HireQuest, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. HireQuest is a nationwide franchisor of on-demand staffing businesses. At quarter-end it had 138 franchisee-owned offices in 30 states and the District of Columbia; it no longer operated company-owned offices.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $3.38 million | $3.29 million | $10.40 million | $10.00 million |
| Operating income (loss) | $1.99 million | $(4.14) million | $3.76 million | $0.11 million |
| Net income (loss) | $1.97 million | $(7.78) million | $4.00 million | $(3.75) million |
| Basic EPS | $0.15 | $(0.60) | $0.30 | $(0.34) |
| System-wide sales | $55.63 million | $74.18 million | $156.16 million | $173.70 million |
- Q3 revenue comprised $3.22 million in franchise royalties and $164,000 in service revenue. Royalties were up 2.5% year over year, while system-wide sales fell 25.0%. Nine-month royalties increased 3.1%, while system-wide sales declined 10.1%.
- Reported operating margin was 58.9% in Q3 and 36.2% for the first nine months; these unusually high margins reflect the franchisor’s net-revenue model and reduced costs. SG&A was $1.36 million in Q3 and $6.54 million year to date. The prior-year comparison included approximately $4.7 million of merger-related costs.
- Operating cash flow was $6.94 million for the nine months, including a $4.18 million cash benefit from lower accounts receivable. Investing cash flow was a use of $6,000 and financing cash flow was a use of $824,000. Cash rose $6.11 million from year-end to $10.30 million.
- At September 30, current assets were $39.62 million and current liabilities $10.25 million, implying working capital of $29.37 million and a current ratio of approximately 3.9. Total assets were $49.15 million; total liabilities were $13.73 million; equity was $35.42 million.
- The filing reports no outstanding line-of-credit borrowings. The $30 million Truist facility had $10.1 million utilized for letters of credit and approximately $19.9 million available; it matures May 31, 2024. The company was compliant with its fixed-charge coverage covenant. The facility is secured by substantially all operating assets.
Changes, outlook, and key risks
- The COVID-19 pandemic materially reduced staffing demand and system-wide sales. Sales improved month over month from April, but remained below prior-year levels. Management expected sales and royalty revenue to remain depressed through Q4 2020 and likely into 2021; no quantitative earnings guidance was provided.
- Thirteen offices closed or consolidated during the first nine months, while four opened. Management said most closures were in areas still served by other offices, but further closures and franchisee financial distress remained possible.
- The company recorded a $1.6 million allowance for potentially uncollectible notes receivable, based on borrower condition, collateral values, and COVID-related outlook. Net notes receivable were approximately $8.5 million, or 17.3% of assets. No notes were reported in default at quarter-end.
- Workers’ compensation is a material exposure: the company is effectively self-insured up to policy deductibles and supports approximately $9.1 million of collateral with a letter of credit. Claims reserves depend on estimates and actuarial assumptions.
- The 2019 comparisons are affected by the July 2019 merger, reverse-acquisition accounting, and presentation of company-owned offices sold in 2019 as discontinued operations. The 2019 tax provision was also unusual, reflecting Legacy HQ’s former pass-through status and tax accounting changes.
- HireQuest declared and paid a $0.05-per-share quarterly dividend, totaling approximately $678,000, and stated it intended to continue quarterly dividends subject to business results and financial position. A one-year repurchase plan authorized up to 1 million shares; 23,638 shares were purchased in Q3 for approximately $146,000.
- Management stated it expected available cash, operating cash generation, note collections, and unused credit capacity to cover operating and other liquidity needs for at least 12 months. It cautioned that pandemic effects and future access to credit are uncertain. Legal proceedings were not expected to result in material uninsured losses.
Most important facts for investors to verify
- Whether staffing demand and franchise system-wide sales recover, and the effect on royalty revenue, office count, and franchisee health.
- Recoverability of the $8.5 million net notes receivable balance, including the $1.6 million allowance and exposure to the California office purchaser.
- Adequacy of workers’ compensation reserves and continued availability of the credit facility and required letters of credit.
- Sustainability of cash generation and the dividend given working-capital needs, ongoing COVID-19 disruption, and capital spending.
- Comparability of reported earnings across periods, particularly the merger-related costs, discontinued operations, and unusual 2019 tax effects.