 2019 for the purpose of reporting this pre-2019 backlog consistent with the methodology above. This resulted in a reduction to backlog of $46,584 at December 31, 2019 and a reduction in the 12-month backlog of $397 at December 31, 2019. 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.
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 CFR.
The following tables show our backlog by geographic region as of December 31, 2020 and 2019:
Total Backlog 12-Month Backlog
As of December 31, 2020
Americas $ 276,752 41.6 % $ 105,721 45.2 %
Middle East/Asia/Pacific 160,211 24.0 % 66,407 28.3 %
Europe 105,478 15.8 % 37,062 15.8 %
Africa 124,273 18.6 % 25,187 10.7 %
Total $ 666,714 100.0 % $ 234,377 100.0 %
Total Backlog 12-Month Backlog
As of December 31, 2019
Americas $ 340,972 44.6 % 108,174 43.9 %
Middle East/Asia/Pacific 247,368 32.3 % 80,409 32.7 %
Europe 90,134 11.8 % 35,000 14.2 %
Africa 86,203 11.3 % 22,574 9.2 %
Total $ 764,677 100.0 % $ 246,157 100.0 %
At December 31, 2020, our backlog was $666,714, compared to $764,677 at December 31, 2019, which includes the re-evaluation and write down of the realizable value of a number of contracts booked before January 1, 2019, some of which were a result of the impacts of COVID-19. Additionally, we removed approximately $46 million of backlog from a project as a result of entering into a joint venture and sharing a portion of the work with our partner. This partnership has improved our margins on the project and enhanced our probability of being awarded future opportunities on this multi-phase project. The December 31, 2020 decrease in backlog from the prior year is primarily due to delays in new projects awarded as a result of COVID-19. Of the total backlog at December 31, 2020, we estimate that 35.2% will be recognized as CFR over the next twelve months based on the backlog table above.
The amount of our new bookings, before any cancellations or other reductions, was $360,900 and equates to a book-to-burn ratio of 121.7% for the year ended December 31, 2020. Our book-to-burn ratio, a non-GAAP measure, is determined by taking our new CFR bookings and dividing it by CFR for the applicable period. This metric allows management to monitor the Company's business development efforts to ensure we grow our backlog and our business over time, and management believes that this measure is useful to investors for the same reason.
Our remaining performance obligations represent the aggregate transaction price of executed contracts for projects partially completed or not yet started as of the end of the reporting period. The difference between the remaining performance obligations of $101,800, as described further in Note 4 - Revenue from Contracts with Clients in our consolidated financial statements, and the backlog of $666,714 at December 31, 2020 is due to the backlog including the full value of client contracts billed on a T&M basis, which are not included as part of the remaining performance obligation. Such contracts are excluded from the remaining performance obligation because they are not fixed price contracts and the consideration expected under such contracts is variable as it is based upon hours and costs incurred, which results in the counter-party only being obligated to the Company for services provided through the completion or termination date.
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 2020, some of our largest project management competitors included: AECOM, ARCADIS N.V., Jacobs Engineering Group, Inc., WSP, 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 59 Chief Executive Officer
William H. Dengler, Jr. 54 Executive Vice President and Chief Administrative Officer
Todd Weintraub 57 Chief Financial Officer
Abdo E. Kardous 61 Regional President, Middle East
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.
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.
Employees
At December 31, 2020, we had (in ones) 2,704 professionals. Of these professionals, 2,603 worked in our Project Management Group and 101 worked in our Corporate offices. Our personnel included 2,299 full-time employees, 138 part-time employees, 216 independent external contractors and 50 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 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.
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.

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ITEM 1A. RISK FACTORS
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.
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.
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.
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. A portion of our backlog contains estimated revenue from ID/IQ contracts, in which, we only include backlog for work that has been approved by the client. 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.
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 decision made in the British referendum of June 23, 2016 to leave the European Union, commonly referred to as "Brexit," has led to volatility in the financial markets of the United Kingdom and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such markets. On January 31, 2020, the United Kingdom ceased to be a member state of the European Union. As of that date, the United Kingdom entered a transitional period with the European Union, which is expected to continue through December 31, 2020. During this transitional period, the United Kingdom retains access to the E.U. single market and customs union and the United Kingdom and European Union are expected to attempt to negotiate various aspects of their future relationship following the transitional period, including a free trade deal.
The long-term effects of Brexit will depend on the agreements or arrangements between the United Kingdom and the European Union, and the extent to which the United Kingdom retains access to E.U. markets both during and after the transitional period. The longer term economic, legal, political and social framework to be put in place between the United Kingdom and the European Union is unclear at this stage and is likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, Brexit caused significant volatility in global stock markets and currency exchange fluctuations. To the extent our accounts receivable are denominated in British Pounds, we may be subject to increased risks related to currency exchange rates.
In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which E.U. laws to replace or replicate. Brexit could also have a destabilizing effect if other E.U. member states were to consider the option of leaving the European Union. For these reasons, the United Kingdom's exit from the European Union could have adverse consequences on our business, financial condition and results of operations.
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 clients.
The coronavirus outbreak could impact our international operations and results of operations.
Our business and results of operations could be materially and adversely affected by the effects of a widespread outbreak of a contagious disease, including the recent outbreak of the respiratory illness caused by a coronavirus strain first identified in Wuhan, Hubei Province, China, or any other outbreak of contagious diseases, and other adverse public health developments. These effects could include disruptions or restrictions on our employees’ and subcontractors’ ability to travel, as well as temporary closures of the facilities and areas where we perform our work. Any disruption of current projects, including effects on the supply chain on which our projects depend, could adversely impact our business and results of operations which could also lead to a loss of clients, as well as competitive or business harm. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our services, including the award of future projects, and could impact our results of operations.
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, 2020.
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.
Future sales of our common and preferred stock may depress the price of our common stock.
As of March 2, 2021, there were 56,481 shares of our common stock outstanding. An additional 1,563 shares of our common stock may be issued upon the exercise of options held by employees, management and directors and an additional 2,452 shares of our common stock may be issued upon the vesting of restricted and deferred stock units. 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 4,015 shares of our common stock without stockholder approval. Future issuances or sales of our preferred stock or 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.
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
Our executive office is an operating lease 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. We have approximately 70 operating leases for office facilities throughout the world, including our executive offices.
Our principal worldwide office locations and the geographic regions in which we reflect their operations are as follows:
Americas Europe Middle East/Asia/Pacific
Austin, TX Amsterdam, Netherlands Abu Dhabi, UAE
Boston, MA Athens, Greece Baghdad, Iraq
Cleveland, OH Barcelona, Spain Doha, Qatar
Columbus, OH Belgrade, Serbia Dubai, UAE
East Hartford, CT Bucharest, Romania Jeddah, Saudi Arabia
Fords, NJ Frankfurt, Germany Kabul, Afghanistan
Houston, TX Geneva, Switzerland Manama, Bahrain
Irvine, CA Istanbul, Turkey Muscat, Oman
Irving, TX Lisbon, Portugal Riyadh, Saudi Arabia
Jacksonville, FL Madrid, Spain Beijing, China
Miami, FL Nicosia, Cyprus Gurgaon, India
New York, NY Nur-Sultan, Kazakhstan Hong Kong, China
New Orleans, LA Pristina, Kosovo Islamabad, Pakistan
Oakland, CA Rome, Italy Mumbai, India
Ontario, CA Sarajevo Bosnia and Herzegovina Singapore
Orlando, FL Skopje, North Macedonia
Philadelphia, PA (Headquarters) Tbilisi, Georgia Africa
Phoenix, AZ Tirana, Albania Algiers, Algeria
Pittsburgh, PA Warsaw, Poland Cairo, Egypt
Plantation, FL Wroclaw, Poland Casablanca, Morocco
San Diego, CA Tripoli, Libya
San Francisco, CA
San Jose, CA
Seattle, WA
Spokane, WA
Toledo, OH
Uniontown, PA
Washington, DC
Mexico City, Mexico

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ITEM 3. LEGAL PROCEEDINGS
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.
Knowles Limited (“Knowles”), a subsidiary of the Company, is a party to an arbitration proceeding instituted on July 8, 2014 in which Knowles claimed that it was entitled to payment for services rendered to Celtic Bioenergy Limited (“Celtic”). The arbitrator decided in favor of Knowles. The arbitrator’s award was appealed by Celtic to the U.K. High Court of Justice, Queen’s Bench Division, Technology and Construction Court (“Court”). On March 16, 2017, the Court (1) determined that certain relevant facts had been deliberately withheld from the arbitrator by an employee of Knowles and (2) remitted the challenged parts of the arbitrator’s award back to the arbitrator to consider the award in possession of the full facts. In May 2019, Celtic issued a claim against Knowles for negligent application and a hearing was held in December 2019. The arbitration was concluded in August 2020 in Knowles' favor. Celtic has appealed the arbitrator's decision.
Loss on Performance Bond
The Company is 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.
On February 8, 2018, the Company received notice from the First Abu Dhabi Bank ("FAB", formerly known as the National Bank of Abu Dhabi) that Public Authority of Housing Welfare of Kuwait submitted a claim for payment on a Performance Guarantee issued by the Company for approximately $7,938 for a project located in Kuwait. FAB subsequently issued, on behalf of the Company, such payment on February 15, 2018. The Company is taking legal action to recover the full Performance Guarantee amount. On September 20, 2018 the Kuwait First Instance Court dismissed the Company's case. As a result, the Company fully reserved the performance guarantee payment above in the first quarter of 2018 and it is presented as "Loss on Performance Bond" on the consolidated statements of operations. The Company filed an appeal before the Kuwait Court of Appeals seeking referral of the matter to a panel of experts for determination. On April 21, 2019, the Court of Appeals ruled to refer the matter to the Kuwait Experts Department. Hearings with the Kuwait Experts Department were held during July and September 2019. A final report from the panel of experts was issued by the panel of experts in October 2019 for the held hearings on January 7, 2020 and February 4, 2020 and reserved the case for judgement to be issued. We filed a pleading before the Kuwait Cassation Court in August 2020 and we are awaiting a decision.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the NYSE under the trading symbol “HIL.”
Stockholders
As of March 2, 2021, there were approximately 67 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. As of March 2, 2021, there were approximately 2,822 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.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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, the following 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 facilities management and related consulting. These services are primarily delivered on a “cost plus” or “time and materials” ("T&M") 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 most payroll and benefits, except for paid time-off, which is recorded in selling, general and administrative expenses ("SG&A"). We also provide services under fixed price contracts and T&M contracts with a cap.
Our revenue consists of two components: CFR and reimbursable expenses. The professionals we deploy are occasionally subcontractors. We generally bill the actual cost of these subcontractors and recognize this cost as both revenue (reimbursable expenses) 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 the costs for subcontractors on which we generally pass through 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.
SG&A expenses 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.
The Company operates in a single reporting segment, known as the Project Management Group which provides fee-based project, construction and facilities management services to our clients. 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.
Impact of COVID-19 on our Business
In December 2019, COVID-19 was identified in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic as a result of the further spread of the virus into all regions of the world, including those regions where our primary operations occur.
We instituted a work-from-home policy for all offices and employees globally in late March 2020, except for field-based employees who normally work on-site at our client’s facilities. These field-based employees are complying with our respective clients’ policies. The majority of our field employees are located in the regions where they deliver their services, so travel restrictions enacted by various government authorities did not impair their ability to continue to perform services for our clients. Employees have been returning to their assigned offices, on a modified basis, as their city, state and country reopens, consistent with the applicable requirements of local law.
Most of the projects to which we provide services have been classified as essential services by the relevant governmental authority and as such have continued despite restrictions on the operation of "non-essential" businesses by certain governmental authorities. The majority of our billable employees have continued to provide billable services to our clients, either on-site or remotely at the same or at a slightly reduced volume as in effect prior to the spread of COVID-19. We estimate that COVID-19 resulted in loss of CFR of approximately $25,000 for the twelve months ended December 31, 2020, inclusive of delayed projects awards and cancellations brought on by the virus.
Nearly all our employees had company laptop computers and the ability to work remotely prior to the institution of our work-at-home policy. The work-at-home policy did not have a significant impact on our employees’ ability to perform their job requirements. Our internal control structure does not generally require physical access to our office locations, and has not to date and is not expected in the future to be adversely impacted by the spread of COVID-19 and the corresponding response by certain governmental authorities. Processes that require physical access to our offices, such as receiving mail (including collections) and processing and mailing manual checks, are being performed by designated individuals at a reduced frequency while certain of our offices remain closed.
The main impacts on our business observed to date other than those discussed above are delays in the procurement processes of a number of our current and potential clients and a temporary slowing of certain collections. We expect these delays in the procurement process to adversely impact the timing of our new bookings, resulting in lower bookings, CFR and backlog for the duration of the economic slowdown caused by the pandemic.
We also experienced a slightly lower than normal amount of collections during the latter part of March. Collections returned to a more normal level during the second quarter and remained at a more normal level through the remainder of the year. We had unrestricted cash of $34,229 and available borrowing capacity on our credit facilities totaling $11,711 at December 31, 2020.
Management implemented various actions and policies that resulted in approximately $11,000 in cost reductions to partially offset the expected reduction in CFR. This is higher than the $10,000 estimated previously due to the continuation of cost reductions as COVID-19 has continued to impact the business beyond the time initially contemplated. We expect costs in 2021 to increase modestly in line with an anticipated rebound in activity, as the effects of the COVID-19 pandemic subside and the Company's activity increases. The Company will continue to manage costs and its association with CFR relative to the evolving effects of COVID-19.
The full extent and duration of the impact of COVID-19 on our operations and financial performance is currently unknown, and depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets on a macro-scale and any new information that may emerge concerning the severity of the virus, its spread to other regions and the actions to contain the virus or treat its impact, among others.
We will continue to evaluate the potential short-term and long-term implications of COVID-19 on our consolidated financial statements and operations. We believe that the lower backlog reflected in the financial statements at December 31, 2020 was primarily due to the effects of the COVID-19 pandemic. The potential additional future impacts to our consolidated financial statements of operations include, but are not limited to: decreased CFR, lower gross and operating margins, impairment of goodwill and indefinite-lived intangible assets and fair value and collectability of receivables.
Any of these outcomes could have a material adverse impact on our business, financial condition, results of operations and cash flows. Management currently believes that it has adequate liquidity and business plans to continue to operate the business and mitigate the risks associated with COVID-19 for at least the next 12 months from the date of this report.
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, areas that management considers critical 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 T&M arrangements, contract fees are based upon time and materials incurred. The contracts may be structured as basic T&M, 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 a margin 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 contractual terms. Under cost plus a margin contracts, we charge our clients for our costs, plus a fixed fee or rate.
Under T&M 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.
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 will 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, 2020 and 2019, the allowance for doubtful accounts was $53,450 and $59,131, respectively. The allowance for doubtful accounts balance included approximately $33,242 and $32,864 related to our receivables in Libya at December 31, 2020 and 2019, respectively.
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.
2020 Business Overview
Consolidated Results
(In thousands)
Years Ended December 31,
2020 2019
Income Statement Data:
Consulting fee revenue $ 296,615 $ 308,620
Reimbursable expenses 71,909 67,817
Total revenue 368,524 376,437
Direct expenses 249,173 249,587
Gross profit 119,351 126,850
Selling, general and administrative expenses 109,215 109,746
Foreign currency exchange loss 2,923 1,159
Plus: Share of profit of equity method affiliates 3,286 2,601
Operating profit 10,499 18,546
Less: Interest and related financing fees, net 5,224 5,795
Plus: Other (loss) income, net (5,711) 394
(Loss) income before income taxes (436) 13,145
Income tax expense (benefit) 7,134 (1,109)
Net (loss) income (7,570) 14,254
Less: net income - noncontrolling interests 612 170
Net (loss) income attributable to Hill International, Inc. $ (8,182) $ 14,084
Results of Operations
Year Ended December 31, 2020 Compared to
Year Ended December 31, 2019
Total Revenue:
2020 2019 Change
Americas $ 192,777 52.4 % $ 200,142 53.1 % $ (7,365) (3.7) %
Middle East/Asia/Pacific 92,639 25.1 % 104,927 27.9 % (12,288) (11.7) %
Europe 53,819 14.6 % 43,488 11.6 % 10,331 23.8 %
Africa 29,289 7.9 % 27,880 7.4 % 1,409 5.1 %
Total $ 368,524 100.0 % $ 376,437 100.0 % $ (7,913) (2.1) %
Consulting Fee Revenue:
2020 2019 Change
Americas $ 137,247 46.2 % $ 140,992 45.7 % $ (3,745) (2.7) %
Middle East/Asia/Pacific 89,037 30.0 % 100,751 32.6 % (11,714) (11.6) %
Europe 43,769 14.8 % 41,305 13.4 % 2,464 6.0 %
Africa 26,562 9.0 % 25,572 8.3 % 990 3.9 %
Total $ 296,615 100.0 % $ 308,620 100.0 % $ (12,005) (3.9) %
Total revenue decreased approximately $7,913 for the twelve months ended December 31, 2020 when compared to the same time period in the prior year. CFR was $296,615 and $308,620 of the total revenue for the twelve months ended December 31, 2020 and 2019, respectively, which was approximately 80.5% and 82.0% of total revenues, respectively.
The decrease in total revenue and the corresponding decrease in CFR for the twelve months ended December 31, 2020 compared to the same period in 2019 was primarily due to delayed project starts and project suspensions due to the COVID-19 pandemic.
Gross Profit:
2020 2019 Change
% of CFR % of CFR
Americas $ 61,228 51.3 % 44.6 % $ 60,980 48.1 % 43.3 % $ 248 0.4 %
Middle East/Asia/Pacific 28,553 23.9 % 32.1 % 38,847 30.6 % 38.6 % (10,294) (26.5) %
Europe 16,795 14.1 % 38.4 % 15,928 12.6 % 38.6 % 867 5.4 %
Africa 12,775 10.7 % 48.1 % 11,095 8.7 % 43.4 % 1,680 15.1 %
Total $ 119,351 100.0 % 40.2 % $ 126,850 100.0 % 41.1 % $ (7,499) (5.9) %
The change in gross margin as a percentage of CFR for the twelve months ended December 31, 2020 compared to the same period in 2019 was primarily due to the following:
Americas:
The increase in gross margin as a percentage of CFR in the region is primarily due to a $1,700 decrease in direct benefit expenses as a result of the suspension of the employers 401(k) match during the second half of 2020. This match has been reinstated for 2021.
Middle East/Asia/Pacific:
The decrease in gross margin as a percentage of CFR in the region is primarily due to work on a large project in Qatar which started during the second half of 2019 with lower than average margin, an increase in expense related to the liquidation of a bond and a reduction in the revenue of an ongoing project related to updated cost projections. A settlement on a project in Kuwait, which terminated during 2020, also contributed to the decrease in gross margin.
Africa:
The increase in gross margin as a percentage of CFR in the region is primarily due to receiving a $1,200 credit from one of our partners.
Selling, General and Administrative Expenses:
Our total selling, general and administrative expenses ("SG&A") was approximately the same amount for the twelve months ended December 31, 2020 and 2019.
During 2020, labor expenses were reduced by approximately $900 and travel expenses were reduced by approximately $2,800, as a result of the COVID-19 stay at home orders issued throughout the world. In addition, legal expenses were lower in 2020 by approximately $2,200 primarily as a result of a settlement and return of previously incurred legal expenses, professional fees were reduced by approximately $1,800 due to lower fees being charged and bad debt expense was reduced by $2,000 as a result of payments received on accounts receivables previously reserved. Offsetting these reductions were a $7,124 net benefit in 2019 from the collection of a fully-reserved receivable and a $1,600 of additional depreciation charge for the write-off of leasehold improvements related to the Company subletting office space in Philadelphia to a third party during the first quarter of 2020, an approximate $350 increase in computer equipment and software costs primarily related to remote working and increases in other indirect expenses.
During 2019, we received a payment of more than $9,400, which netted to $7,124 after payments to subcontractors and other costs, against the approximately $42,000 outstanding accounts receivable that we had been owed from the Organization for the Development of Administrative Centres ("ODAC"), an agency of the Libyan national government, which we had previously fully reserved. Upon receiving payment, the reserve was reversed in the amount received, which decreased the bad debt expense for 2019.
SG&A expenses represented approximately 36.8% and 35.6% of CFR for the twelve months ended December 31, 2020 and 2019, respectively.
Foreign Currency Exchange Loss
Foreign currency exchange losses were approximately $1,800 greater for the twelve months ended December 31, 2020 compared to the same period in 2019. The currency exchange losses were primarily caused by an 18% weakening of the Brazilian Real against the Euro prior to declaring bankruptcy of our Brazilian subsidiary and a 12% strengthening of the Egyptian pound against the Euro in 2019 compared to a 4% weakening during the same period in 2020.
Interest and related financing fees, net
Interest and related financing fees, net, include interest expense of $5,357, net of $133 in interest income, and interest expense of $6,082, net of $287 in interest income for the years ended December 31, 2020 and 2019, respectively, which decreased as a result of higher weighted-average interest rates billed to us on our secured credit facilities with Société Générale throughout the year ended December 31, 2019.
Income Taxes
The effective income tax rates for 2020, and 2019 were (1636.2)% and (8.4)% respectively. The Company’s effective tax rate differs from the U.S. federal statutory rate, for the year ended December 31, 2020, primarily due to additional uncertain tax position accruals, as well as the inability to recognize any tax benefit for losses in certain jurisdictions, particularly Brazil.
The Company’s effective tax rate for the year ended December 31, 2019 differs from the U.S. federal statutory rate primarily due to benefits recognized from provision to return adjustments and the reversal of an outstanding tax accrual related to the Claims Construction Group sale. This is partially offset by additional uncertain tax position accruals, as well as additional increases in our valuation allowances.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC 740, Income Taxes. We consider both positive and negative evidence. In making this determination, management assesses all of the evidence available at the time including recent earnings, internally-prepared income projections, and historical financial performance.
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 three 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.
At December 31, 2020 and 2019, our primary sources of liquidity consisted of $34,229 and $15,915 in cash and cash equivalents, respectively, of which $28,842 and $15,260 was on deposit in foreign locations, respectively, and $11,711 and $14,735 of available borrowing capacity under our various credit facilities, respectively. 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, 2020 and 2019, we had approximately $52,236 and $50,779 of availability under these arrangements. Our sources of liquidity under arrangements with foreign banks are available for repatriation as deemed necessary by us with some restrictions and tax implications.
We believe that we have sufficient liquidity to support the reasonably anticipated cash needs of our operations over the next twelve months from the date of this filing.
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.
Cash Flows
Years ended December 31,
2020 2019 Change
Net cash provided by operating activities $ 12,278 $ 9,979 $ 2,299
Net cash used in investing activities (2,893) (3,936) 1,043
Net cash provided by (used in) financing activities 6,515 (4,931) 11,446
Effect of foreign exchange rate changes on cash 540 763 (223)
Deconsolidated cash 9 - 9
Net increase in cash, cash equivalents and restricted cash $ 16,431 $ 1,875 $ 14,556
Operating Activities
The increase in cash from operations during 2020 was primarily due to increased collection activity of our outstanding accounts receivable balances, the deferral of payroll taxes permitted under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the suspension of the 401(k) match by the Company for most of the year and the deferral of certain rent payments.
Cash held in restricted accounts is primarily collateral for the issuance of performance and advance payment bonds, letters of credit and escrow and was $7,184 and $9,067 at December 31, 2020 and 2019, respectively. The decrease is primarily due to the release of cash collateral and reduction of certain performance bonds.
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 primarily due 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 2020 and 2019, cash was used in investing activities primarily for the purchase of fixed assets. In 2020, cash was also used to purchase an engineering license in New York. Fixed asset purchases in 2019 include leasehold improvements at our Philadelphia office to consolidate space and sublease our unused floor.
Financing Activities
Net cash provided by financing activities during 2020 was from net borrowings on revolving debt of $5,800 and $1,300 of term loans. Net cash used in financing activities during 2019 was due to the net pay-downs on revolving debt of $4,065 and term loans of $1,060.
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, "Financial Statements and Supplementary Data" 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.
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 2021 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, 2020, where applicable.
Total (1)
2021 2022-2023 2024-2025 2026 and later
Performance bonds (2)(4)
$ 46,503 $ 32,914 $ 6,628 $ 3,791 $ 3,170
Advance payment guarantee (2)
16,475 4,110 6,905 3,329 2,131
Bid or tender bonds (3)
1,955 1,862 93 - -
Other (4)
2,449 2,249 200 - -
$ 67,382 $ 41,135 $ 13,826 $ 7,120 $ 5,301
(1)At December 31, 2020, the Company had provided cash collateral amounting to $7,184 for certain of these items. That collateral is reflected in restricted cash on the Company's consolidated balance sheets. See Note 14 - Commitments and Contingencies 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)Includes off-balance sheet arrangements with open-ended expiration dates.
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, 2020:
Total 2021 2022-2023 2024-2025 2026 and thereafter
Principal and repayment of notes payable and credit facilities (1)
$ 49,281 $ 955 $ 47,659 $ 579 $ 88
Interest expense on notes payable and credit facilities (2) (5)
8,127 4,092 4,014 19 2
Fees paid on off-balance sheet arrangements (3) (5)
2,224 942 886 351 45
Operating lease obligations (4) (5)
21,598 5,772 8,170 4,698 2,958
Finance lease obligations (4) (5)
265 75 150 40 -
$ 81,495 $ 11,836 $ 60,879 $ 5,687 $ 3,093
(1) Reduced by the amortization of deferred financing costs related to our term loan debt. Balances due partially include amounts payable in various foreign currencies and are reflected based on foreign currency exchange rates as of December 31, 2020, where applicable.
(2)Estimated using the weighted average effective interest rates as of December 31, 2020 on our notes payable and credit facilities. Includes the amortization of deferred financing costs related to our term loan and revolving credit facilities.
(3)Fees paid on our off-balance sheet arrangements are included in interest and related financing fees, net, in our consolidated statements of operations.
(4)Represents future minimum rental commitments under non-cancelable lease terms. Amounts exclude contingent rental payments, where applicable, that may be payable based on lease provisions where annual rent increases are based on certain economic indexes, among other items. We expect to fund these commitments with existing cash and cash flow from operations.
(5)Amounts presented are partially payable in various foreign currencies and are based on the foreign currency rates at December 31, 2020.
The liability for unrecognized tax benefits is not included in the table above due to the subjective nature of the costs and timing of anticipated payments.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Hill International, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Hill International, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 16, 2021 expressed an adverse opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Estimates-at-Completion
As described further in Note 4 to the financial statements, the Company generally recognizes revenue over a period of time as control transfers to a customer, based on the extent of progress towards satisfaction of the related performance obligation. The selection of the method used to measure progress requires judgment and is dependent on the contract type selected by the customer during contract negotiation and the nature of the services and solutions to be provided. For performance obligations requiring the delivery of a service for a fixed price, the Company uses the ratio of actual costs incurred to total estimated costs, provided that costs incurred (an input model) represents a reasonable measure of progress toward the satisfaction of a performance obligation, in order to estimate the portion of total transaction price earned. We identified the initial development and subsequent updates to estimates-at-completion as a critical audit matter.
The principal considerations for our determination that the development and updating of estimates-at-completion in recognizing revenue is a critical audit matter are the significant management judgments involved in the initial creation and subsequent updates to the Company’s estimates-at-completion and related profit recognized, which required subjective management and auditor judgment in the development and execution of such estimates. Inputs and assumptions requiring significant management judgment included anticipated direct labor, subcontract labor, and other direct costs required to deliver on unfinished performance obligations.
Our audit procedures related to this matter included the following, among others:
•We evaluated the design and tested the operating effectiveness of controls relating to the development of initial estimates-to-completion and the ongoing updating and monitoring of estimates specific to the estimates-at-completion.
•We tested management’s process for developing, revising and applying estimates-at-completion to a sample of contracts. Our testing included evaluating key inputs and assumptions by comparing the estimates to underlying supporting documentation or other corroborating evidence that supports estimated costs. We interviewed project managers of the Company to evaluate progress to date and discuss factors impacting the estimated hours to complete the project.
•To assess the Company’s ability to develop reliable estimates, we performed the following analytical analysis:
o We performed analytical procedures of gross margin fluctuations on a contract by contract basis to
corroborate cumulative catch-up adjustments.
o We performed a look-back analysis on a contract by contract basis comparing actual costs incurred during the
year to prior year estimated costs.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2019.
Philadelphia, Pennsylvania
March 16, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Hill International, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Hill International, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weaknesses described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control - Integrated Framework issued by COSO.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment.
•Revenue Recognition - the Company failed to:
o Consistently ensure there were effective and documented review controls over the set-up and monitoring of
its estimates at completion calculations for long-term fixed fee contracts;
o Design controls to ensure the proper set-up of contract information in the system and over the review and
approval of manual billings. This contract information and manual billing is used in the revenue recognition
process
•Vendor Approval - The Company did not properly design policies, procedures and controls to ensure that vendors were properly reviewed, approved and set-up within the system.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020. The material weaknesses identified above were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and this report does not affect our report dated March 16, 2021 which expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 16, 2021
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
2020 2019
Assets
Cash and cash equivalents $ 34,229 $ 15,915
Cash - restricted 3,752 4,666
Accounts receivable, net 98,186 103,892
Accounts receivable - affiliates, net 23,285 18,776
Current portion of retainage receivable 11,775 16,459
Prepaid expenses and other current assets 9,378 9,340
Income taxes receivable 2,298 2,256
Total current assets 182,903 171,304
Property and equipment, net 9,443 11,895
Cash - restricted, net of current portion 3,432 4,401
Operating lease right-of-use assets 13,116 17,451
Financing lease right-of-use assets 288 -
Retainage receivable 6,044 5,695
Acquired intangibles, net 2,253 232
Goodwill 46,397 48,024
Investments 2,805 1,711
Deferred income tax assets 3,698 3,800
Other assets 1,620 5,038
Total assets $ 271,999 $ 269,551
Liabilities and Stockholders’ Equity
Current maturities of notes payable and long-term debt $ 987 $ 1,792
Accounts payable and accrued expenses 67,797 65,172
Income taxes payable 2,219 3,152
Current portion of deferred revenue 3,305 10,773
Current portion of operating lease liabilities 4,797 5,736
Current portion of financing lease liabilities 70 -
Other current liabilities 5,796 4,876
Total current liabilities 84,971 91,501
Notes payable and long-term debt, net of current maturities 48,294 41,150
Retainage payable 600 1,551
Deferred income tax liabilities 1,210 419
Deferred revenue 7,488 3,041
Non-current operating lease liabilities 13,184 17,030
Non-current financing lease liabilities 186 -
Other liabilities 6,778 4,631
Total liabilities 162,711 159,323
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 1,000 shares authorized, none issued
- -
Common stock, $0.0001 par value; 100,000 shares authorized, 62,920 and 62,708 shares issued at December 31, 2020 and 2019, respectively 6 6
Additional paid-in capital 215,010 212,759
Accumulated deficit (79,542) (71,360)
Accumulated other comprehensive income (loss) 1,318 (3,817)
Treasury stock of 6,807 and 6,546 at December 31, 2020 and 2019, respectively (29,056) (28,231)
Hill International, Inc. share of equity 107,736 109,357
Noncontrolling interests 1,552 871
Total equity 109,288 110,228
Total liabilities and stockholders’ equity $ 271,999 $ 269,551
See accompanying notes to consolidated financial statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
2020 2019
Consulting fee revenue $ 296,615 $ 308,620
Reimbursable expenses 71,909 67,817
Total revenue 368,524 376,437
Direct expenses 249,173 249,587
Gross profit 119,351 126,850
Selling, general and administrative expenses 109,215 109,746
Foreign currency exchange loss 2,923 1,159
Plus: Share of profit of equity method affiliates 3,286 2,601
Operating profit 10,499 18,546
Less: Interest and related financing fees, net 5,224 5,795
Plus: Other (loss) income, net (5,711) 394
(Loss) income before income taxes (436) 13,145
Income tax expense (benefit) 7,134 (1,109)
Net (loss) income (7,570) 14,254
Less: net income - noncontrolling interests 612 170
Net (loss) income attributable to Hill International, Inc. $ (8,182) $ 14,084
Basic (loss) income per common share - Hill International, Inc. $ (0.14) $ 0.25
Basic weighted average common shares outstanding 56,603 56,280
Diluted (loss) income per common share - Hill International, Inc. $ (0.14) $ 0.25
Diluted weighted average common shares outstanding 56,603 56,280
See accompanying notes to consolidated financial statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Years Ended December 31,
2020 2019
Net (loss) income $ (7,570) $ 14,254
Foreign currency translation adjustments, net of tax 5,204 (1,146)
Comprehensive (loss) income (2,366) 13,108
Less: Comprehensive income attributable to noncontrolling interests 681 266
Comprehensive (loss) income attributable to Hill International, Inc. $ (3,047) $ 12,842
See accompanying notes to consolidated financial statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2020 and 2019
(In thousands)
Common Stock Additional
Paid-in Retained
Earnings Accumulated Other
Comprehensive Treasury Stock Hill Share of Stockholders’ Equity Non-controlling Interests Total
Stockholders’
Equity
Shares Amount Capital (Deficit) Income (Loss) Shares Amount
Balance - December 31, 2018 62,181 $ 6 $ 210,084 $ (85,444) $ (2,575) 6,546 $ (28,231) $ 93,840 $ 605 $ 94,445
Net earnings - - - 14,084 - - - 14,084 170 14,254
Other comprehensive earnings (loss) - - - - (1,242) - - (1,242) 96 (1,146)
Shares issued to Board of Directors 128 - - - - - - - - -
Share-based compensation expense 322 - 2,514 - - - - 2,514 - 2,514
Shares issued under employee stock purchase plan 77 - 161 - - - - 161 - 161
Balance - December 31, 2019 62,708 6 212,759 (71,360) (3,817) 6,546 (28,231) 109,357 871 110,228
Net (loss) earnings - - - (8,182) - - - (8,182) 612 (7,570)
Other comprehensive earnings - - - - 5,135 - - 5,135 69 5,204
Shares issued to Board of Directors 277 - - - - - - - - -
Share-based compensation expense - - 2,006 - - - - 2,006 - 2,006
Shares issued under employee stock purchase plan 196 - 245 - - - - 245 - 245
Transfer of shares pledged as collateral (1)
(261) - - - - 261 (825) (825) - (825)
Balance - December 31, 2020 62,920 $ 6 $ 215,010 $ (79,542) $ 1,318 6,807 $ (29,056) $ 107,736 $ 1,552 $ 109,288
(1) See Note 12 - Stockholders' Equity for more detail.
See accompanying notes to consolidated financial statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2020 2019
Cash flows from operating activities:
Net (loss) income $ (7,570) $ 14,254
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 4,038 3,824
Recovery of bad debts (1,940) (11,360)
Amortization of deferred loan fees 699 715
Deferred tax expense 782 751
Share-based compensation 2,006 2,514
Lease right-of use assets 4,135 3,899
Loss on liquidation of subsidiary 5,501 -
Foreign currency remeasurement losses (gains) 2,923 (905)
Changes in operating assets and liabilities:
Accounts receivable 13,463 27,315
Accounts receivable - affiliates (4,509) 485
Prepaid expenses and other current assets 1,149 (3,792)
Income taxes receivable (419) (1,504)
Retainage receivable (337) 200
Other assets (4,693) (164)
Accounts payable and accrued expenses (245) (14,934)
Deferred payroll tax payments 3,623 -
Income taxes payable (952) (5,703)
Deferred revenue (3,102) (2,554)
Lease liabilities (4,622) (4,630)
Other current liabilities 1,168 124
Retainage payable (952) 624
Other liabilities 2,132 820
Net cash provided by operating activities 12,278 9,979
Cash flows from investing activities:
Payments for purchase of property and equipment (1,843) (3,936)
Acquisition of Grandfathered Engineering Corporation license (1,050) -
Net cash used in investing activities (2,893) (3,936)
Cash flows from financing activities:
Payments on term loans (893) (1,060)
Proceeds from term loan borrowings 1,310 -
Proceeds from revolving loans 53,630 37,296
Repayment of revolving loans (47,777) (41,361)
Proceeds from stock issued under employee stock purchase plan 245 194
Net cash provided by (used in) financing activities 6,515 (4,931)
Effect of foreign exchange rate changes on cash 540 763
Deconsolidated cash 9 -
Net increase in cash, cash equivalents and restricted cash 16,431 1,875
Cash, cash equivalents and restricted cash - beginning of year 24,982 23,107
Cash, cash equivalents and restricted cash - end of year $ 41,413 $ 24,982
Years Ended December 31,
2020 2019
Supplemental disclosures of cash flow information:
Interest and related financing fees paid $ 4,670 $ 5,347
Income taxes paid 3,748 4,821
Transfer of proceeds from shares pledged as collateral to treasury stock 825 -
Cash paid for amounts included in the measurement of lease liabilities 8,448 8,164
Right-of-use assets obtained in exchange for operating lease liabilities(1)
1,293 21,351
Right-of-use assets obtained in exchange for financing lease liabilities 288 -
Cancellation of PIDC-Local Development Corporation forgivable loan 345 -
(1) Amounts relate to the Company's adoption of the new accounting guidance for leases, as described in Note 3 Summary of Significant Accounting Policies, for the year ended December 31, 2019.
See accompanying notes to consolidated financial statements.
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 1 - The Company
Hill International, Inc. (including, as required by its context, its subsidiaries, “Hill” or the “Company”) is a professional services firm that provides program management, project management, construction management and other consulting services primarily to the buildings, transportation, environmental, energy and industrial markets worldwide. Hill’s clients include the U.S. federal government, U.S. state and local governments, foreign governments and the private sector. The Company had approximately 2,700 professionals in approximately 70 offices worldwide as of December 31, 2020.
The Company was incorporated on June 28, 2006 upon merging with Arpeggio Acquisition Corp in the state of Delaware. Prior to the merger, Arpeggio Acquisition Corp. completed its final public offering on June 30, 2004. Hill's common stock is traded on the NYSE under the trading symbol “HIL.”
All amounts included in the following Notes to the Consolidated Financial Statements are in thousands, except per share data.
Note 2 - Liquidity
The Company's principal sources of liquidity consisted of cash and cash equivalents of $34,229 and $15,915 at December 31, 2020 and 2019, respectively; available borrowing capacity of $7,495 and $9,052 under the Company's domestic revolving credit facility with Société Générale at December 31, 2020 and 2019, respectively; available borrowing capacity under the Company's international revolving credit facility with Société Générale of $1,085 and $3,145 at December 31, 2020 and 2019, respectively; and available borrowing capacity under other foreign credit agreements of $3,131 and $2,538 at December 31, 2020 and 2019, respectively. Additional information regarding the Company's credit facilities is set forth in Note 10 - Notes Payable and Long-Term Debt.
In December 2019, COVID-19 was identified in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic as a result of the further spread of the virus into all regions of the world, including those regions where the Company's primary operations occur. The effects of this global pandemic on the Company includes anticipated lower gross and operating margins, as well as temporary delays in certain accounts receivable collections. These effects may continue in the foreseeable future. The Company is focused on preserving its principal sources of liquidity and managing its cash flow and will continue to evaluate the potential short-term and long-term implications of COVID-19 on its consolidated statements of operations. The Company has achieved approximately $11,000 in corporate cost reductions in 2020. The Company believes that it has adequate liquidity and business plans to continue to operate the business and mitigate the risks associated with COVID-19 for the next 12 months from March 16, 2021, the date of this filing.
Note 3 - Summary of Significant Accounting Policies
(a) Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Hill International, Inc. and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassification
Certain back-office expenses and foreign currency translation gains and losses that had previously been included in the individual regions in the operating profit/(loss) table presentation are currently being included within the corporate costs line item on the operating profit/(loss) tables herein. The related 2019 prior period operating profit (loss) by geographic region and corporate costs have been recast to reflect this change. This change only affects the presentation in the operating profit/(loss) tables and has no impact on total operating profit/(loss) reported.
Foreign currency transaction gains and losses that, in previous periods, had been included in selling, general and administrative ("SG&A") expenses line item on the Consolidated Statements of Operations, are presented as a separate line item on the Consolidated Statements of Operations for the twelve months ended December 31, 2020. The related foreign currency transaction gains and losses for the twelve months ended December 31, 2019 have been reclassed to reflect this change. This change has no impact on the total operating profit/(loss) reported.
Certain accrued agency fees that had previously been included in accrued payroll and related expenses in the components of accounts payable and accrued expenses table in Note 9 - Accounts Payable and Accrued Expenses are currently being included within the accrued agency fees line item. The related amounts at December 31, 2019 have been reclassed to reflect this change.
Interest costs and (gains)/losses recognized with the Company's End of Service Benefit plan ("EOSB" plan) had previously been included in SG&A and are now presented in other (loss) income, net in the Company's Consolidated Statements of Operations for the twelve months ended December 31, 2020 and 2019 for $637 and $219, respectively. This change results in an increase on the total operating profit previously reported for the twelve months ended December 31, 2019, but has no impact on the total net income reported.
Certain geographic regions have been combined in tables throughout the document including in Note 4 - Revenue from Contract with Clients, Note 6 - Property and Equipment and Note 17 - Segment and Related Information. In the current year, Americas includes United States and Latin America and Middle East/Asia/Pacific includes Middle East and Asia/Pacific. The related 2019 presentation has been recast to conform to current year presentation.
Other (Loss) Income, net
During the twelve months ended December 31, 2020, a loss of $5,501 was recognized due to the bankruptcy filing and deconsolidation of our subsidiaries in Brazil (see Note 18 - Deconsolidation of Controlling Interest in Subsidiaries). Also, the Company's EOSB plan (see Note 16 Benefit Plans) interest cost and actuarial loss totaling $637 for the twelve months ended December 31, 2020 is included within Other (loss) income, net. An additional $345 of other income was recognized during the twelve months ended December 31, 2020, representing the cancellation of a loan agreement made with the PIDC-Local Development Corporation that was funded to the Company on October 24, 2014 as part of the city of Philadelphia's (the "City") Economic Stimulus Program. In February 2020, the City agreed to cancel this loan due to the Company satisfying all obligations upon which cancellation of such debt was conditioned in the Loan Agreement.
During the twelve months ended December 31, 2019, the Company recognized $394 of income in Other (Loss) Income, net, related to the settlement of a $1,000 grant received from the Pennsylvania Department of Community and Economic Development (the "PADCED") in May 2015 (the "Grant"), net of $606 of expense related to interest costs, net of gains, related to the Company's EOSB plan and other non-operating activity. The Grant was used as part of the relocation of Hill's corporate headquarters to the city of Philadelphia where partial or full repayment of the Grant is required if specific conditions were not met, which included maintaining a minimum number of employees throughout 2018, among other conditions, with the possibility of extension at the PADCED's discretion. In July 2019, the PADCED concluded that the Company is required to repay $351 of the Grant since the Company failed to meet its employment commitment. In July 2020, the PACDED agreed to further reduce the required repayment to $324 payable in four installments of $81, with the last installment due May 1, 2021.
(b) Foreign Currency Translations and Transactions
Assets and liabilities of all foreign operations are translated at year-end rates of exchange while revenues and expenses are translated at the average monthly exchange rates. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholders’ equity titled accumulated other comprehensive income (loss) until the entity is sold or substantially liquidated. Gains or losses arising from foreign currency transactions (transactions denominated in a currency other than the entity’s local currency), including those resulting from intercompany transactions, are reflected in foreign currency exchange loss in the consolidated statements of operations. The impact of foreign exchange on long-term intercompany loans, for which repayment has not been scheduled or planned and permanent equity has been elected, are recorded in accumulated other comprehensive income (loss) on the Company's consolidated balance sheets. There were no such long-term intercompany loans as of December 31, 2020.
(c) Use of Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the revenue and expenses reported for the periods covered by the financial statements and certain amounts disclosed in the accompanying notes to the consolidated financial statements. Actual results could differ significantly from those estimates and assumptions. The estimates affecting the consolidated financial statements that are particularly significant include revenue calculations, goodwill impairment determination on recoverability of long-lived assets, income taxes, allowance for doubtful accounts, right-of-use assets, operating lease liabilities and commitments and contingencies.
(d) Fair Value Measurements
The fair value of financial instruments, which primarily consists of cash and cash equivalents, accounts receivable and accounts payable, approximates carrying value due to the short-term nature of the instruments. The carrying value of a significant portion of our credit facilities approximates fair value as the interest rates are variable and approximates current market levels.
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it would transact, and the Company considers assumptions that market participants would use when pricing the asset or liability.
Non-financial assets and liabilities, such as goodwill and long lived assets that are initially recorded at fair value, will be assessed for impairment, if deemed necessary. Additional information related to the Company's impairment assessment of these assets are included in paragraphs (k) Long-Lived Assets and (l) Goodwill below.
See paragraph below (s) Share-Based Compensation, to be read in conjunction with Note 11 Share-Based Compensation, for information related to certain share-based compensation awards that require the Company to estimate the fair value of such award when the value cannot be measured at the time of the grant.
(e) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in money market funds and investment grade securities held with financial institutions. The Company considers all highly liquid instruments purchased with a remaining maturity of three months or less at the time of purchase to be cash equivalents.
(f) Restricted Cash
Restricted cash primarily represents cash collateral required to be maintained in foreign bank accounts to serve as collateral for letters of credit, bonds or guarantees on certain projects. Generally, the cash will remain restricted until the respective project has been completed, which typically is greater than one year.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows:
2020 2019
Cash and cash equivalents $ 34,229 $ 15,915
Cash - restricted 3,752 4,666
Cash - restricted, net of current portion 3,432 4,401
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 41,413 $ 24,982
(g) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable.
The Company maintains its cash accounts with high quality financial institutions. Although the Company believes that the financial institutions with which it does business will be able to fulfill their commitments, there is no assurance that those institutions will be able to continue to do so.
The Company provides professional services, under contractual arrangements, to domestic and foreign governmental units, institutions and the private sector. To reduce credit risk, the Company performs ongoing credit evaluations of its clients and requires customary retainers where appropriate.
No single client contributed 10% or more to revenue for the years ended December 31, 2020 and 2019.
The following table presents the number of clients comprised of 10% or more of the Company's billed accounts receivable:
December 31,
2020 2019
Number of 10% clients 1 1
Percentage of billed accounts receivable 16 % 14 %
(h) Allowance for Doubtful Accounts
The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectability of specific accounts and the overall condition of the receivable portfolios. When evaluating the adequacy of the allowance for doubtful accounts, the Company specifically analyzes trade receivables, including retainage receivable, historical bad debts, client credits, client concentrations, current economic trends and changes in client payment terms. If the financial condition of clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should the Company determine that it would be able to realize more of its receivables in the future than previously estimated, an adjustment to the allowance would increase earnings in the period such determination was made. The allowance for doubtful accounts is reviewed at a minimum on a quarterly basis and adjustments are recorded as deemed necessary.
(i) Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is provided over the estimated useful lives of the assets as follows:
Method Estimated Useful Life
Furniture and equipment Straight-line 10 years
Leasehold improvements Straight-line Shorter of estimated useful life or lease term
Computer equipment and software Straight-line 3 to 5 years
Automobiles Straight-line 5 years
The Company capitalizes costs associated with internally developed and/or purchased software systems that have reached the application development stage and meet recoverability tests. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software, payroll and payroll-related expenses for employees who are directly associated with and devote time to internal-use software projects. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Costs for general and administrative, overhead, maintenance and training, as well as the cost of software that does not add functionality to existing systems, are expensed as incurred.
Upon retirement or other disposition of these assets, the cost and related depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in results of operations. Expenditures for maintenance, repairs and renewals of minor items are charged to expense as incurred. Major renewals and improvements are capitalized.
(j) Retainage Receivable
Retainage receivable represents balances billed but not paid by clients pursuant to retainage provisions in their contracts and will be due upon completion of specific tasks or the completion of the contract.
(k) Long-Lived Assets
Acquired intangible assets consist of contract rights, client related intangibles and trade names arising from the Company’s acquisitions. Contract rights represent the fair value of contracts in progress and backlog of an acquired entity. For intangible assets purchased in a business combination, the estimated fair values of the assets are used to establish the cost basis. Valuation techniques consistent with the market approach, the income approach and the cost approach are used to measure fair value. These assets are amortized over their estimated lives which range from three to fifteen years.
The Company reviews long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flow discounted at a rate commensurate with the risks associated with the recovery of the asset. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
No such impairment losses were recorded during the year ended December 31, 2020. During the year ended December 31, 2019, the Company recorded an impairment loss of $563, which is in SG&A on the consolidated statements of operations and in depreciation and amortization on the consolidated statements of cash flows. The impairment related to the Company's 2015 acquisition of one of its current subsidiaries, IMS Proje Yonetimi ve Danismanlik A.S. ("IMS"), which is based out of the Company's office in Turkey. The Company's consolidated balance sheet included an intangible asset related to IMS for client relationships prior to the impairment. In addition to the decline in the intangible asset's carrying value as a result of the Company's exposure to foreign exchange losses, the Company assessed that the client relationships that were in-place at the time of the intangible asset's initial fair value measurement no longer had any value at December 31, 2019.
Acquired intangible assets also includes the purchase of an engineering license during the year ended December 31, 2020. The transaction was recorded as an asset acquisition, with an indefinite useful life.
(l) Goodwill
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. The Company tests goodwill annually for impairment during the third quarter. To determine the fair value of our reporting unit, we use the discounted cash flow, the public company and the quoted price methods, 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 for the businesses, the useful life over which cash flows will occur, and determination of the Company’s weighted average cost of capital. The Company’s changes in estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment. During the three months ended March 31, 2020 the Company determined that the significant decline in its market capitalization as a result of the COVID-19 pandemic indicated that an impairment loss may have been incurred. The Company bypassed the qualitative assessment and proceeded directly to performing the quantitative goodwill impairment test. The quantitative goodwill impairment test concluded that the fair value of the Company (reporting unit) exceeded its carrying amount at that time, and therefore, goodwill was not considered impaired. The Company also performed its annual impairment test effective July 1, 2020. Based on the valuation as of July 1, 2020, the fair value of the Company exceeded its carrying value. The Company determined that no impairment existed at December 31, 2020 and December 31, 2019. In the future, the Company will continue to perform the annual test during its fiscal third quarter unless events or circumstances indicate an impairment may have occurred before that time.
(m) Investments
The Company will, in the ordinary course of business, form joint ventures for specific projects. These joint ventures have historically required limited or no investment and simply provide a pass-through for the Company’s billings. Any distributions in excess of the Company’s billings are accounted for as income when received and are accounted for under the equity method of accounting. In addition, the Company may make other investments accounted for at-cost. The Company’s total investments at December 31, 2020 and 2019 are as follows:
December 31,
2020 2019
RAMPED Metro Joint Venture (1)(3)
1,493 527
Concessia, Cartera y Gestion de Infrastructuras S.A. (2)
1,193 1,096
Other (3)
119 88
$ 2,805 $ 1,711
(1)The Company has a 45.0% interest in this joint venture, which was formed for construction management of the Riyadh Metro system in Saudi Arabia.
(2)The Company has a 5.7% interest in Concessia, Cartera y Gestion de Infrastructuras S.A. ("Concessia"), an entity which invests in the equity of companies that finance, construct and operate various public and private infrastructure projects in Spain. The practicability exception to fair value measurement was elected due to the fact that there is no readily determinable fair value for this investment. Therefore, the investment is measured at-cost, less impairment, plus or minus observable price changes (in orderly transactions) of an identical or similar investment of the same issuer. There have been no impairments of and no observable price changes in the investment.
(3)Includes investments accounted for under the equity method of accounting.
(n) Deferred Financing Costs, Net
Net deferred financing costs include debt discount and debt issuance costs associated with obtaining commitments for financing transactions. Deferred financing costs related to revolving-debt arrangements are reflected in prepaid expenses and other current assets and other assets in the consolidated balance sheets and are amortized on a straight-line basis over the term of the loan. Deferred financing costs related to any term debt that requires scheduled repayments are recorded as a direct deduction from the Company's notes payable and other long-term debt and are amortized over the term of the respective financing agreement using the effective interest method. The amortization of such costs are included in interest and related financing fees, net, on the accompanying consolidated statements of operations.
Unamortized deferred financing costs are expensed if the associated debt is refinanced or repaid before the maturity.
(o) Deferred Revenue
In certain instances, the Company may collect advance payments from clients for future services. These payments are reflected as deferred revenue in the Company’s consolidated balance sheets. As the services are performed, the Company reduces the balance and recognizes revenue.
(p) Deferred Rent
The Company adopted Accounting Standards Update ("ASU") 2016-2, Leases (Topic 842) on January 1, 2019, which required the Company to recognize lease assets and operating lease liabilities on the Company's consolidated balance sheet for all leases with estimated lease terms of more than one year. See further detail in Note 15 - Leases.
Leases with estimated lease terms of less than one year or arrangements where the Company subleases real estate to a third party were not accounted for under ASU 2016-2. Such leases remained accounted for under the previous Accounting Standards Codification ("ASC") 840, Leases. The lease expense is recognized on a straight-line basis over the lease term and any differences between the rent paid under the terms of the lease and the straight-line rent expense is recorded as a deferred rent liability. At December 31, 2020 and 2019, deferred rent was $2, and is included in other current liabilities and other liabilities in the consolidated balance sheets.
(q) Income Taxes
The Company estimates income taxes in each of the jurisdictions in which it operates. This process involves estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheets. The Company assesses the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent it believes recovery is not likely, the Company establishes a valuation allowance. To the extent the Company establishes a valuation allowance in a period, it must include an expense within the tax provision in the consolidated statements of earnings. The Company has recorded a valuation allowance to reduce the deferred tax asset to an amount that is “more likely than not” (i.e., a likelihood greater than 50 percent) to be realized in future years. If the Company determines in the future that it is more likely than not to be allowed by the tax jurisdiction based solely on the technical merits of the position, that the deferred tax assets subject to the valuation allowance will be realized, then the previously provided valuation allowance will be adjusted.
The Company recognizes a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is more likely than not 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.
(r) Revenue Recognition
The Company generates revenue primarily from providing professional services to its clients under various types of contracts. In providing these services, the Company may incur reimbursable expenses, which consist principally of amounts paid to subcontractors and other third parties and travel and other job related expenses that are contractually reimbursable from clients. The Company includes reimbursable expenses in computing and reporting its total revenue as long as the Company remains responsible to the client for the fulfillment of the contract and for the overall acceptability of all services provided.
If estimated total costs on any contract project a loss, the Company charges the entire estimated loss to operations in the period the loss becomes known. The cumulative effect of revisions to revenue, estimated costs to complete contracts, including penalties, incentive awards, change orders, claims, anticipated losses, and others are recorded in the accounting period in which the events indicating a loss are known and the loss can be reasonably estimated. These loss projects are re-assessed for each subsequent reporting period until the project is complete. Such revisions could occur at any time and the effects may be material.
See, "Note 4 - Revenue from Contracts with Clients" for more detail regarding how the Company recognizes revenue under each of its contractual arrangements.
(s) Share-Based Compensation
For compensation issued under equity-classified awards, the Company uses the Black-Scholes option-pricing model to measure the estimated fair value of any share-based compensation award when the fair value of the award is not readily determinable, which generally applies to options issued to purchase the Company’s common stock, but may also include restricted stock units, deferred stock units and common stock if the fair value cannot be determined. Option-pricing valuation models require the input of highly subjective assumptions.
Once the fair value of the award is determined, the value is recognized as share-based compensation expense and is recognized over the service period on a straight-line basis or when the conditions of the award have been met. Forfeitures reduce compensation expense in the period they occur. The Company’s policy is to primarily use newly issued shares to satisfy the exercise of stock options.
Any liability-classified awards are recorded at fair value based on the closing stock price of the Company's common stock and are re-measured each period until settlement of the award.
See Note - 11 Share-Based Compensation for more detail.
(t) Advertising Costs
Advertising costs are expensed as incurred and are reflected in SG&A expenses in the Company's consolidated statements of operations. These costs incurred were $253 and $229 for the years ended December 31, 2020 and 2019, respectively.
(u) Income (loss) per Share ("EPS")
Basic income (loss) per common share has been computed using the weighted-average number of shares of common stock outstanding during the year. Diluted income (loss) per common share includes the incremental shares issuable upon the assumed exercise of stock options using the treasury stock method and any other unvested share-based compensation awards, if dilutive.
Stock options, deferred stock and restricted stock units totaling 2,300 and 2,376 shares of the Company’s common stock were not included in the calculation of diluted common shares outstanding for the years ended December 31, 2020 and 2019, respectively, because they were anti-dilutive.
The following table provides a reconciliation to net income (loss) used in the numerator for net (loss) income per common share attributable to Hill:
Years Ended December 31,
2020 2019
Net (loss) income $ (7,570) $ 14,254
Less: net earnings - noncontrolling interest 612 170
Net (loss) income attributable to Hill International, Inc. $ (8,182) $ 14,084
Basic weighted average common shares outstanding 56,603 56,280
Effect of dilutive securities:
Stock options - -
Unvested share-based compensation units - -
Diluted weighted average shares common outstanding 56,603 56,280
Basic and diluted net income (loss) per common share - Hill International, Inc. $ (0.14) $ 0.25
(v) New Accounting Pronouncements
Changes to U.S. GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs and, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Company or adoption will have minimal impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-4, Intangibles - Goodwill and Other (Topic 350), which removes step 2 from the goodwill impairment test. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units’ fair value. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017, and the prospective transition method should be applied. The Company adopted this guidance on January 1, 2020 and it did not materially impact its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this guidance on January 1, 2020 on a prospective basis and will begin to capitalize certain implementation costs that may have been previously expensed as incurred. There was no impact on the Company's consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("VIE"). The amendments in this ASU for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required by GAAP). These amendments will create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public companies. Early adoption is permitted. The Company adopted this guidance in January 1, 2020. There was no impact on the Company's consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606, specifically when the collaborative arrangement participant is a customer in the context of a unit-of-account. It provides more comparability in the presentation of revenues for certain transactions between collaborative arrangement participants, including adding unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public companies. Early adoption is permitted. The Company adopted this guidance in January 1, 2020. There was no impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326) - Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. This ASU will be effective for the Company commencing January 1, 2023. The Company is in the process of assessing the impact of this ASU on our consolidated financial statements and disclosures.
Note 4 - Revenue from Contracts with Clients
The Company recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the Company expects to be entitled in exchange for such goods or services.
Below is a description of the basic types of contracts from which the Company may earn revenue:
Time and Materials Contracts
Under the time and materials (“T&M”) arrangements, contract fees are based upon time and materials incurred. The contracts may be structured as basic time and materials, cost plus a margin or time and materials subject to a maximum contract value (the "cap value"). Due to the potential limitation of the cap value, the economic factors of the contracts subject to a cap value differ from the economic factors of basic T&M and cost plus contracts. The majority of the Company’s contracts are for consulting projects where it bills the client monthly at hourly billing rates. The hourly billing rates are determined by contractual terms. Under cost plus a margin contracts, the Company charges its clients for its costs, plus a fixed fee or rate. Under time and materials contracts with a cap value, the Company charges the clients for time and materials based upon the work performed however there is a cap or a not to exceed value. There are often instances that a contract is modified to extend the contract value past the cap. As the consideration is variable depending on the outcome of the contract renegotiation, the Company will estimate the total contract price in accordance with the variable consideration guidelines and will only include consideration that it expects to receive from the client. When the Company is reaching the cap value, the contract will be renegotiated, or Hill ceases work when the maximum contract value is reached. The Company will continue to work if it is probable that the contract will be extended. The Company will only include consideration or contract renegotiations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. If the Company continues to work and is uncertain that a contract change order will be processed, the variable consideration will be constrained to the cap until it is probable that the contract will be renegotiated. The Company is only entitled to consideration for the work it has performed, and the cap value is not a guaranteed contract value.
Fixed Price Contracts
Under fixed price contracts, the Company’s clients pay an agreed amount negotiated in advance for a specified scope of work. The Company is guaranteed to receive the consideration to the extent that the Company delivers under the contract. The Company recognizes revenue over a period of time on fixed price contracts using the input method based upon direct costs incurred to date, which are compared to total projected direct costs. Costs are the most relevant measure to determine the transfer of the service to the client. The Company assesses contracts quarterly and will recognize any expected future loss before actually incurring the loss. When the Company is expecting to reach the total value under the contract, the Company will begin to negotiate a change order.
Change Orders and Claims
Change orders are modifications of an original contract. Either the Company or its client may initiate change orders. They may include changes in specifications or design, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Management evaluates when a change order is probable based upon its experience in negotiating change orders, the client’s written approval of such changes or separate documentation of change order costs that are identifiable. Change orders may take time to be formally documented and terms of such change orders are agreed with the client before the work is performed. Sometimes circumstances require that work progresses before an agreement is reached with the client. If the Company is having difficulties in renegotiating the change order, the Company will stop work 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 the Company seeks to collect from its clients or others for client-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. Costs related to change orders and claims are recognized when they are incurred. The Company evaluates claims on an individual basis and recognizes revenue it believes is probable to collect.
U.S. Federal Acquisition Regulations
The Company has contracts with the U.S. government that contain provisions requiring compliance with the U.S. Federal Acquisition Regulations (“FAR”). These regulations are generally applicable to all of its federal government contracts and are partially or fully incorporated in many local and state agency contracts. They limit the recovery of certain specified indirect costs on contracts subject to the FAR. Cost-plus contracts covered by the FAR provide for upward or downward adjustments if actual recoverable costs differ from the estimate billed under forward pricing arrangements. Most of the Company's federal government contracts are subject to termination at the convenience of the federal government. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.
Federal government contracts that are subject to the FAR and that are required by state and local governmental agencies to be audited are performed, for the most part, by the Defense Contract Audit Agency (“DCAA”). The DCAA audits the Company’s overhead rates, cost proposals, incurred government contract costs and internal control systems. During the course of its audits, the DCAA may question incurred costs if it believes the Company has accounted for such costs in a manner inconsistent with the requirements of the FAR or Cost Accounting Standards and recommend that its U.S. government corporate administrative contracting officer disallow such costs. Historically, the Company has not incurred significant disallowed costs because of such audits. However, the Company can provide no assurance that the DCAA audits will not result in material disallowances of incurred costs in the future.
Disaggregation of Revenues
The Company has one operating segment, the Project Management Group, which reflects how the Company is being managed. Additional information related to the Company’s operating segment is provided in Note 17 - Segment and Related Information. The Project Management Group provides extensive construction and project management services to construction owners worldwide. The Company considered the type of client, type of contract and geography for disaggregation of revenue. The Company determined that disaggregating by (1) contract type; and (2) geography would provide the most meaningful information to understand the nature, amount, timing, and uncertainty of its revenues. The type of client does not influence the Company’s revenue generation. Ultimately, the Company is supplying the same services of program management, project management, construction management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, labor compliance services and facilities management services. The Company’s contracts are generally long term contracts that are either based upon time and materials incurred or provide for a fixed price. The contract type will determine the level of risk in the contract related to revenue recognition. For purposes of disaggregation of revenue, the contract types have been grouped into: (1) Fixed Price - which include fixed price projects; and, (2) T&M - which include T&M contracts, T&M with a cap and cost plus contracts. The geography of the contracts will depict the level of global economic factors in relation to revenue recognition.
The components of the Company’s revenue by contract type and geographic region for the twelve months ended December 31, 2020 and 2019:
Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019
Fixed Price T&M Total Percent of Total Revenue Fixed Price T&M Total Percent of Total Revenue
Americas $ 21,964 $ 170,813 $ 192,777 52.4 % $ 26,664 ( 1)
$ 173,478 $ 200,142 53.1 %
Middle East/Asia/Pacific 16,242 76,397 92,639 25.1 % 31,923 73,004 104,927 27.9 %
Europe 44,003 9,816 53,819 14.6 % 27,645 ( 2)
15,843 43,488 11.6 %
Africa 4,159 25,130 29,289 7.9 % 1,492 26,388 27,880 7.4 %
Total $ 86,368 $ 282,156 $ 368,524 100.0 % $ 87,724 $ 288,713 $ 376,437 100.0 %
(1) Includes $1,122 of revenue, previously classified as T&M contracts.
(2) Includes $4,109 of revenue, previously classified as T&M contracts.
The Company recognizes revenue when it transfers promised goods or services to clients in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company exercises judgment in determining if the contractual criteria are met to determine if a contract with a client exists, specifically in the earlier stages of a project when a formally executed contract may not yet exist. The Company typically has one performance obligation under a contract to provide fully-integrated project management services, and, occasionally, a separate performance obligation to provide facilities management services. Performance obligations are delivered over time as the client receives the service.
The consideration promised within a contract may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the client regarding acknowledgment and/or agreement with the modification, as well as historical experience with the client or similar contractual circumstances. The Company transfers control of its service over time and, therefore, satisfies a performance obligation and recognizes revenue over time by measuring the progress toward complete satisfaction of that performance obligation. The Company’s fixed price projects and T&M with a cap contracts, expected to exceed the cap value, generally use a cost-based input method to measure its progress towards complete satisfaction of the performance obligation as the Company believes this best depicts the transfer of control to the client. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Due to the nature of the work required to be performed under the Company’s performance obligations, estimating total revenue and cost at completion on its long term contracts is complex, subject to many variables and requires significant judgment.
For basic and cost plus T&M contracts and T&M with a cap, not expected to exceed the cap, contracts, the Company recognizes revenue over time using the output method which measures progress toward complete satisfaction of the performance obligation based upon actual costs incurred, using the right to invoice practical expedient.
Accounts Receivable
Accounts receivable includes amounts billed and currently due from clients and amounts for work performed which have not been billed to date. The billed and unbilled amounts are stated at the net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of client creditworthiness, historical payment experience and the age of outstanding receivables.
Contract Assets and Liabilities
Contract assets include unbilled amounts typically resulting from performance under long-term contracts where the revenue recognized exceeds the amount billed to the client. Retainage receivable is included in contract assets. The current portion of retainage receivable is a contract asset, which prior to the adoption of ASC 606, had been classified within accounts receivable.
The Company’s contract liabilities consist of advance payments and billings in excess of revenue recognized and are reported as deferred revenue in the consolidated balance sheets. The Company classifies billings in excess of revenue recognized as deferred revenue as current or non-current based on the timing of when revenue is expected to be recognized.
The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing of the Company’s performance and client payments. The amount of revenue recognized during the twelve months ended December 31, 2020 and 2019 that was included in the deferred revenue balance at the beginning of the period was $9,955 and $14,156, respectively.
Remaining Performance Obligations
The remaining performance obligations represent the aggregate transaction price of executed contracts with clients for which work has partially been performed or not started as of the end of the reporting period. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. T&M contracts are excluded from the remaining performance obligation as these contracts are not fixed price contracts and the consideration expected under these contracts is variable as it is based upon hours and costs incurred in accordance with the variable consideration optional exemption. As of December 31, 2020 and 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $101,800 and $113,592, respectively. During the following 12 months, approximately 47% of the remaining performance obligations are expected to be recognized as revenue with the remaining balance recognized over 2 to 5 years.
Note 5 - Accounts Receivable
The components of accounts receivable and accounts receivable - affiliates reflected in the Company's consolidated balance sheets, are as follows:
December 31,
Accounts Receivable 2020 2019
Billed (1)
$ 113,021 $ 132,339
Unbilled (2)
37,960 30,026
$ 150,981 $ 162,365
Allowance for doubtful accounts (1)(3)
(52,795) (58,473)
Accounts Receivable, net $ 98,186 $ 103,892
Accounts Receivable - Affiliates
Billed $ 15,560 $ 12,546
Unbilled (2)
8,380 6,888
$ 23,940 $ 19,434
Allowance for doubtful accounts (3)
(655) (658)
Accounts Receivable - Affiliates, net $ 23,285 $ 18,776
(1) Includes $33,242 and $32,864 related to amounts due from a client in Libya as of December 31, 2020 and 2019, respectively, which were both fully reserved for in the allowance for doubtful accounts.
(2) Amount is net of unbilled reserves.
(3) See Schedule II-Valuation and Qualifying Accounts for breakdown of allowance for doubtful accounts for amounts added/(recovered), net of charge-offs for amounts determined to be uncollectible, for the years ended December 31, 2020 and 2019.
Unbilled receivables primarily represent revenue earned on contracts that the Company is contractually precluded from billing until predetermined future dates.
The Company determines its allowance for doubtful accounts based on the aging of amounts that have been billed to-date, the client's history, credit, concentration and current economic changes. The allowance for doubtful accounts is reviewed, at a minimum, on a quarterly basis and adjustments are recorded as deemed necessary.
During the year ended December 31, 2019 , the Company recovered amounts due from a client in Libya of $9,652. The client's accounts receivable balance had been reserved for in the Company's allowance for doubtful accounts in previous years, which were reversed as a result of the receipt of the payments. No additional amounts were recovered from the Libyan client during the year ended December 31, 2020.
Net bad debt recoveries of $1,936 and $8,426 are included in SG&A expenses in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively.
Note 6 - Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets based on the type of property and equipment . Upon retirement or other disposition of these assets, the cost and related depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in results of operations. Expenditures for maintenance, repairs and renewals of minor items are charged to expense as incurred. Major renewals and improvements are capitalized.
The components of property and equipment are as follows:
December 31,
2020 2019
Furniture and equipment $ 8,416 $ 10,608
Leasehold improvements 10,197 10,977
Automobiles 1,309 1,334
Computer equipment and software 28,069 29,285
47,991 52,204
Less accumulated depreciation and amortization (38,548) (40,309)
Property and equipment, net $ 9,443 $ 11,895
The Company's depreciation expense for the related balances were recorded as follows to the Company's consolidated statements of operations:
Years Ended December 31,
2020 2019
Total depreciation expense $ 3,959 $ 2,810
Portion charged to direct expenses $ 397 $ 856
Portion charged to selling, general and administrative expense $ 3,562 $ 1,954
Note 7 - Intangible Assets
The following table represents acquired intangible assets as a result of the Company's acquisition history and the client contracts that were attained at the time of the acquisition:
December 31,
2020 2019
Gross
Carrying
Amount Accumulated
Amortization Gross
Carrying
Amount Accumulated
Amortization
Engineering license $ 2,100 $ - $ - $ -
Client relationships 509 356 1,080 848
Total $ 2,609 $ 356 $ 1,080 $ 848
Intangible assets, net $ 2,253 $ 232
During the year ended December 31, 2020, the Company acquired a Grandfathered Engineering Corporation license ("engineering license"), which was determined to have an indefinite useful life. As such, no amortization expense was recorded during the year ended December 31, 2020.
The Company's client relationships intangible assets are amortized over the estimated life of ten years.
Amortization expense related to these intangible assets of $79 and $1,014 for years ended December 31, 2020 and 2019, respectively. The twelve months ended December 31, 2019 included an impairment loss of $563 and was reflected in selling, general and administrative expenses on the Company's consolidated statements of operations. This client relationship intangible asset related to the Company's 2015 acquisition of one of its current subsidiaries, IMS Proje Yonetimi ve Danismanlik A.S. ("IMS"), which is based out of the Company's office in Turkey. The Company's consolidated balance sheets included an intangible asset related to IMS for client relationships prior to the impairment. In addition to the decline in the intangible asset's carrying value as a result of the Company's exposure to foreign exchange losses, the Company assessed that the client relationships that were in-place at the time of the intangible asset's initial fair value measurement no longer had any value at December 31, 2019. The Company did not incur any impairment losses during the year ended December 31, 2020.
The following table presents the estimated amortization expense based on our remaining intangible assets for the next five years:
Estimated
Amortization
Years Ending December 31, Expense
2021 $ 51
2022 51
2023 51
2024 -
2025 -
Note 8 - Goodwill
The following table summarizes the changes in the carrying value of goodwill:
Balance, December 31, 2018 $ 48,869
Translation adjustments (1)
(845)
Balance, December 31, 2019 48,024
Translation adjustments (1)
(1,627)
Balance, December 31, 2020 $ 46,397
(1) The translation adjustments are calculated based on the foreign currency exchange rates as of December 31, 2020 and 2019.
During the three months ended March 31, 2020 the Company determined that the significant decline in its market capitalization as a result of the COVID-19 pandemic indicated that an impairment loss may have been incurred. The Company bypassed the qualitative assessment and proceeded directly to performing the quantitative goodwill impairment test. The quantitative goodwill impairment test concluded that the fair value of the Company (reporting unit) exceeded its carrying amount at that time, and therefore, goodwill was not considered impaired.
The Company performed its annual impairment test effective July 1, 2020 and noted no impairment. Based on the valuation as of July 1, 2020, the fair value of the Company exceeded its carrying value. The Company also determined that no impairment existed at December 31, 2020 and December 31, 2019. In the future, the Company will continue to perform the annual test during its third quarter unless events or circumstances indicate an impairment may have occurred before that time.
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 for the businesses, the useful life over which cash flows will occur, and determination of the Company’s weighted average cost of capital. The Company’s changes in estimates and assumptions, including decreases in stock price and market capitalization, could materially affect the determination of fair value and/or conclusions on goodwill impairment. As a result of recent events, including market volatility and the impact on the global economy, it is as least reasonably possible that changes in one or more of those assumptions could result in impairment of our goodwill in future periods.
Note 9 - Accounts Payable and Accrued Expenses
The table below reflects the Company's breakdown of the amounts in accounts payable and other accrued expenses by cost category as of the periods presented below:
December 31,
2020 2019
Accounts payable $ 20,953 $ 22,102
Accrued payroll and related expenses 26,691 24,718
Accrued subcontractor fees 8,711 9,405
Accrued agency fees (1)
4,239 4,395
Accrued legal and professional fees 2,894 2,169
Other accrued expenses 4,309 2,383
$ 67,797 $ 65,172
(1) $4,156 in accrued agency fees at December 31, 2019 that were previously included in accrued payroll and related expenses are now reflected in accrued agency fees.
Note 10 - Notes Payable and Long-Term Debt
The table below reflects the Company's notes payable and long-term debt, which includes credit facilities:
Interest Rate (1)
Balance Outstanding as of
Loan Maturity Interest Rate Type December 31,
2020 December 31,
2019 December 31,
2020 December 31,
Secured Credit Facilities
Hill International, Inc. - Société Générale 2017 Term Loan Facility 06/20/2023 Variable 7.67% 7.92% $ 28,950 $ 29,250
Hill International, Inc. - Société Générale Domestic Revolving Credit Facility (2)
05/04/2022 Variable 5.50% 6.27% 14,400 9,400
Hill International N.V. - Société Générale International Revolving Credit Facility (3)(6)
05/04/2022 Variable 4.11% 4.16% 4,035 2,302
Unsecured Credit Facilities
Hill International, Inc. - First Abu Dhabi Bank PJSC Overdraft Credit Facility (4)
04/18/2021 Variable 5.65% 5.81% - 593
Hill International Brasil S.A. - Revolving Credit Facility (5)
06/12/2020 Fixed 3.07% 3.24% - 498
Unsecured Notes Payable and Long-Term Debt
Hill International Spain SA-Bankia S.A. & Bankinter S.A. (6)
12/31/2021 Fixed 2.21% 2.21% 581 1,054
Philadelphia Industrial Development Corporation Loan 04/01/2027 Fixed 2.79% 2.79% 421 486
Hill International Spain S.A.-Bankinter S.A.2020 Term Loan (6)(7)
05/04/2024 Variable 2.23% N/A 357 -
Hill International Spain S.A.-Banco Santander, S.A. Term Loan (6)(7)
05/30/2025 Fixed 3.91% N/A 367 -
Hill International Spain S.A.-BBVA, S.A. P.P. Term Loan (6)(7)
06/19/2025 Variable 2.28% N/A 367 -
Hill International Spain S.A.-Bankia, S.A. 2020 Term Loan (6)(7)
06/05/2025 Variable 2.54% N/A 303 -
Total notes payable and long-term debt, gross 49,781 43,583
Less: unamortized discount and deferred financing costs related to Société Générale 2017 Term Loan Facility (500) (641)
Notes payable and long-term debt $ 49,281 $ 42,942
Current portion of notes payable 1,171 1,972
Current portion of unamortized debt discount and deferred financing costs (184) (180)
Current maturities of notes payable and long-term debt $ 987 $ 1,792
Notes payable and long-term debt, net of current maturities 48,294 41,150
Footnotes to the Notes Payable and Long-Term Debt Table Above:
(1) Interest rates for variable interest rate debt are reflected on a weighted average basis through December 31, 2020 and 2019 since the loan origination or modification date.
(2) At December 31, 2020 and 2019, the Company had $6,605 and $6,548 of outstanding letters of credit, respectively, in addition to the balances outstanding above, which resulted in $7,495 and $9,052 of available borrowing capacity under the Domestic Revolving Credit Facility, respectively. The amounts available were based on the maximum borrowing capacity of $28,500 and $25,000 as of December 31, 2020 and 2019, respectively. See 'Secured Credit Facilities' section below for further information.
(3) As of December 31, 2020 and 2019, the Company had $2,189 and $2,232 of outstanding letters of credit, respectively, in addition to the balances outstanding above, which resulted in $1,085 and $3,145 of available borrowing capacity under the International Revolving Credit Facility, respectively. The amounts available were based on the Company's borrowing capacity of $7,309 and $7,679 as of December 31, 2020 and 2019, respectively. See ''Secured Credit Facilities' section below for further information.
(4) FAB overdraft credit facility lender was formerly known as National Bank of Abu Dhabi. There is no stated maturity date, however, the loan is subject to annual review in April of each year, or at any other time as determined by FAB. Therefore, the amount outstanding is reflected within the current maturities of notes payable and long-term debt. Balances outstanding are reflected in U.S. dollars based on the conversion rates from AED as of December 31, 2020 and 2019. The Company had $3,131 and $2,538 of availability under the credit facility as of December 31, 2020 and 2019, respectively.
(5) See Note 18 - Deconsolidation of Controlling Interest in Subsidiaries related to the bankruptcy and liquidation of Hill International Brasil S.A. (the "borrower"), which resulted in the deconsolidation of the borrower from the Company's consolidated financial statements. This unsecured revolving credit facility was subject to automatic renewals on a monthly basis. Effective with the November 2019 renewal of the unsecured revolving credit facility, the interest rate was reduced by the credit facility lender from 3.30% to 2.80%. The Company had no availability under the unsecured credit facility as of December 31, 2019. The amounts outstanding are based on conversion rates from Brazilian Real as of December 31, 2019.
(6) Balances outstanding are reflected in U.S. dollars based on the conversion rates from Euros as of December 31, 2020 and 2019, accordingly.
(7) Includes loan agreements entered into between April and June 2020, where the respective loan agreements require interest-only monthly payments during grace periods that last from six months or one year from the date of the agreements. The variable interest loans are subject to either semi-annual or annual review by the respective lenders thereof and the respective interest rates in respect thereof are determined based on the European Inter-Bank Offered Rate, or “EURIBOR,” for the relevant interest period (or at a substitute rate to be determined to the extent EURIBOR is not available), plus a margin, as set by the respective lender.
Secured Credit Facilities
On May 5, 2017 the Company entered into a credit agreement with Société Générale (the “Agent”) and other U.S. Loan Parties (the “U.S. Lenders”) consisting of (1) a $30,000 term loan (the "2017 Term Loan Facility"); (2) a $25,000 U.S. dollar-denominated revolving credit facility (the “Domestic Revolving Credit Facility”, together with the 2017 Term Loan Facility, the “U.S. Credit Facilities”); and (3) a credit agreement with the Agent (the “International Lender”) providing a €9,156 ($10,000 at closing) revolving credit facility (the “International Revolving Credit Facility” and together with the Domestic Revolving Credit Facility, the “Revolving Credit Facilities” and, together with the U.S. Credit Facilities, the “Secured Credit Facilities”) which is available to Hill International N.V. The Domestic Revolving Credit Facility and the International Revolving Credit Facility include sub-limits for letters of credit amounting to $20,000 and €8,000 ($9,130 at closing), respectively.
On April 1, 2020, the Company amended its Secured Credit Facilities, which increased the credit commitment with one of the U.S. Lenders under the Domestic Revolving Credit Facility by $3,500 from $25,000 to $28,500 and simultaneously decreased the credit commitment with the International Lender under the International Revolving Credit Facility by €3,179 (approximately $3,500 at closing) from €9,156 (approximately $10,000) to €5,977 (approximately $6,536 at closing).
The Secured Credit Facilities contain customary default provisions, representations and warranties, and affirmative and negative covenants, and require the Company to comply with certain financial and reporting covenants. The financial covenant is comprised of a maximum Consolidated Net Leverage Ratio of 3.00 to 1.00 for any fiscal quarter ending on or subsequent to March 31, 2017 for the trailing twelve months then-ended. The Consolidated Net Leverage Ratio is the ratio of (a) consolidated total debt (minus unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, depreciation, amortization, share-based compensation and other non-cash charges, including bad debt expense, certain one-time litigation and transaction related expenses, and restructuring charges for the trailing twelve months. In the event of a default, the U.S. Lender and the International Lender may increase the interest rates by 2%. The Company was in compliance with this financial covenant calculation as of December 31, 2020.
The U.S. Credit Facilities are guaranteed by certain U.S. subsidiaries of the Company, and the International Revolver is guaranteed by the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.
2017 Term Loan Facility
The Company has the right to prepay the 2017 Term Loan Facility in full or in part at any time without premium or penalty (except customary breakage costs). The Company is required to make certain mandatory prepayments, without premium or penalty (except customary breakage costs), including (i) net proceeds of any issuance or incurrence of indebtedness by the Company after the closing, (ii) with net proceeds from certain asset sales outside the ordinary course of business, and (iii) with 50.00% of the excess cash flow for each fiscal year of the Company commencing with the first full fiscal year ending after closing (which percentage would be reduced to 25.00% if the Consolidated Net Leverage Ratio is equal to or less than 2.0 to 1.00).
The 2017 Term Loan Facility (along with interest thereon) is generally secured by a first-priority security interest in substantially all assets of the Company and certain of the Company’s U.S. subsidiaries other than accounts receivable and cash proceeds thereof, as to which the 2017 Term Loan Facility (and the interest thereon) is secured by a second-priority security interest.
Revolving Credit Facilities
The Revolving Credit Facilities require payment of interest only during the term and may be repaid in whole or in part at any time, without premium or penalty, subject to certain customary limitations, and will be available to be re-borrowed from time to time through the maturity date.
The interest rate on borrowings under the Domestic Revolving Credit Facility are, at the Company’s option, either the LIBOR rate for the relevant interest period, plus 3.75%, per annum or the Base Rate, plus 2.75%, per annum.
The interest rate on borrowings under the International Revolving Credit Facility will be the European Inter-Bank Offered Rate, or “EURIBOR,” for the relevant interest period (or at a substitute rate to be determined to the extent EURIBOR is not available) plus 4.50% per annum.
Commitment fees are paid quarterly and are calculated at 0.50% per annum based on the daily unused portion of the Domestic Revolving Credit Facility and at 0.75% per annum based on the daily unused portion of the International Revolving Credit Facility.
The unamortized debt issuance costs of $755 and $1,317 are included in prepaid expenses and other current assets and other assets in the Company's consolidated balance sheets at December 31, 2020 and December 31, 2019, respectively.
Generally, the obligations of the Company under the Domestic Revolving Credit Facility are secured by a first-priority security interest in the Eligible Domestic Receivables, cash proceeds and bank accounts of the Company and certain of the Company’s U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and such subsidiaries. The obligations of the Subsidiary under the International Revolving Credit Facility are generally secured by a first-priority security interest in substantially all accounts receivable and cash proceeds thereof, certain bank accounts of the Subsidiary and certain of the Company’s non-U.S. subsidiaries, and a second-priority security interest in substantially all other assets of the Company and certain of the Company’s U.S. and non-U.S. subsidiaries.
The amounts available under the Domestic Revolving Credit Facility is subject to a borrowing base that is equal to 85.0% of the difference between (x) the aggregate amount of Eligible Domestic Receivables as of the immediately preceding calendar month and (y) the Dilution Reserve (the "Reserve"), which is equal to 1.0% of (x), not to exceed the $25,000 maximum capacity. The Reserve may be adjusted from time to time based on the most recently delivered collateral audit performed by the Agent and such percentage shall be in effect for the next succeeding twelve months and thereafter under the percentage is reset, however, the Reserve may not be reset more frequently than once a year. The amounts under the International Revolving Credit Facility is also subject to a borrowing base equal to (i) 85.0% of the aggregate amount of the Eligible International Receivables as of the last day of the fiscal quarter, plus 10.0% of the aggregate amount of the Eligible International Receivables as of the last day of the fiscal quarter.
At December 31, 2020, contractually scheduled maturities of current and long-term debt, net of the amortization of the deferred financing costs related to the 2017 Term Loan Facility, were as follows:
Years Ending December 31, Total Scheduled Maturities (1)
2021 $ 955
2022 18,958
2023 28,701
2024 380
2025 199
Thereafter 88
Total $ 49,281
(1) Amounts are estimated based on the foreign currency exchange rates as of December 31, 2020, where applicable.
Other Financing Arrangements
On May 1, 2020, subsequent to the maturity of the Company's previous commercial premium financing arrangement in April 30, 2020 with AFCO Premium Credit LLC ("AFCO"), the Company entered into a new financing agreement for the renewal of its corporate insurance policies with AFCO for $3,391. The terms of the arrangement include a $509 down payment, followed by monthly payments to be made over an ten month period at a 3.04% interest rate through March 31, 2021.
As of December 31, 2020 and 2019, the balances payable to AFCO for these arrangements were $872 and $768 and is reflected in other current liabilities on the Company's consolidated balance sheets.
Note 11 - Share-Based Compensation
The Company provides for equity-based incentives under its 2017 Equity Compensation Plan (the "2017 Plan") to eligible participants under the 2017 Plan, which includes employees, non-employee directors, officers, advisors, consultants or other personnel of the Company (the "Participants"). The 2017 Plan covers 4,250 shares of the Company's common stock and may be awarded to Participants in the form of the Company's common stock, stock options, including stock appreciation rights, restricted stock, deferred stock units ("DSU"), restricted stock units ("RSU"), dividend equivalents rights and other forms of equity-based awards.
A portion of the stock options or other equity units outstanding during the year ended December 31, 2020 may include those issued under the Company's previous equity compensation plans (the 2006 Employee Stock Purchase Plan and 2009 Non-Employee Director Stock Grant Plan). Future grants are no longer available under these plans.
The Company records share-based compensation expense based on the fair value of the equity award grants, as described further below. Share-based compensation expense is included in selling, general and administrative expenses in the Company's consolidated statements of operation.
The following table summarizes the total share-based compensation expense as follows:
Years Ended December 31,
2020 2019
Restricted stock units $ 975 $ 472
Deferred stock units 622 664
Stock options 366 434
Common stock (1)
- 916
Common stock issued under the 2008 Employee Stock Purchase Plan 43 28
Total $ 2,006 $ 2,514
(1) The year ended December 31, 2019 included common stock issued for the Company's Profit Improvement Plan.
The unrecognized costs related to these equity units, excluding employee stock options (summarized separately below) was $2,498 and $1,183, which are expected to be recognized over a weighted-average period of 1.6 and 2.1 years at December 31, 2020 and 2019, respectively.
The following table summarizes the activity related to the equity units, excluding employee stock options (summarized separately below), issued by the Company for the years ended December 31, 2020 and 2019:
Number of RSU's RSU Weighted
Average Issue Price Number of DSU's DSU Weighted
Average Issue Price
Unvested, December 31, 2018 - $ - 20 $ 3.05
Outstanding, Granted 485 3.22 254 2.74
Forfeited (21) 3.23 - -
Vested - - (240) 2.73
Unvested, December 31, 2019 464 3.22 34 3.11
Granted 444 3.28 343 1.69
Forfeited (51) 3.26 - -
Vested (167) 3.23 (356) 1.74
Unvested, December 31, 2020 690 $ 3.26 21 $ 3.10
RSU's
RSU's issued entitle each Participant to receive one unit of common stock upon vesting. RSU's awarded by the Company may be subject to vesting conditions that are contingent upon time and performance, depending on the terms of the RSU award.
Time-Vested RSU's
During the twelve months ended December 31, 2020 and 2019, the Company granted certain key employees and executive officers RSU's under the 2017 Plans that will vest and convert to common stock annually over a three-year period on the anniversary date of the grant date, contingent upon their employment with the Company at each vesting date. Any unvested time-based RSU's will be forfeited if the Participant is no longer employed by the Company at any vesting date over the three-year term and the related expense will be adjusted for amounts related to the unvested RSU's. The value of these RSU awards was determined based on the Company's closing stock price at the grant date and is being recorded on a straight-line basis over the three-year term.
Performance-Vested RSU's
For RSU awards contingent upon performance conditions, the Company will assess if the pre-defined performance condition(s) is achievable based on the terms within each RSU award agreement. If achievable, the Company may also be required to estimate the number of RSU's subject to vest if different levels of the performance conditions are specified within the award agreement. The fair value of the RSU award is based on the Company closing stock price on the date of the grant, if specified within the award agreement. If the RSU grant value is indeterminable at the time of the grant, the Company will use the Black-Scholes option-pricing model to estimate the fair value of the award (additional information related to the Black-Scholes option-pricing model is detailed below under '2006 Employee Stock Option Plan'). The Company will continue to assess the fair value of the RSU award periodically until final determination.
During the twelve months ended December 31, 2020 and 2019, the Company granted certain key employees and executive officers performance-based RSU's, where vesting is contingent upon the Company's achievement of an earnings-based performance target for at least one of the years included during the three-year term. The number of RSU's that could vest range from 50.0% to 200.0% of the number RSU's included in the grant. Common stock will be issued for each vested RSU on the third anniversary of the grant date. Any unvested RSU's are subject to forfeiture if the Participant is no longer employed by the Company prior to the vesting date in which the performance target is met. The Participant is still entitled to the vested RSU's if they separate from the Company before the three-year anniversary grant date. The fair value of the grants is based on the closing price of the Company's stock at the grant date. As of December 31, 2020, the target for the initial year during the three-year term had not been met and, accordingly, the Company did not record any share-based compensation expense for these RSU's.
DSU's
DSU's issued entitle the Participant to receive one share of the Company's common stock for each vested DSU upon separation from the Company. The fair value of these awards is measured based on the number of DSU's awarded in the terms of the award agreement and the closing price of the DSU grant date. The Company recognizes share-based compensation on a straight-line basis over the term specified in the DSU agreement. Any unvested DSU's will be forfeited upon termination of employment or services from the Company prior to the vesting date. Share-based compensation expense is adjusted accordingly based on the forfeiture terms that are stipulated in the DSU agreement.
DSU's awards that have been granted to the Hill's executive officers and other key employees are time-vesting. The DSU's vest over a three-year term at each anniversary of the DSU grant date at 33.3% per annum. The Company will adjust the share-based compensation expense for any forfeited DSU's if the Participant leaves prior to the last installment of the vesting period.
The Company's non-employee board of directors (the "Board") receive DSU grants for their equity-based portion of their annual service retainer at each annual stockholder meeting during their term of service. At their election, the Board can also receive additional DSU's in lieu of the cash portion of their annual retainer. DSU's issued to the Board are only subject to forfeiture if their departure from the Company is due to termination with cause and, otherwise, will vest. Therefore, the Company recognizes the full fair value of the award at the date of the grant. The fair value of the DSU's are determined based on the Company's stock closing price on the grant date and the number of DSU's awarded in the award agreement.
Employee Stock Option
The Black-Scholes option valuation model is used to estimate the fair value of the options. The following table summarizes the fair value of options granted during 2020 and 2019 and the assumptions used to estimate the fair value:
December 31,
2020 2019
Average expected life (years) N/A * 3.50
Forfeiture range N/A * - %
Weighted average forfeiture rate N/A * - %
Dividends N/A * - %
Volatility range N/A * 49.4 %
Weighted average volatility N/A * 49.4 %
Range of risk-free interest rates N/A * 1.9 %
Weighted average risk-free interest rate N/A * 1.9 %
Weighted average fair value at grant date N/A * $ 0.88
* There were no stock options granted during the year ended December 31, 2020.
The expected term of the options is management's estimates based on the Company's option exercise history. Expected volatility was calculated using the average historical volatility of the Company's stock price. The risk-free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the term of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective, particularly as to stock price volatility of the underlying stock, which can materially affect the resulting valuation.
A summary of the Company’s stock option activity and related information for the years ended December 31, 2020 and 2019 is as follows (in thousands, except exercise price and remaining life data):
Options Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Life (in years) Aggregate
Intrinsic
Value
Outstanding, December 31, 2018 1,943 $ 4.36
Granted 500 3.13
Exercised - -
Expired (564) 4.53
Forfeited - -
Outstanding, December 31, 2019 1,879 3.98
Granted - -
Exercised - -
Expired (306) 3.79
Forfeited (10) 4.46
Outstanding, December 31, 2020 1,563 $ 4.01 2.40 $ 3,273
Exercisable, December 31, 2020 1,036 $ 4.01 1.96 $ 2,372
The aggregate intrinsic value represents the difference between the exercise prices and the closing stock price on December 31, 2020. At December 31, 2020, the weighted average exercise price of the outstanding options was $4.01 and the closing stock price was $1.92.
The weighted average characteristics of outstanding stock options by exercise price at December 31, 2020 are as follows:
Options Outstanding Options Exercisable
Exercise
Prices Number Outstanding at December 31, 2020 Weighted Average Remaining Contractual
Life (in years) Number Exercisable at December 31, 2020 Weighted Average Remaining Contractual
Life (in years)
$3.13 500 3.45 167 3.45
4.00 250 2.25 200 2.25
4.03 225 1.08 225 1.08
4.31 13 2.45 10 2.45
4.65 347 3.19 208 3.19
4.90 5 1.59 5 1.59
4.95 211 0.19 211 0.19
5.17 12 2.45 10 2.45
1,563 2.40 1,036 1.96
At December 31, 2020, total unrecognized compensation cost related to non-vested options was $527 which will be recognized over the remaining weighted-average service period of 2.40 years.
2008 Employee Stock Purchase Plan
The Employee Stock Purchase Plan ("ESPP") covers 2,000 shares of the Company’s common stock. Eligible employees may purchase shares at 85% of the fair market value on the date of purchase. During the years ended December 31, 2020 and 2019, the Company received aggregate ESPP proceeds of $245 for 196 of the Company's shares and $161 for 77 of the Company's shares, respectively.
Note 12 - Stockholders’ Equity
In April 2020, the Company exercised its right to retain 261 common shares that were pledged as collateral under the terms of a secured promissory note payable to the Company. Upon the terms of the secured promissory note, the note holder agreed to relinquish these shares upon the maturity date. As a result, these shares have been transferred from common stock to treasury stock, as reflected on the Company's Statements of Stockholders' Equity.
Note 13 - Income Taxes
The effective tax rates for the years ended December 31, 2020 and 2019 were (1636.2)% and (8.4)%, respectively. For the year ended December 31, 2020, the Company’s effective tax rate differs from the U.S. federal statutory rate primarily due to additional uncertain tax position accruals, as well as the inability to recognize any tax benefit for losses in certain jurisdictions, particularly Brazil. For the year ended December 31, 2019, the Company’s effective tax rate differs from the U.S. federal statutory rate primarily due to benefits recognized from provision to return adjustments and the reversal of an outstanding tax accrual related to the Claims Construction Group sale. This is partially offset by additional uncertain tax position accruals, as well as additional increases in the Company's valuation allowances.
The components of (loss) earnings before income taxes on the Company's consolidated statements of operations by the United States and foreign jurisdictions were as follows:
Years Ended December 31,
2020 2019
United States $ (1,839) $ (3,948)
Foreign jurisdictions 1,403 17,093
$ (436) $ 13,145
Income tax expense (benefit), as reflected in the Company's consolidated statements of operations, consists of the following:
Current Deferred Total
Year ended December 31, 2020:
U.S. federal $ - $ 26 $ 26
State and local 217 (15) 202
Foreign jurisdictions 6,100 806 6,906
$ 6,317 $ 817 $ 7,134
Year ended December 31, 2019:
U.S. federal $ 65 $ 23 $ 88
State and local (27) (5) (32)
Foreign jurisdictions (1,934) 769 (1,165)
$ (1,896) $ 787 $ (1,109)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as The Tax Cuts and Jobs Act of 2017 (the “Act”). The Act makes broad and complex changes to the U.S. tax code and includes significant provisions impacting the Company's 2018 and 2019 effective tax rate. The changes include, but are not limited to, a reduction in the U.S. federal corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, a one-time deemed repatriation (“Transition Tax”) on earnings of certain foreign subsidiaries that were previously tax deferred, and the creation of new taxes that may apply on certain foreign sourced earnings. The Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. For the year ended December 31, 2020, there was no tax incurred as a result of the period inclusion. For the year ended December 31, 2019, there was an immaterial amount of tax incurred as a result of the period inclusion.
On December 27, 2020, the Consolidated Appropriations Act 2021 (the “Appropriations Act”) was enacted in response to the COVID-19 pandemic. The Appropriations Act, among other things, temporarily extends certain expiring tax provisions through December 31, 2025. Additionally, the Appropriations Act enacts new provisions and extends certain provisions originated within the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020. The Company is currently evaluating the provisions of the Appropriations Act as well as the CARES Act, but at present time, does not expect that the CARES Act or the Appropriations Act will result in a material tax or cash benefit.
Income tax expense (benefit) was $7,134 and $(1,109) for the twelve months ended December 31, 2020 and 2019, respectively. The following table summarizes the difference between the income tax expense/(benefit) at the United States statutory rate of 21.0% for both years ended December 31, 2020 and 2019 and the income tax expense at effective worldwide tax rates for the respective periods:
Years Ended December 31,
2020 2019
Statutory federal income tax (benefit) $ (92) $ 2,760
Foreign tax expense 4,415 50
Change in the valuation allowance (766) 1,968
Net liability additions for uncertain tax positions 1,713 1,183
Excess compensation 129 -
State and local income taxes, net of federal income tax benefit 202 (32)
Stock options 122 94
Foreign intercompany loan adjustments 764 185
Prior period adjustments 499 (1,821)
Global intangible low-taxed income - 369
Non-deductible loss on bond - (1,667)
Reversal of Construction Claims Group liability - (4,056)
Other 148 (142)
Total $ 7,134 $ (1,109)
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows:
December 31,
2020 2019
Deferred tax assets:
Net operating loss carry forward - U.S. operations $ 9,442 $ 9,807
Net operating loss carry forward - foreign operations 6,673 10,295
Compensated absences 1,559 944
Foreign income taxes on currency translation 3,315 5,543
Share-based compensation 581 465
Allowance for doubtful accounts 2,840 3,440
Labor contingencies 6 261
Interest limitations 1,144 1,659
Foreign tax credit 115 292
Accrued expenses 1,369 1,164
Other 279 375
Total gross deferred tax assets 27,323 34,245
Valuation allowances (20,103) (28,821)
Net deferred tax assets 7,220 5,424
Deferred tax liabilities:
Intangible assets (1,627) (1,364)
Depreciation (317) (86)
Prepaid expenses (465) (434)
Change in tax method (570) (284)
Deferred income (1,753) 125
Total gross deferred tax liabilities (4,732) (2,043)
Net deferred tax assets $ 2,488 $ 3,381
The deferred taxes have been reflected in the Company's consolidated balance sheets based on tax jurisdiction as follows:
December 31,
2020 2019
Deferred tax asset $ 3,698 $ 3,800
Deferred tax liability (1,210) (419)
Net deferred tax assets $ 2,488 $ 3,381
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC 740, Income Taxes. They consider both positive and negative evidence. In making this determination, management assesses all of the evidence available at the time including recent earnings, internally-prepared income projections, and historical financial performance. See Schedule II - Valuation and Qualifying Accounts for breakdown of valuation allowance for amounts added, net of deductions, for the years ended December 31, 2020 and 2019.
During the year ended December 31, 2018, the Company generated net operating losses in the U.S., which, under the Act, now have an unlimited life. The Company recorded an additional valuation allowance to materially offset this loss, as the Company had determined that it was more likely than not that the they would not be able to utilize a significant portion of its United States deferred tax assets. The gross cumulative federal net operating loss as of December 31, 2020 and 2019 was $9,351 and $9,553, respectively, with no expiration. The cumulative state net operating losses at December 31, 2020 and 2019 were $115,291 and $113,945, which will begin to expire in 2025.
At December 31, 2020 and 2019, there were approximately $32,014 and $46,630, respectively, of gross foreign net operating loss carry forwards. The majority of these net operating loss carry forwards have an unlimited carry forward period. It is anticipated that these losses will not be utilized due to continuing losses in these jurisdictions. Foreign valuation allowances of $8,541 and $16,073 were recorded at December 31, 2020 and 2019, respectively, primarily related to the foreign net operating loss carry forwards.
The Company continues to evaluate its worldwide cash needs, and as of December 31, 2020, the Company has a partial reinvestment assertion on certain of its unremitted foreign earnings. Generally, the foreign earnings previously subject to the Transition Tax in the U.S. can be distributed without additional U.S. federal tax, however, any such repatriation of previously unremitted foreign earnings could incur withholding and other foreign taxes, if applicable, as well as certain U.S. state taxes when remitted in any given year. At December 31, 2020, the Company has made no provision for federal, state, withholding or other foreign taxes related to these earnings as these taxes are either not applicable or not material. Additionally, the Company's Netherlands subsidiary has a partial reinvestment assertion regarding certain unremitted foreign earnings as well. The Company has made no provision for foreign taxes related to these earnings because the Netherlands entity continues to qualify for the participation exemption whereby certain foreign earnings can be repatriated without any additional tax at December 31, 2020.
The Company will recognize a tax benefit in the financial statements for an uncertain tax position only if the Company'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 financial reporting purposes.
The following table indicates the changes to the Company’s uncertain tax positions for the years ended December 31, 2020 and 2019, including interest and penalties:
Years Ended December 31,
2020 2019
Balance, beginning of year $ 4,615 $ 2,988
Reductions based on tax positions related to prior years (162) (702)
Reduction due to settlements with taxing authorities - (960)
Additions based on tax positions related to prior years 1,875 3,289
Balance, end of year $ 6,328 $ 4,615
The Company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Company generally is no longer subject to U.S. or state examinations by tax authorities for taxable years prior to 2015. However, net operating losses utilized from prior years in subsequent years’ tax returns are subject to examination until three years after the filing of subsequent years’ tax returns. The statute of limitations expiration in foreign jurisdictions for corporate tax returns generally ranges between two and five years, depending on the jurisdiction.
The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense. At December 31, 2020 and 2019, the Company’s consolidated balance sheet reflects cumulative provisions for interest and penalties of $757 and $616, respectively, related to potential interest and penalties.
The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of its provision for income taxes. As part of its assessment of potential adjustments to its tax returns, the Company increases its current tax liability to the extent an adjustment would result in a cash tax payment or decreases its deferred tax assets to the extent an adjustment would not result in a cash tax payment. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.
Note 14 - Commitments and Contingencies
General Litigation
From time to time, the Company is a defendant or plaintiff in various legal proceedings that 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.
Knowles Limited (“Knowles”), a subsidiary of the Company, is a party to an arbitration proceeding instituted on July 8, 2014 in which Knowles claimed that it was entitled to payment for services rendered to Celtic Bioenergy Limited (“Celtic”). The arbitrator decided in favor of Knowles. The arbitrator’s award was appealed by Celtic to the U.K. High Court of Justice, Queen’s Bench Division, Technology and Construction Court (“Court”). On March 16, 2017, the Court (1) determined that certain relevant facts had been deliberately withheld from the arbitrator by an employee of Knowles and (2) remitted the challenged parts of the arbitrator’s award back to the arbitrator to consider the award in possession of the full facts. The Company is evaluating the impact of the judgment of the Court. In May 2019, Celtic issued a claim against Knowles for negligent application and a hearing was held in December 2019. The arbitration was concluded in August 2020 in Knowles' favor. Celtic has appealed the arbitrator's decision.
Loss on Performance Bond
On February 8, 2018, the Company received notice from the First Abu Dhabi Bank ("FAB", formerly known as the National Bank of Abu Dhabi) that the Public Authority of Housing Welfare of Kuwait submitted a claim for payment on a performance guarantee issued by the Company for approximately $7,938 for a project located in Kuwait. FAB subsequently issued, on behalf of the Company, a payment on February 15, 2018. The Company is taking legal action to recover the full Performance Guarantee amount. On September 20, 2018 the Kuwait First Instance Court dismissed the Company's case. As a result, the Company fully reserved the performance guarantee payment above in the first quarter of 2018. The Company filed an appeal before the Kuwait Court of Appeals seeking referral of the matter to a panel of experts for determination. On April 21, 2019, the Court of Appeals ruled to refer the matter to the Kuwait Experts Department. Hearings with the Kuwait Experts Department were held during July and September 2019. A final report was issued by the panel of experts in October 2019 for the held hearings on January 7, 2020 and February 4, 2020 and reserved the case for judgment to be issued. The Company filed a pleading before the Kuwait Cassation Court in August 2020 and is awaiting a decision.
Off-Balance Sheet Arrangements
The Company enters into agreements with banks for the banks to issue bonds and letters of guarantee to clients, potential clients and other third parties, mainly for the purposes as follows:
(1)The Company has entered into contracts for the performance of construction management services that provide that the Company receive advance payment of some of the management fee from the client prior to commencement of the construction project. However, the clients require a guarantee of service performance in the form of an advance payment bond. These bonds are evidenced by Letters of Guarantee issued by the subsidiaries’ banks in favor of the clients. In some cases, these clients also require a parent company guarantee. The average term the Company entered into such arrangements was 2.1 years at December 31, 2020.
(2)The Company may also enter into certain contracts that require a performance bond to be issued by a bank in favor of the client for a portion of the value of the contract. These bonds may be exercised by the client in instances where the Company fails to provide the contracted services. The weighted average term the Company entered into such arrangements was 1.1 years at December 31, 2020, which excludes performance bonds that contain open-ended expiration dates.
(3)Certain clients may require bonds as part of the bidding process for new work. Bid bonds are provided to demonstrate the financial strength of the companies seeking the work and are usually outstanding for short periods. If the bid is rejected, the bond is canceled and if the bid is accepted, the Company may be required to provide a performance bond. The weighted average term of these arrangements was 0.3 years at December 31, 2020, which excludes bid bonds with open-ended expiration dates.
The maximum potential future payment under these arrangements at December 31, 2020 and 2019 was $67,382 and $74,597, respectively, which primarily includes credit facility arrangements that are denominated in foreign currencies. These balances partially reduced the Company's available borrowing capacity on the Domestic and International Revolving Credit Facilities by a total of $8,794 and $8,780 at December 31, 2020 and 2019, respectively, as reflected in Note 10 - Notes Payable and Long-Term Debt.
Cash held in restricted accounts as collateral for the issuance of performance and advance payment bonds, letters of credit and escrow at December 31, 2020 and 2019 was $7,184 and $9,067, respectively.
Other
The Company has identified a potential tax liability related to certain foreign subsidiaries’ failure to comply with laws and regulations of the jurisdictions, outside of their home country, in which their employees provided services. The Company has estimated the potential liability to be approximately $1,323 which is reflected in other liabilities in the consolidated balance sheet, $402 of which was expensed in selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2020.
Note 15 - Leases
The Company leases office space, equipment and vehicles throughout the world. Many of the Company's leases include one or more options to renew at the Company's sole discretion. The lease renewal option terms generally range from 1 month to 5 years for office leases. The determination of whether to include any renewal or early termination options is made by the Company at lease inception when establishing the term of the lease. On January 1, 2019, the Company adopted ASU-2016-2, Leases (Topic 842), which required the Company to recognize right-of use lease ("ROU") assets and lease liabilities on its consolidated balance sheet for all leases in excess of one year in duration. The lease liability represents the present value of the remaining lease payments, which only includes payments that are fixed and determinable at the time of commencement, over the lease term. The lease term may be adjusted for renewal or early termination options provided in the leases only if it is reasonably certain that the Company will exercise such options. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The Company elected to adopt the guidance using the modified retrospective method and, therefore, have not recast comparative periods presented in its unaudited consolidated financial statements. The Company elected the package of transition practical expedients for existing leases and therefore the Company has not reassessed the following: lease classification for existing leases, whether any existing contracts contained leases, if any initial direct costs were incurred and whether existing land easements should be accounted for as leases. The Company did not apply the hindsight practical expedient, accordingly, the Company did not use hindsight in its assessment of lease terms. As permitted under ASU 2016-2, the Company elected as accounting policy elections to not recognize ROU assets and related lease liabilities for leases with terms of twelve months or less and to not separate lease and non-lease components, and instead account for the non-lease components together with the lease components as a single lease component.
Rent expense for leases is recognized on a straight-line basis over the lease term from the lease commencement date through the scheduled expiration date for rent payments that are determined to be fixed, or are determinable at the lease commencement date. Some of the Company's lease arrangements require periodic increases in the Company's base rent that may be subject to certain economic indexes, among other items. In addition, these leases may require the Company to pay property taxes, utilities and other costs related to several of its leased office facilities. Typically, these amounts for such payments cannot be determined at the lease commencement date, and are identified as variable lease payment, which are expensed as incurred.
Total rent expense for the twelve months ended December 31, 2020 and 2019 included $2,374 and $2,138, respectively, that was associated with leases with an initial term of 12 months or less, in addition to variable costs the Company is responsible for paying on all leases.
Rent expense for operating leases is recognized on a straight-line basis over the lease term from the lease commencement date through the scheduled expiration date. Rent expense of approximately $8,294 and $9,079 for the twelve months ended December 31, 2020 and 2019, respectively, is included in either selling, general and administrative expenses or direct expenses, as appropriate, in the consolidated statements of operations.
During the three months ended June 30, 2020, as a result of the COVID-19 pandemic, the Company received rent concessions from certain lessors primarily in the form of rent payment deferrals, where rents that were originally scheduled to be paid to such lessors during the three months ended June 30, 2020, per the terms of the leases, were agreed to not become due and payable until 2021, with the option to pay the amounts deferred in monthly installments, plus interest. In April 2020, the FASB issued a Q&A in order to simplify how ASC-842 should be applied to rent concessions received as a result of the pandemic, and provided an optional practical expedient that permits an entity to make an election to not evaluate whether concessions granted by lessors related to COVID-19 are lease modifications, under certain conditions. Entities that make this election can then apply the lease modification guidance in ASC-842 or account for the concession as if it were contemplated as part of the existing contract. The Company elected to apply the practical expedient and not apply the lease modification guidance and has accordingly continued to recognize the rent expense as if no deferral had been provided. The Company recorded a payable for these amounts reflected in accounts payable and accrued expenses in the Company's consolidated balance sheets of $586 for such rent deferrals, which are required to be paid over monthly installments through December 2021.
The Company subleases certain real estate to third parties (the "sublessee"). The sublease income recognized for the twelve months ended December 31, 2020 and 2019 was $1,338 and $569, respectively, and was recorded as a reduction to selling, general and administrative expenses in the Company's consolidated statements of operations. These subleases may require the sublessee to reimburse the Company if they are required to pay property taxes, utilities and other costs related to the leased office facility. These reimbursements are identified as variable lease payments since these amounts cannot be determined at the lease commencement date and are recognized as reduction in expense as incurred.
The following is a schedule, by years, of maturities of lease liabilities as of December 31, 2020:
Years Ending December 31, Total Operating Lease Payments Total Financing Lease Payments
2021 $ 5,772 $ 75
2022 4,491 75
2023 3,679 75
2024 2,735 40
2025 1,963 -
Thereafter 2,958 -
Total minimum lease payments (1)(2)
21,598 265
Less amount representing imputed interest 3,260 9
Present value of lease obligations $ 18,338 $ 256
Weighted average remaining lease term (years) 4.63 3.54
Weighted average discount rate 7.0% 2.1%
(1) Partially includes rent expense amounts payable in various foreign currencies and are based on the foreign currency exchange rate as of December 31, 2020, where applicable.
(2) Includes lease amendments executed as of December 31, 2020, but not yet commenced.
Note 16 - Benefit Plans
401(k) Retirement Savings Plan
The Company maintains a 401(k) Retirement Savings Plan (the “401(k) Plan”) for qualified employees. The terms of the 401(k) Plan define qualified employees as those over 21 years of age who have completed at least thirty days of service. Generally, the Company matched $0.50 on the dollar of employee contributions up to a maximum of 6.0% of the employee's salary. Beginning with the May 1, 2020 pay period, the Company suspended the Company match through December 31, 2020 as part of the Company's corporate cost reductions related to COVID-19 (see Note 2 - Liquidity). The Company resumed the match on January 1, 2021. For the years ended December 31, 2020 and 2019, the Company recognized expense of $706 and $2,151, respectively, which is included in selling, general and administrative expenses in the consolidated statements of operations.
End of Service Benefits
The Company maintains several End of Service Benefit plans (the “EOSB Plans”) that provide lump sum termination benefits to certain employees in the United Arab Emirates, Saudi Arabia, Qatar, Oman, and Bahrain. The EOSB Plans are calculated based on tenure of service and may vary depending on the circumstances surrounding the separation. Generally, the plans provide for a lump sum benefit that is based on the employee's salary, years of service and statutory requirements that exist within the employee's office location. The Company calculated the present value of the expected future payments using the Projected Unit Credit Method, which estimates the fair value of the projected benefits that current plan participants will earn and was used to assess the Company's liabilities as of December 31, 2020 and 2019. The baseline assumptions used for the calculation included a discount rate of 0.9%, a salary increase of 2.0% per annum and an employee turnover rate of 25% per annum. The Company recorded liabilities of $10,090 and $10,440 for the EOSB Plans as of December 31, 2020 and 2019, respectively, which are included in accrued payroll and related expenses. For the years ended December 31, 2020 and 2019, the Company recognized expense for the EOSB Plans of $2,456 and $2,269, respectively, of which $1,819 and $1,962, respectively, related to service costs is included in direct expense and selling, general and administrative expense in the consolidated statements of operations. The remaining expense is included in other (loss) income, net, in the consolidated statements of operations.
Note 17 -Segment and Related Information
The Company has one reporting segment, the Project Management Group, which reflects how the Company is managed. The Project Management Group provides construction and project management services to construction owners worldwide. Such services include program management, project management, construction management, project management oversight, troubled project turnaround, staff augmentation, project labor agreement consulting, commissioning, estimating and cost management, labor compliance services (collectively, "integrated project management") and facilities management services.
The following tables present certain information for the Company's operations:
Total Revenue by Geographic Region:
2020 2019
Americas $ 192,777 52.4 % $ 200,142 53.1 %
Middle East/Asia/Pacific 92,639 25.1 % 104,927 27.9 %
Europe 53,819 14.6 % 43,488 11.6 %
Africa 29,289 7.9 % 27,880 7.4 %
Total $ 368,524 100.0 % $ 376,437 100.0 %
For the twelve months ended December 31, 2020 and 2019, total revenue for the United Arab Emirates amounted to $39,353 or 10.7%, and $37,904 or 10.1%, of the Company's total revenue, respectively. No other country except for the United States and the United Arab Emirates accounted for over 10% of total revenue.
Operating Profit (Loss):
2020 2019
Americas $ 31,959 $ 27,834
Middle East/Asia/Pacific 9,287 13,782
Europe 5,558 4,955
Africa 5,401 11,235
Corporate (41,706) (39,260)
Total $ 10,499 $ 18,546
Depreciation and Amortization Expense:
2020 2019
Project Management $ 1,385 $ 3,791
Corporate 2,653 33
Total $ 4,038 $ 3,824
Revenue By Client Type:
2020 2019
U.S. federal government $ 17,942 4.9 % $ 18,967 5.0 %
U.S. state, regional and local governments 118,845 32.2 % 124,504 33.1 %
Foreign governments 99,906 27.1 % 91,683 24.4 %
Private sector 131,831 35.8 % 141,283 37.5 %
Total $ 368,524 100.0 % $ 376,437 100.0 %
Property, Plant and Equipment, Net by Geographic Location:
December 31,
2020 2019
Americas $ 7,741 $ 10,401
Middle East/Asia/Pacific 917 882
Europe 544 473
Africa 241 139
Total $ 9,443 $ 11,895
Note 18 - Deconsolidation of Controlling Interest in Subsidiaries
On June 12, 2020, Hill International Brasil S.A ("Hill Brazil") filed for bankruptcy and liquidation with the Bankruptcy Court of Sao Paulo Brazil. Hill Brazil was a consolidated operating subsidiary of Hill International Brasil Participacoes LTDA ("Brazil Consolidated"). A trustee was appointed by the court on June 15, 2020 to oversee the settlement of liabilities and close the entity. The Company lost control of Hill Brazil on the date of the bankruptcy filing and, as a result, deconsolidated Hill Brazil at that time.
At June 12, 2020, Hill Brazil's assets totaled $1,901, and consisted of Cash $9, Accounts receivable $1,380, Property, Plant & Equipment $295 and other assets $217. At June 12, 2020, Hill Brazil's liabilities totaled $3,538 and consisted of accounts payable and accrued expenses $1,800, debt $365, deferred revenue $132 and other liabilities $1,242. Therefore, Hill Brazil's liabilities exceeded assets by $1,638. The write-off of the investment in Hill Brazil by Brazil Consolidated resulted in a $1,201 loss. The write-off of the balance sheet and write-off of the investment in Hill Brazil resulted in a $437 gain on the deconsolidation before consideration of foreign currency adjustments and intercompany items.
In conjunction with the liquidation of Hill Brazil, the Company's intercompany receivables from Hill Brazil totaling $116 were fully reserved and an intercompany payable of $1,180 to Hill Brazil from Brazil Consolidated was written off against the income/loss of the liquidation. Additionally, $5,565 of accumulated other comprehensive losses related to foreign currency adjustments was taken into expense. This resulted in a net loss of $4,064 related to the deconsolidation which was recorded on the consolidated statements of operations under other loss (income), net.
On December 29, 2020, Brazil Consolidated filed for bankruptcy and liquidation with the Bankruptcy Court of Sao Paulo Brazil. Brazil Consolidated was a consolidated subsidiary of Hill International, N.V. The Company lost control of Brazil Consolidated on the date of the bankruptcy filing and as a result deconsolidated Brazil Consolidated at that time which resulted in an additional net loss of $1,437 being recorded on the consolidated statements of operations under other loss (income), net. The balance sheet of Brazil Consolidated primarily consisted of intercompany payables. The corresponding intercompany receivables were written off on the respective entity's balance sheets in conjunction with the liquidation and deconsolidation of Brazil Consolidated resulting in no net consolidated income/loss impact. The net loss is primarily comprised of the deconsolidation of $1,350 of net assets, and $313 of accumulated other comprehensive losses related to foreign currency adjustments taken into expense which were offset by $226 of eliminated capital.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Based upon its evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, because of the material weaknesses in its internal controls over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of December 31, 2020.
Exchange Act Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934 (the "Exchange Act") define “disclosure controls and procedures” to mean controls and procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. The definition further states that disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As a result of the material weaknesses identified, we performed additional analysis, substantive testing and other post-closing procedures intended to ensure our consolidated financial statements were prepared in accordance with U.S. GAAP. Accordingly, the Company's management believes that the consolidated financial statements and related notes hereto included in this Annual Report on Form 10-K fairly presents in all material respects the Company’s financial position, results of operations and cash flows for the periods presented.
(b) Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in the Exchange Act. Our internal control system was designed under the supervision of our Chief Executive Officer (the "CEO") and our Senior Vice President and Chief Financial Officer (the "CFO") and with the participation of management in order to provide reasonable assurance regarding the reliability of our financial reporting and our preparation of financial statements for external purposes in accordance with U.S. GAAP.
All internal control systems, no matter how well designed and tested, have inherent limitations, including, among other things, the possibility of human error, circumvention or disregard. Therefore, even those systems of internal control that have been determined to be effective can provide only reasonable assurance that the objectives of the control system are met and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, under the supervision of our CEO and CFO, evaluated the effectiveness of our internal control over financial reporting and, based on the criteria established in the applicable “Internal Control-Integrated Framework” issued by the COSO (2013), determined that the Company had not maintained effective internal control over financial reporting as of December 31, 2020 due to the material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting, a copy of which is included in Item 8 of this Annual Report on Form 10-K.
Material Weaknesses
The Company has multiple material weaknesses that are in various stages of remediation. The Company plans to make further substantive improvements to the design of the internal control structure to remediate the underlying causes of the control deficiencies that led to the material weaknesses. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing and analysis, that these controls are operating effectively.
Remediated Material Weaknesses
Control Environment
Financial Reporting - Policies Procedures and Controls
The material weakness that the Company did not design, establish, and maintain effective documented U.S. GAAP compliant financial accounting policies and procedures, nor a formalized process for determining, documenting, communicating, implementing, monitoring, and updating accounting policies and procedures has been remediated. The Company has implemented new accounting and finance policies which are reviewed and updated periodically. This matter was first reported in the Company's December 31, 2016 Form 10-K/A.
Control Activities
Foreign Currency Transactions
The material weakness that the Company did not maintain effective controls over the accurate preparation, recording, and review of foreign currency related transactions in accordance with ASC 830, Foreign Currency Matters has been remediated.
This matter resulted in a restatement of the Company’s 2016, 2015, and 2014 consolidated financial statements and specifically related to the Company’s accounting for its foreign currency gains and losses on intercompany transactions. The Company has implemented controls and processes over foreign currency transactions and analysis of the corresponding general ledger accounts to mitigate this matter.
This matter was first reported in the Company's December 31, 2016 Form 10-K/A Amendment 2. This matter was self-reported by the Company to the SEC.
In the SEC investigation, errors were identified in the accounting for foreign exchange losses, with former employees attempting to spread losses out over time in order to reduce the negative impact of such losses on the Company’s financial statements. This resulted in both the Company’s net income and accumulated other comprehensive income (loss) account being overstated. In January 2020, the Company reached a settlement with the SEC without admitting or denying wrongdoing.
Cash Flow
The material weakness that the Company did not maintain effective controls to ensure the accurate preparation and review of the cash flow statement in accordance with ASC 230, Statement of Cash Flows has been remediated. This matter was first reported in the Company's December 31, 2016 10-K/A Amendment 2. These deficiencies resulted in material line item adjustments to the Company's consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014.
Controls and processes implemented to address this matter included engaging a third-party service provider to design and implement the cash flow statement preparation process. The Company prepares the statement of cash flows on a functional currency basis for all entities, translates the individual statements to United States dollars and then aggregates each statement into a consolidated statement of cash flows.
Journal Entries - Policies, Procedures and Controls
The material weakness that the Company did not design and operate policies, procedures and controls to ensure that journal entries were properly approved has been remediated, including a segregation of duties between the preparer and approver of the journal entries. This matter was first reported in the Company's December 31, 2019 10-K.
The Company has implemented controls and processes over the review and approval of journal entries and the segregation of the preparation and approval functions to mitigate this matter. The company has implement new accounting and finance policies which are reviewed and updated periodically.
Aggregation of Deficiencies
Multiple deficiencies were aggregated to create a material weakness.
Intercompany Balances
The material weakness that intercompany balances were not appropriately recorded and paired within the system, nor were the intercompany accounts appropriately reconciled on a timely and continuing basis has been remediated. The company has implemented controls and oversight of the intercompany process mitigating this matter. This matter was first reported in the December 31, 2016 10-K/A Amendment 2.
Joint Ventures
The material weakness that the Company did not properly account for its investments in joint ventures, as required under ASC 323, Equity Method and Joint Ventures has been remediated. The Company has implemented a white paper process for joint ventures to ensure the proper accounting treatment is followed; additional controls provide for the oversight of the accounting for each joint venture agreement. This matter was first reported in the December 31, 2016 10-K/A Amendment 2.
Information & Communication
Access & Segregation of Duties
The material weakness that the Company did not maintain effective controls over certain information technology ("IT") systems and processes that are relevant to the preparation of our consolidated financial statements has been remediated Specifically, the Company did not maintain effective monitoring controls for the periodic review of access to financial systems and data, for user access to segregated duties within financial applications and for decommissioning of access privileges following changes in employment status.
The Company has completed system access reviews and a comprehensive segregation of duties ("SOD") review. The Company will continue to monitor and execute access and SOD reviews periodically. Additional updates to system roles, access and compensating controls will be performed to further mitigate SOD conflicts.
The Company has and will continue to address the coordination and communication of personnel changes between the finance, human resources and IT departments to ensure timely modification or decommissioning of access. This matter was first reported in the Company's December 31, 2018 Form 10-K.
Monitoring & Review
The material weakness that the Company did not maintain effective monitoring and review activities including the timely assessment of control design gaps and their impact to the control environment has been remediated. This matter was the result of the Company not completing Sarbanes Oxley (“SOX”) testing for fiscal year 2018 and was first reported in the Company's December 31, 2018 Form 10-K. Due to the volume of material weaknesses and control deficiencies previously outstanding, additional oversight was required to mitigate the weaknesses identified in the control environment.
The Company has implemented remediation plans that have addressed multiple material weaknesses. The Company will continue to monitor and review the control environment.
Risk Assessment
Income Tax & Uncertain Tax Positions
The material weakness that the Company did not maintain effective controls over its income tax provision and related balance sheet accounts has been remediated. This matter was specific to the reversal of tax accruals established for uncertain tax positions.
The Company has implemented multiple controls to ensure the proper recognition and de-recognition of tax liabilities is performed. The Tax Director analyzes all uncertain tax provisions quarterly which is reviewed with the Company CFO. This matter was first reported in the Company's December 31, 2016 Form 10-K/A Amendment 2.
Outstanding Material Weaknesses
We continue implementing various changes in our internal control over financial reporting to remediate the material weaknesses described. We continue to make progress on our remediation and our goal is to implement the remaining control improvements related to these material weaknesses throughout the remainder of 2021. Management believes that the new people, processes, third party partners and control design provide the foundation for remediation of the remaining material weaknesses. The material weaknesses will be deemed fully remediated when the control processes have been operating effectively for a sufficient period of time and when management testing has reached a successful conclusion. We will continue to review, optimize and enhance our financial reporting controls and procedures, as we continue to evaluate and work to improve our internal control over financial reporting.
Control Activities
Vendor Approval - Policies, Procedures and Controls
The Company did not properly design policies, procedures and controls to ensure vendors were properly reviewed, approved and set-up within the system.
There is insufficient review and approval of vendor set-up in the accounting system to ensure accuracy and completeness of vendor information, as well as compliance with Company policy.
The Company will institute a policy during 2021 that all new vendor set-ups and changes will be reviewed for accuracy, completeness and compliance with Company policy by an individual other than the individual entering the information, with such review documented at an appropriate level of precision.
Revenue Recognition - Policies, Procedures and Controls
The Company’s revenue recognition policies, procedures, and controls were not designed effectively. More specifically:
The Company failed to consistently ensure there were effective and documented review controls over the set-up and monitoring of its estimates at completion calculations for long-term fixed fee contracts.
Consulting fee revenue (“CFR”) from long-term fixed fee contracts comprised of approximately 16% of the Company’s total CFR during 2020. The Company formalized the preparation of estimates at completion during 2020 for substantially all long-term fixed fee contracts. Accordingly, the Company prepared estimates at completion for substantially all long-term fixed fee contracts during 2020.
These estimates at completion were not independently reviewed for accuracy, which is a failure in control design for long-term fixed fee contracts. The Company had in place during 2020 certain other controls, including comparing actual costs incurred to costs expected according to the estimate at completion, with investigation of significant variances, as well as margin analysis comparing actual gross margin on projects to expected gross margin, with significant variances investigated. However, the performance of these other controls was not consistently documented and/or not consistently at a level of precision to be considered effective.
The Company will institute a policy in 2021 requiring independent review of estimates at completion, with such review documented at an appropriate level of precision. The Company will also institute a policy in 2021 to formally document the actual vs. expected costs and gross margin analysis.
The Company failed to design controls to ensure the proper set-up of contract information in the system and over the review and approval of manual billings. This contract information and manual billing is used in the revenue recognition process.
The Company developed a contract checklist during 2020 to ensure contract data was entered properly into the accounting system. The checklist did not require independent verification of billing rates contained in the contract or supplemental documentation, which is a failure in control design for revenue recognition. The Company had in place during 2020 certain other controls, including the margin analysis mentioned above and project manager review of substantially all client invoices. However, the performance of these other controls was not consistently documented and/or not consistently at a level of precision to be considered effective.
A majority of the Company’s client invoices are generated automatically from the accounting system. Certain client invoices are prepared manually in Excel based on information from the accounting system. These manual invoices are reviewed and approved by the project manager. However, this review was not consistently documented and/or not consistently at a level of precision to be considered effective.
The Company will add to the contract checklist during 2021 a requirement to verify billing rates to the contract or supplemental documentation. The Company will also institute a policy in 2021 to formally document the gross margin analysis, as well for project managers to formally document their review of client invoices. Additionally, the Company is in the process of configuring its accounting system to enhance invoicing capabilities, which we believe will substantially decrease the amount of manual invoicing.
Changes in Internal Control over Financial Reporting
Except for the continued improvements resulting from progress made on the above noted remediation plans, there were no changes to the Company’s internal control over financial reporting during the fourth quarter of 2020 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not applicable.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information in our 2021 Proxy Statement, which will be filed with the SEC within 120 days after the close of our fiscal year, regarding directors and executive officers appearing under the headings "Proposal 1: Election of Directors" and "Other Matters-Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated by reference in this section. The information under the heading "Executive Officers" in Part I, Item 1 of this Form 10-K is also incorporated by reference in this section. In addition, the information under the heading "Corporate Governance" in our 2021 Proxy Statement is incorporated by reference in this section.
We have adopted a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. This code of ethics is available on our website at www.hillintl.com, or may be obtained free of charge by making a written request addressed to our Legal Department. We will disclose on our website amendments to, and, if any are granted, waivers of, our code of ethics.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information appearing in our 2021 Proxy Statement under the headings "Executive Compensation" and "Director Compensation" is incorporated by reference in this section.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information appearing in our 2021 Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” is incorporated by reference in this section.
Equity Compensation Plan Information
The following table provides information as of December 31, 2020 for common shares of the Company that may be issued under our 2008 Employee Stock Purchase Plan and our 2017 Equity Compensation Plan. See Note 11 Share-Based Compensation to the consolidated financial statements for further information related to these plans.
Plan Category Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a) Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a)) (1)
(c)
Equity compensation plans approved by security holders 4,015 $ 3.52 2,242
Equity compensation plans not approved by security holders - - -
Total 4,015 $ 3.52 2,242
(1)As of December 31, 2020, the Company had 922 shares remaining available for future issuance under our 2008 Employee Stock Purchase Plan and 1,320 shares remaining available for future issuance under our 2017 Equity Compensation Plan. Future grants are no longer available under our 2006 Employee Stock Option Plan or our 2009 Non-Employee Director Stock Grant Plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information appearing in our 2021 Proxy Statement under the headings "Corporate Governance" and "Certain Relationships and Related Transactions" is incorporated by reference in this section.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The table below reflects the fees and expenses for services rendered by Grant Thornton for the years ended December 31, 2020 and 2019. The Audit Committee pre-approved all of these services.
Years Ended December 31,
Type of Fees 2020 2019
Audit Fees (1)
$ 1,825 $ 2,001
Audit - Related Fees (2)
39 37
Total Fees $ 1,864 $ 2,038
(1) Audit fees consist of fees billed and an estimate of fees to be billed for services for the audit of our financial statements and review of our financial statements included in our quarterly reports on Form 10-Q and services provided in connection with other statutory or regulatory filings.
(2) Audit-related fees consist of fees incurred for the audit of the Company's 401(k) plan.
Pre-Approval Policy of Audit Services and Permitted Non-Audit Services of Independent Auditors
The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services and are pre-approved in one of two methods. Under the first method, the engagement to render the services would be entered into pursuant to pre-approval policies and procedures established by the Audit Committee, provided (i) the policies and procedures are detailed as to the services to be performed, (ii) the Audit Committee is informed of each service, and (iii) such policies and procedures do not include delegation of the Audit Committee’s responsibilities under the Exchange Act to the Company’s management. Under the second method, the engagement to render the services would be presented to and pre-approved by the Audit Committee (subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Audit Committee prior to the completion of the audit). The Chairman of the Audit Committee will have the authority to grant pre-approvals of audit and permissible non-audit services by the independent auditors, provided that all pre-approvals by the Chairman must be presented to the full Audit Committee at its next scheduled meeting. The Company will provide for appropriate funding, as determined by the Audit Committee, for payment of compensation to the independent registered public accounting firm and to any consultants, experts or advisors engaged by the Audit Committee.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
Financial statements:
The consolidated balance sheets of the Registrant as of December 31, 2020, and 2019, the related consolidated statements of operations, comprehensive (loss) earnings, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2020, the footnotes thereto, and the report of Grant Thornton, independent auditors, are filed herewith.
Financial statement schedule:
Schedule II-Valuation and Qualifying Accounts for the years ended December 31, 2020 and 2019.
(b) Exhibits
Exhibit Index
Exhibit No. Description
2.1 Agreement and Plan of Merger dated December 5, 2005, by and among Arpeggio Acquisition Corporation, Hill International, Inc. and certain stockholders of Hill International, Inc., as amended. (Included as Annex A of the Definitive Proxy Statement (No. 000-50781) filed on June 6, 2006 and incorporated herein by reference.)
3.1 Amended and Restated Certificate of Incorporation of Arpeggio Acquisition Corporation. (Included as Annex B of the Definitive Proxy Statement (No. 000-50781) filed on June 6, 2006 and incorporated herein by reference.)
3.2 Amended and Restated By-laws of Hill International, Inc. (Included as Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 31, 2017 and incorporated herein by reference.)
3.3 Certificate of First Amendment of Amended and Restated Certificate of Incorporation of Hill International, Inc. (Included as Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 18, 2013 and incorporated herein by reference.)
4.1 Specimen Common Stock Certificate. (Included as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 (No. 333-114816) filed on April 23, 2004 and incorporated herein by reference.)
4.2 Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
10.1* Hill International, Inc. 2006 Employee Stock Option Plan (as amended through June 11, 2012). (Included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 14, 2012 and incorporated herein by reference.)
10.2 U.S. Credit Agreement, dated as of September 26, 2014, among Hill International, Inc., as borrower, Société Générale, as administrative agent, collateral agent and lender, the other lenders party thereto, and certain subsidiaries of the Company. (Included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 2, 2014 and incorporated herein by reference.)
10.3 U.S. Guaranty and Security Agreement, dated as of September 26, 2014, among Hill International, Inc., Société Générale, as administrative agent and collateral agent and certain subsidiaries of the Company. (Included as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 2, 2014 and incorporated herein by reference.)
10.4 International Credit Agreement, dated as of September 26, 2014, among Hill International N.V., as borrower, Hill International, Inc., certain of its subsidiaries party thereto, and Société Générale, as administrative agent, collateral agent and letter of credit issuer, and the lenders party thereto (Included as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on October 2, 2014 and incorporated herein by reference.)
10.5 International Guaranty and Security Agreement, dated as of September 26, 2014, among Hill International N.V., as borrower, Hill International, Inc., and the lenders party thereto in favor of Société Générale, as administrative agent. (Included as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on October 2, 2014 and incorporated herein by reference.)
10.6 Intercreditor Agreement, dated as of September 26, 2014, by and among Société Générale, as collateral agent, and the loan parties thereto. (Included as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on October 2, 2014 and incorporated herein by reference.)
10.7* Hill International, Inc. 2007 Restricted Stock Grant Plan. (Included as Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 (No. 333-141814), filed on April 2, 2007 and incorporated herein by reference.)
10.8* Hill International, Inc. 2008 Employee Stock Purchase Plan. (Included as Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 (No. 333-152145), filed on July 3, 2008 and incorporated herein by reference.)
10.9* Hill International, Inc. 2015 Senior Executive Retention Plan. (Included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 2, 2015 and incorporated herein by reference.)
10.10 Hill International, Inc. 2010 Senior Executive Bonus Plan. (Included as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 30, 2010 and incorporated herein by reference.)
10.11* Hill International, Inc. 2016 Executive Retention Plan. (Included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 9, 2016 and incorporated herein by reference.)
10.12* Form of Hill International, Inc. 2016 Executive Retention Plan Participation Agreement. (Included as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 9, 2016 and incorporated herein by reference.)
10.13* Hill International, Inc. 2017 Equity Compensation Plan (Included as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on June 20, 2017 and incorporated herein by reference.)
10.14 Second Amendment to Credit Agreement (Included as Exhibits 10.1 and Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on May 11, 2017 and incorporated herein by reference.)
10.15 Increased Commitment Agreement (Included as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on June 23, 2017 and incorporated herein by reference.)
10.16 Nomination and Standstill Agreement (Included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 9, 2018.)
10.17 Nomination and Standstill Agreement (Included as Exhibit 10.1 to the Registrant’s Report on Form 8-K filed on September 13, 2018.)
10.18 Hill International, Inc. 2017 Equity Compensation Plan (amended and restated through March 26, 2018) (Included as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on September 28, 2018.)
10.19 Form of Restricted Stock Unit Award Agreement (Included as Exhibit 10.1 to the Registrant’s Report on Form 8-K filed on December 3, 2018.)
10.20 Form of Deferred Stock Unit Award Agreement (Officers) (Included as Exhibit 10.2 to the Registrant’s Report on Form 8-K filed on December 3, 2018.)
10.21 Form of Deferred Stock Unit Award Agreement (Directors) (Included as Exhibit 10.3 to the Registrant’s Report on Form 8-K filed on December 3, 2018.)
10.22 Reduction in Cash Compensation of Board of Directors (disclosed in the Registrant’s Report on Form 8-K filed on April 28, 2020).
21 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton, Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002..
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.PRE XBRL Taxonomy Presentation Linkbase Document.
101.CAL XBRL Taxonomy Calculation Linkbase Document.
101.LAB XBRL Taxonomy Label Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Constitutes a management contract or compensatory plan.