HireQuest, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. HireQuest is a nationwide staffing franchisor. At quarter-end it reported 212 franchised offices in 35 states and Washington, D.C. (the overview elsewhere says approximately 210).
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5.71 million | $2.90 million | $9.11 million | $7.02 million |
| Operating income | $3.30 million | $0.94 million | $2.53 million | $1.77 million |
| Net income | $2.72 million | $1.16 million | $6.46 million | $2.03 million |
| Diluted EPS | $0.20 | $0.09 | $0.47 | $0.15 |
| Adjusted EBITDA (non-GAAP) | $4.41 million | $1.76 million | $5.94 million | $4.75 million |
Q2 revenue increased 96.7% year over year; six-month revenue increased 29.7%. Franchise royalties were $5.45 million in Q2 and $8.71 million for the half, while service revenue was $0.26 million and $0.40 million, respectively. Operating margin was 57.8% in Q2 and 27.8% for the half; net margin was 47.7% and 70.9%, respectively. The unusually high six-month net margin reflects a nonrecurring acquisition gain, not solely ongoing operations.
System-wide sales, a company-defined performance indicator rather than reported revenue, rose 101.2% to $88.68 million in Q2 and 44.2% to $145.02 million for the half. Management attributed royalty growth to both acquisitions and organic improvement from the pandemic-affected prior-year comparison.
Cash, debt, and liquidity
- Cash was $2.20 million at June 30, down from $13.67 million at December 31, 2020. Current assets were $41.15 million and current liabilities $19.66 million, or working capital of approximately $21.49 million.
- Six-month cash from operations was $11.33 million; investing used $23.99 million, mainly for acquisitions; financing provided $1.20 million. Cash decreased by $11.46 million.
- HireQuest reported a $60 million revolving facility and a $3.2 million term loan with Truist. Term-note balance was $3.15 million. Letters of credit used $14.8 million of capacity; the company reported approximately $13.7 million available for additional borrowing under the borrowing base at quarter-end. The term loan and revolver carry variable rates; reported effective rates were approximately 3.0% and 2.7%, respectively.
- The credit agreement requires a minimum 1.25:1 fixed-charge coverage ratio and maximum 3.0:1 leverage ratio; the company reported compliance at June 30. It stated that cash, operating cash generation, and borrowing capacity should cover needs for at least 12 months.
Material changes and unusual items
- Completed the Snelling acquisition on March 1 for approximately $17.7 million and the Link franchise-asset acquisition on March 22 for approximately $11.1 million. Acquisitions expanded the reported office base; the company subsequently sold the Snelling company-owned locations.
- Six-month results included a $4.96 million bargain-purchase gain from Snelling and approximately $1.22 million net loss associated with sales of acquired assets. These items materially affected miscellaneous income and earnings.
- SG&A rose 5.7% in Q2 and 13.5% for the half, reflecting acquisition-related costs and higher compensation and other expenses, partly offset by lower bad-debt expense. Depreciation and amortization also increased following acquisitions.
- Dividends paid in the first half totaled approximately $1.50 million. The board subsequently declared a $0.06-per-share dividend payable September 15, 2021.
Outlook, risks, and controls
Management said system-wide sales had been trending toward historical levels month to month, but expected pandemic-related weakness in royalties to persist through the rest of 2021 and potentially beyond. It cited uncertainty around COVID-19, customer demand, franchisee performance and closures, acquisition integration, staffing-industry conditions, regulatory and legal matters, and access to credit. At least 13 franchise offices had closed or consolidated at least partly because of COVID-19; the company said further closures or franchisee hardship remained possible.
The company reported that disclosure controls were not effective at June 30 because of a previously identified material weakness: insufficient accounting resources for technical accounting and review. Management described staffing and outside-professional measures to remediate it but gave no assurance as to when remediation would be complete. Management nevertheless concluded the financial statements fairly presented the company’s financial position and results in all material respects. Legal proceedings were not expected to result in material uninsured losses.
Important facts for investors to verify
- How much of earnings and revenue growth is sustainable after separating acquisitions, the bargain-purchase gain, asset-sale effects, and pandemic-related comparisons.
- Whether system-wide sales and royalty trends continue to improve, and whether franchisee closures or financial stress increase.
- Actual borrowing-base availability and liquidity needs as accounts receivable, payroll funding, workers’ compensation obligations, and acquisition integration evolve.
- Progress and cost of remediating the material weakness in financial reporting controls.
- Collectability of notes receivable, including impaired balances, and the company’s workers’ compensation claim estimates and collateral requirements.
- Terms and governance of related-party transactions, including the sale of approximately $5.3 million of notes receivable to Bass, an entity related to significant shareholders and directors.