HireQuest, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
HireQuest is a nationwide staffing and recruiting franchisor. At quarter-end, it reported 428 franchisee-owned offices and one company-owned office. It generally records franchise royalties and service fees rather than franchisees’ full staffing sales. TEC assets acquired in December 2023 were subsequently sold to buyers who became franchisees.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change / context |
|---|---|---|---|
| Total revenue | $8.419 | $9.857 | Down 14.6% |
| Franchise royalties | $7.831 | $9.323 | Down 16.0% |
| Operating income | $2.102 | $3.316 | Operating margin 25.0%, versus 33.6% |
| Continuing-operations net income | $1.692 | $2.318 | Down 27.0%; diluted EPS was $0.12 versus $0.17 |
| Net income | $1.619 | $2.630 | Includes discontinued-operations loss of $0.073 in 2024 and income of $0.312 in 2023 |
| Adjusted EBITDA | $3.357 | $4.581 | Non-GAAP; margin 39.9% versus 46.5% |
| Operating cash flow | $(0.967) | $0.390 | Continuing operations used $0.894 in 2024 |
| Cash at period-end | $1.569 | $8.207 | Q1 2024 cash increased from $1.342 at year-end 2023 |
System-wide sales fell 12.7% to $134.035 million; management attributed the revenue decline to broad-based sales weakness, including a $12.3 million decrease in MRI system-wide sales. The net effective royalty rate declined to 5.8% from 6.1%. SG&A decreased to $5.619 million, partly reflecting a 9.8% reduction in headcount, but fell less than revenue.
Cash used in continuing operations reflected working-capital demands, notably a $3.386 million increase in accounts receivable. Investing activities provided $0.213 million, mainly from franchisee note repayments; financing activities provided $0.981 million, including $1.988 million of net revolving-credit borrowings, offset partly by $0.838 million of dividends.
At March 31, current assets were $55.065 million and current liabilities were $37.085 million, leaving working capital of approximately $18.0 million. The company had $16.107 million outstanding on its revolving line of credit, $0.476 million of term loans, and approximately $24.2 million of facility availability based on eligible collateral, reserves, and covenant compliance. The variable-rate facility’s effective borrowing rate was approximately 6.6%. The company reported compliance with its financial covenants.
Material changes, outlook and risks
- System-wide sales declined across several major brands: HireQuest Direct fell 7.6%, Snelling and HireQuest 12.6%, and Northbound, MRI and SearchPath 23.4%. DriverQuest and TradeCorp and HireQuest Health grew from smaller bases.
- Workers’ compensation expense was approximately $0.572 million, compared with a net expense of $0.185 million a year earlier. Management said prior-period results benefited from releases of acquired reserves and does not expect similar future benefits; claims experience and expense remain difficult to predict.
- Management said available cash, operating cash generation, note repayments and credit capacity should meet liquidity needs for at least the next 12 months and beyond. No specific revenue or earnings guidance was provided. The company said it expects borrowing costs to remain exposed to interest-rate movements.
- The company intends to continue quarterly dividends based on results and financial position; it paid $0.06 per share in Q1 2024. Dividends are subject to credit-agreement restrictions and conditions.
- Management identified economic and staffing-demand uncertainty, franchisee performance, acquisition integration, workers’ compensation claims, cybersecurity and other operational disruptions, and legal or regulatory matters as risks. It said inflation had not materially affected results to date, but prolonged inflation could affect growth and acquisitions. It reported no material changes to previously disclosed risk factors and no expected material uninsured losses from current legal proceedings.
- Disclosure controls and procedures were deemed ineffective because a previously identified material weakness in internal control over financial reporting remained: insufficient accounting resources for technical accounting matters and review. Management said remediation was ongoing; it had not concluded the weakness was remediated.
Important facts for investors to verify
- Whether system-wide sales and royalty trends, particularly MRI, stabilize or continue to weaken.
- Accounts-receivable collections, working-capital needs, and continued access to revolving-credit availability under eligible-collateral and covenant requirements.
- Workers’ compensation claim development and reserve assumptions, given the year-over-year expense increase and management’s caution about volatility.
- Progress and independent testing of the control-remediation plan. The filing refers to hiring a CFO “in November 2024,” which is after the May 9, 2024 filing date; verify this apparent date inconsistency and the company’s current control status.
- The performance and sale status of discontinued operations, including the held-for-sale Dubin assets, and the collectability of franchisee notes receivable.