HireQuest, Inc. — 2023 Form 10-K
Reporting period: Year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter report. Comparisons below are to 2022 unless stated otherwise. Amounts are in U.S. dollars.
Business context
HireQuest is a staffing and recruiting franchisor. Its brands provide temporary staffing, direct-dispatch labor, executive search and permanent-placement services. The company generally earns royalties and service fees; its reported revenue excludes sales from company-operated offices classified as discontinued operations. At year-end it reported 427 franchised offices and one company-owned office, with operations in the United States and 13 other countries.
The December 2022 MRI acquisition materially expanded the business, particularly its recruiting network. In December 2023, HireQuest acquired ten TEC Staffing locations in Arkansas for approximately $9.8 million, then sold the acquired assets to franchisees for approximately $7.6 million.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| System-wide sales | $605.1 million | $472.2 million | Up 28.1%, principally reflecting a full year of MRI versus about one month in 2022 |
| Total revenue | $37.9 million | $31.0 million | Up 22.4%; includes $35.8 million in franchise royalties and $2.1 million in service revenue |
| Income from operations | $10.6 million | $16.0 million | Operating margin 28.1% versus 51.8% |
| Net income | $6.1 million | $12.5 million | Net margin 16.2% versus 40.2%; 2023 included a $0.3 million discontinued-operations loss |
| Diluted EPS | $0.45 | $0.91 | Declined year over year |
| Adjusted EBITDA | $16.5 million | $22.0 million | Non-GAAP; 43.5% and 71.2% of revenue, respectively |
| Cash from operating activities | $10.6 million | $16.9 million | Down year over year |
| Cash at year-end | $1.3 million | $3.0 million | Current assets were $51.5 million and current liabilities $35.7 million |
| Debt at year-end | $14.8 million | $16.5 million | $14.1 million revolving credit borrowings plus $0.6 million term loans, compared with $12.5 million and $4.0 million, respectively |
Investing activities used $7.1 million, including $9.8 million paid for acquisitions, partly offset by proceeds from converting acquired offices to franchises. Financing activities used $5.2 million, including $3.3 million of dividends and net payments on debt. HireQuest reported $26.2 million of additional borrowing availability under its Bank of America facility at year-end, after collateral and letter-of-credit considerations, subject to borrowing conditions and covenant compliance.
The $50 million revolving facility matures February 28, 2028, bears variable-rate interest and had an effective rate of approximately 6.7% at year-end. HireQuest reported compliance with its financial covenants. Its current assets exceeded current liabilities by approximately $15.7 million.
Material changes and unusual items
- Royalty revenue rose 23.9%, largely from MRI; the blended effective royalty rate declined to 6.0% from 6.4%.
- SG&A increased to $24.4 million from $12.9 million. Management attributed the increase primarily to a $5.6 million rise in workers’ compensation expense and higher MRI-related salaries, benefits and other costs. Depreciation and amortization increased to $2.8 million from $2.0 million.
- Other miscellaneous expense was $1.7 million and included a $2.0 million loss on the TEC asset disposition. Interest and financing expense rose to $1.4 million from $0.4 million, including a $0.3 million debt-extinguishment loss and higher borrowing costs.
- Workers’ compensation claims liabilities were $6.6 million at year-end, up from $5.9 million. The estimate is actuarially determined and was identified as a critical audit matter.
- In discontinued operations, HireQuest recorded a $0.5 million impairment of the Dubin customer list. It continued to market the remaining Philadelphia operation for sale and expected a sale within 12 months.
Outlook, risks and controls
The filing provides no specific revenue, earnings or other numerical guidance. Management said cash, expected operating cash generation and available credit should be sufficient for liquidity needs for at least the next 12 months and beyond, while noting future financing access is not assured. Management intends to continue quarterly dividends of $0.06 per share, but the board may change or suspend them.
Key risks include economic and staffing-demand cyclicality, seasonal winter weakness, difficulty attracting qualified workers, wage and inflation pressures, workers’ compensation claims and collateral requirements, franchisee financial health, acquisition integration and goodwill or intangible-asset impairment, competition and technology disruption, cybersecurity, and credit-facility covenants. The company’s $0.6 million allowance for potential franchisee note losses was up from $0.3 million in 2022. The filing says current legal proceedings are not expected to result in material uninsured losses.
Management concluded disclosure controls and internal control over financial reporting were not effective at December 31, 2023 because of an unresolved material weakness: insufficient accounting resources to address technical accounting matters and provide adequate review. The company reported remediation efforts, including additional accounting staff and third-party technical support. The financial statement auditor gave an unqualified opinion on the 2023 statements, but was not engaged to audit internal control over financial reporting.
Important facts for investors to verify
- Reconcile the filing’s different revenue descriptions: $35.8 million is franchise royalties, while reported total revenue is $37.9 million including service revenue.
- Review the drivers and potential persistence of the workers’ compensation expense increase and the $6.6 million claims reserve, including required insurance collateral.
- Track progress in remediating the material weakness and whether controls are tested and deemed effective in later filings.
- Assess the quality of reported earnings alongside cash generation and the non-GAAP Adjusted EBITDA reconciliation, including excluded acquisition, impairment and other charges.
- Verify the remaining availability and covenant conditions on the variable-rate credit facility, and monitor debt, dividends and acquisition funding.
- Check the status and sale terms of the remaining Dubin operation and review the TEC disposition loss and related franchise conversion.
- Resolve office-count presentation differences: the filing gives conflicting 2023 opening and closing counts in different sections, although both report a net reduction of eight offices.