HireQuest, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in millions of dollars unless otherwise noted. HireQuest is a staffing and executive-search franchisor; at quarter-end it reported 425 franchised offices and one company-owned office.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $9.27 | $7.85 | $28.12 | $22.89 |
| Operating income | $2.22 | $5.24 | $8.20 | $13.39 |
| Net income from continuing operations | $1.60 | $4.15 | $5.97 | $9.44 |
| Net income, including discontinued operations | $1.48 | $4.25 | $6.12 | $9.74 |
| Adjusted EBITDA (non-GAAP) | $3.74 | $6.54 | $12.19 | $17.66 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.79 | $11.31 |
- Revenue increased 18.1% in Q3 and 22.8% year to date, primarily reflecting the MRI Network acquisition. Franchise royalties rose 19.9% and 26.9%, respectively; service revenue declined.
- Reported operating margins were approximately 23.9% in Q3 and 29.2% year to date, versus 66.8% and 58.5% in the prior-year periods. These comparisons reflect much higher reported operating expenses in 2023 and a prior-year workers’ compensation benefit.
- Adjusted EBITDA declined 42.8% in Q3 and 31.0% year to date. The company defines this non-GAAP measure with exclusions; it is not a substitute for GAAP income or cash flow.
- Nine-month operating cash flow fell to $1.79 million from $11.31 million. The company cited working-capital cash use, including a $4.44 million increase in accounts receivable. Investing activities provided $0.31 million; financing activities used $4.03 million.
Liquidity, debt, and capital
- At September 30, 2023, cash was $1.11 million, current assets were $56.15 million, and current liabilities were $37.08 million, for working capital of approximately $19.1 million.
- Borrowings included $14.41 million on the revolving line and $0.73 million of term loans. The Bank of America senior revolving facility is $50 million, matures in February 2028, and carried an approximately 6.6% effective rate. Reported availability was approximately $25.9 million, subject to eligible collateral and covenant compliance; letters of credit also use facility capacity.
- The facility is secured by substantially all borrower assets and includes leverage, asset-coverage, and fixed-charge-coverage covenants. Management stated that available liquidity should meet anticipated needs for at least 12 months.
- The company paid $0.18 per share in dividends during the first nine months of 2023, including $0.06 per share for Q3. Future dividends depend on business results, financial position, and credit-agreement conditions.
Changes, outlook, and risks
- MRI contributed approximately $1.6 million of Q3 royalty growth and $5.8 million of nine-month royalty growth. Management said pre-existing system-wide sales declined, including lower sales in HireQuest Direct and Snelling/HireQuest. The acquired recruitment business carries lower royalty rates, reducing revenue relative to system-wide sales.
- System-wide sales rose 22.7% in Q3 and 34.1% year to date according to the MD&A table. The narrative gives different growth figures—24.3% and 35.5%, respectively—so investors should verify the underlying calculation.
- Workers’ compensation expense was approximately $1.5 million in Q3 and $2.3 million year to date, compared with benefits of $1.3 million and $2.1 million in the corresponding 2022 periods. The company is effectively self-insured for many claims and says results can fluctuate with claims experience and payroll mix.
- Interest and financing expense increased; nine-month expense was $1.16 million and included a debt-extinguishment charge reported as approximately $318,000 in MD&A. The company attributed higher borrowing costs to debt levels and variable interest rates.
- On October 23, 2023, HireQuest agreed to acquire TEC Staffing assets for approximately $9.8 million, to be financed with the senior credit facility. TEC reported more than $34 million of trailing-12-month revenue; HireQuest plans to convert the operations to Snelling franchises and offer them to buyers. This is a post-quarter agreement, not a completed acquisition as of the filing date.
- Management identified economic and geopolitical uncertainty, inflation and wage pressure, staffing demand, franchisee/customer performance, acquisition integration, workers’ compensation claims, and cybersecurity or operational disruption as risks. No material legal-proceeding changes were reported; management did not expect material uninsured losses.
- Disclosure controls and procedures were deemed ineffective at quarter-end because a previously reported material weakness in internal financial-reporting controls remained. Management cited remediation efforts, including additional accounting resources and external technical support, but had not concluded the weakness was remediated.
- Discontinued operations included the Philadelphia Dubin business classified as held for sale and Dental Power, whose sale generated a gain during 2023. The quarter’s discontinued-operations result was a $0.12 million loss.
Investor verification priorities
- Reconcile the conflicting system-wide-sales growth percentages in the MD&A table and narrative.
- Assess underlying franchise performance excluding MRI, especially the reported declines at established staffing brands, and the lower royalty yield from recruitment services.
- Review the drivers and sensitivity of workers’ compensation reserves, credit-loss allowances, and cash conversion given low cash and reduced operating cash flow.
- Check revolving-facility availability, covenant headroom, interest-rate exposure, and the financing impact of the TEC transaction.
- Monitor remediation and testing of the material weakness in financial-reporting controls, and progress on the Dubin held-for-sale assets.