HireQuest, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. HireQuest is a staffing and executive-search franchisor operating 438 franchisee-owned offices and one company-owned office at quarter-end.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $8.99 | $8.00 | $18.85 | $15.05 |
| Operating income | $2.67 | $4.26 | $5.98 | $8.15 |
| Net income | $2.01 | $4.89 | $4.64 | $5.49 |
| Diluted EPS | $0.15 | $0.36 | $0.34 | $0.40 |
| Adjusted EBITDA (non-GAAP) | $3.87 | $5.85 | $8.45 | $10.80 |
- Q2 revenue grew 12.4%; first-half revenue grew 25.3%. Franchise royalties rose 20.5% in Q2 and 30.7% in the first half, while service revenue declined. Management attributed much of the royalty growth to the MRI acquisition.
- System-wide sales increased 30.8% in Q2 and 40.4% in the first half, per the filing’s KPI table. MRI drove most of the increase; sales from pre-existing locations declined about $6.6 million in Q2 and were approximately flat for the first half. The lower royalty mix of recruitment services reduced revenue growth relative to system-wide sales.
- Operating margin was 29.6% in Q2 versus 53.2% a year earlier; first-half margin was 31.7% versus 54.2%. Net margin was 22.3% versus 61.1% in Q2 and 24.6% versus 36.5% for the first half. Lower prior-year comparison periods included acquisition-conversion gains and other unusual items.
- Adjusted EBITDA declined 33.8% in Q2 and 21.7% in the first half. It is a company-defined non-GAAP measure and excludes specified costs and gains; it should not be treated as a substitute for GAAP earnings.
Cash flow, debt and liquidity
- Cash was $2.1 million at June 30, down from $3.0 million at year-end 2022. Total operating cash flow was negative $0.2 million for the first half; continuing operations used $0.2 million. The increase in accounts receivable used $5.4 million of cash.
- Investing activities provided $0.2 million. Financing activities used $1.0 million, including $3.1 million of term-loan repayments and $1.7 million of dividends, partly offset by $4.0 million of net revolving-credit borrowings.
- At June 30, the $50 million Bank of America revolving facility had $16.5 million outstanding and approximately $23.2 million of availability, subject to eligible collateral and covenant compliance. The borrowing rate was variable and approximately 6.42%. The facility matures in February 2028 and is secured by substantially all borrower assets.
- Term loans totaled $0.9 million. Total current assets exceeded current liabilities by approximately $17.3 million. Current assets included $51.1 million of receivables, while current liabilities included $11.3 million due to franchisees and $3.0 million of current workers’ compensation claims liabilities.
- The credit agreement requires, among other conditions, funded debt to adjusted EBITDA of no more than 3.0:1.0 and fixed-charge coverage of at least 1.25:1.0. The filing states management believed available cash, operating cash generation and borrowing capacity would meet expected liquidity needs for at least the next 12 months.
Material changes, outlook and risks
- Higher operating costs, including MRI-related compensation, administration and amortization, substantially outpaced revenue growth. Management said compensation costs would remain above prior-year levels for the rest of 2023 and expected several quarters would be needed to realize anticipated MRI cost synergies.
- Interest and financing expense increased to $0.3 million in Q2 and $0.9 million in the first half, reflecting higher borrowings, higher rates and about $0.3 million of debt-extinguishment expense associated with refinancing the Truist facilities.
- Workers’ compensation expense was $0.7 million in Q2 and $0.9 million for the first half, compared with benefits in the prior-year periods. Management cautioned that costs fluctuate with payroll, job classifications and claims experience and are difficult to predict.
- Discontinued operations recorded a Q2 loss of $45,000; first-half income of $267,000 included a $340,000 gain on the Dental Power sale. The remaining Dubin Philadelphia business was still classified as held for sale; management expected a sale within 12 months.
- Management identified demand and financial performance in staffing, franchisee and customer health, recession and inflation, acquisition integration, workers’ compensation claims, litigation and regulation, cybersecurity, and access to credit as risks. HireQuest disclosed that cash balances at financial institutions may exceed FDIC insurance limits, although it reported no exposure to Silicon Valley Bank or Signature Bank.
- A material weakness in internal control over financial reporting remained as of June 30, 2023, relating to insufficient accounting resources for technical accounting and review. Management reported remediation efforts underway; disclosure controls were therefore concluded to be ineffective. Management nevertheless stated that the financial statements fairly present the company’s results in all material respects.
- No formal revenue or earnings guidance was provided in the filing. The company said inflation had not materially affected results to date, but prolonged inflation could affect growth and its acquisition strategy. Quarterly dividends were $0.06 per share; the filing says future dividends depend on business results and financial position and are subject to credit-agreement conditions.
Important facts for investors to verify
- Whether pre-existing franchise sales stabilize and whether MRI’s lower royalty rate continues to dilute revenue yield relative to system-wide sales.
- Whether MRI integration delivers the anticipated cost synergies, given rising SG&A, lower operating margins and declining adjusted EBITDA.
- Receivables collection and working-capital requirements, which contributed to negative operating cash flow despite reported profits.
- Revolver availability, variable-rate borrowing costs and continued compliance with credit covenants, including dividend restrictions.
- Workers’ compensation reserve assumptions and the progress and testing required to remediate the disclosed material weakness.
- Completion and proceeds of the remaining Dubin held-for-sale transaction, and the collection terms on the Dental Power sale receivable.