HireQuest, Inc. — FY 2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed March 15, 2022. The filing also provides unaudited fourth-quarter results. HireQuest is a staffing franchisor, with revenue primarily from franchise royalties. The 2021 results reflect the recovery from COVID-19 disruption and four acquisitions.
Business context and material changes
- Completed acquisitions of Snelling, LINK, Recruit Media and Dental Power during 2021. Cash paid for acquisitions was approximately $33.7 million.
- Ended the year with 217 franchised offices and one company-owned office, compared with 139 franchised offices at year-end 2020. System-wide sales were reported at $354.5 million, with approximately $89 million attributed to acquisitions and $55 million to organic growth.
- COVID-19 continued to depress activity, although management said its impact was less severe than in 2020. Management also cited staffing shortages and uneven economic recovery.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Total revenue | $22.8 million | $13.8 million |
| Operating income | $7.7 million | $5.0 million |
| Net income | $11.85 million | $5.36 million |
| Diluted EPS | $0.87 | $0.39 |
| Adjusted EBITDA (non-GAAP) | $14.74 million | $9.55 million |
| Cash from operating activities | $17.4 million | $10.9 million |
- Revenue increased 64.8%; franchise royalties rose 66.6% to $21.3 million. Management attributed the revenue increase to existing offices and acquired operations. The effective blended royalty rate was 6.0% in both years.
- Operating income grew 53.9%, while operating margin was approximately 33.7%, compared with 36.1% in 2020. Net income included a $5.6 million bargain-purchase gain from Snelling, partly offset by a $1.9 million loss on assets transferred in connection with LINK.
- Year-end cash was $1.26 million, down from $13.67 million. Current assets were $42.0 million and current liabilities $21.5 million; management reported working capital of approximately $20.5 million.
- Year-end debt included $3.07 million under the term loan and $0.17 million drawn on the revolving line. Approximately $19.2 million was available under the line, subject to borrowing-base and other conditions. The company reported compliance with its financial covenants.
- Investing activities used $29.4 million, principally reflecting acquisition spending; operating cash flow was $17.4 million. Dividends paid totaled $3.14 million. The quarterly dividend was raised from $0.05 to $0.06 per share in 2021; future payments remain at the board’s discretion.
- Workers’ compensation claims liability increased to $8.25 million from $4.58 million. Notes-receivable loss reserves were approximately $1.9 million.
Fourth-quarter results
For the three months ended December 31, 2021, revenue was $6.77 million versus $3.41 million in the prior-year quarter, and net income was $2.19 million versus $1.36 million. Diluted EPS was $0.16 versus $0.10.
Outlook, risks and unusual items
- No quantified financial guidance was provided. Management said it believed available cash, operating cash generation, note collections and borrowing capacity would meet liquidity needs for at least the next 12 months, while cautioning that future financing availability is not assured.
- Subsequent to year-end, the company reported acquisitions involving Temporary Alternatives, Dubin and Northbound. It also disclosed a March 2022 reduction in required workers’ compensation collateral from $14.3 million to $10.7 million, increasing letter-of-credit availability.
- Key risks include economic and pandemic-related demand changes, competition for temporary workers, wage and supply-cost inflation, seasonality, workers’ compensation claims and collateral requirements, franchisee credit and performance, acquisition integration, employment regulation, and cybersecurity and technology disruption.
- Control issue: Management reported a material weakness in internal control over financial reporting at December 31, 2021, due to insufficient accounting resources for technical accounting and review. Disclosure controls were deemed effective, but internal control over financial reporting was not. Remediation efforts included hiring a CFO and adding accounting resources and outside expertise; management had not yet concluded the weakness was remediated.
- The auditor issued an unqualified opinion on the financial statements, but did not audit or express an opinion on internal control effectiveness. Audit critical matters included workers’ compensation reserves and valuation of Snelling franchise agreements.
Important facts for investors to verify
- System-wide-sales comparability: the filing cites 2020 sales of both $210.9 million and $212.75 million; the latter appears in the detailed component table. The stated 68.1% growth rate uses the lower figure, so confirm the correct baseline.
- How much of reported earnings growth reflects recurring operations versus the $5.6 million bargain-purchase gain and other acquisition-related items.
- Whether the accounting-control material weakness is remediated and whether added acquisitions have increased reporting or integration risks.
- Collectability of franchisee and California purchaser notes, adequacy of workers’ compensation reserves, and the effect of collateral and credit-facility covenants on liquidity.
- Performance and integration of 2021 and subsequent acquisitions, and whether organic growth and franchise royalties persist as pandemic effects and seasonal patterns evolve.