HireQuest, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Dollar amounts are in millions unless otherwise stated. HireQuest is a staffing franchisor, with franchise operations across multiple brands and a smaller company-owned staffing business. At quarter-end it reported 225 franchisee-owned offices and two company-owned offices.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $9.36 | $6.88 | $26.79 | $15.99 |
| Gross profit | $8.24 | $6.88 | $23.96 | $15.99 |
| Income from operations | $5.24 | $3.47 | $13.42 | $6.00 |
| Net income | $4.25 | $3.19 | $9.74 | $9.66 |
| Diluted EPS | $0.31 | $0.23 | $0.71 | $0.71 |
| Adjusted EBITDA (non-GAAP) | $6.63 | $5.29 | $17.85 | $9.60 |
- Q3 franchise royalties were $7.43 million, up from $6.54 million; owned-location staffing revenue was $1.50 million, versus none in Q3 2021. Nine-month royalties were $21.23 million and owned-location staffing revenue was $3.89 million.
- Gross profit was 88.0% of reported revenue in Q3 and 89.4% for the nine months; the comparison with 2021 is affected by the introduction of owned-location staffing revenue and its associated costs. Management reported gross profit as 6.7% of system-wide sales in Q3 and 7.0% year to date.
- System-wide sales increased 21% in Q3 to $123.2 million and 39% year to date to $344.3 million. Acquisitions contributed materially to these increases, alongside organic growth.
- Net income from continuing operations was $4.15 million in Q3 and $9.46 million year to date. The nine-month 2021 comparison included a substantial Snelling bargain-purchase gain; 2022 results included acquisition-related losses and higher taxes.
- Cash provided by operating activities was $11.31 million for the nine months, including $10.77 million from continuing operations, compared with $14.82 million in 2021. Investing activities used $10.15 million, including $19.13 million of acquisition spending, partly offset by $9.32 million from sales of acquired locations. Financing activities used $0.88 million, including $2.48 million of dividends.
Financial position and liquidity
- At September 30, 2022, cash was $1.54 million; accounts receivable, net, was $45.69 million; total assets were $89.77 million; and stockholders’ equity was $55.89 million. Current assets of $50.88 million exceeded current liabilities of $25.62 million by approximately $25.27 million.
- Debt comprised $2.21 million outstanding on the revolving line of credit and $4.13 million of term loans, or approximately $6.33 million in total. The revolving facility is $60 million; reported availability after borrowing-base limits, letters of credit, reserves and advances was approximately $26.1 million.
- The Truist facilities carry variable rates; reported effective rates at quarter-end were approximately 4.9% on the line and 5.1% on the term loan. The Northbound seller note was $1.5 million at 4.0%. HireQuest said it was in compliance with required fixed-charge coverage and leverage covenants.
- Management believes cash, operating cash generation and borrowing capacity are sufficient for working capital and other requirements over the next 12 months and beyond. It cautioned that borrowing costs could rise as benchmark rates increase.
Material changes, outlook and risks
- 2022 acquisitions included Temporary Alternatives, Dubin and Northbound. The company said these transactions expanded its footprint and staffing verticals. It also sold acquired operating assets into franchise arrangements; related 2022 losses contributed to $2.02 million of nine-month other miscellaneous expense, compared with $3.85 million of income in 2021, which included the Snelling bargain-purchase gain.
- Q3 SG&A declined to $2.40 million, primarily reflecting a $982,000 reduction in net workers’ compensation expense as reserves were reduced based on claims experience. Higher salaries and benefits and a $393,000 performance-bonus accrual partly offset the decrease. Nine-month SG&A included a $233,000 impairment charge on a non-franchisee note receivable.
- Management provided no quantified revenue or earnings guidance. It expects significant amortization to continue from acquired intangible assets. It identified staffing demand, franchisee and customer performance, inflation and supply disruptions, interest-rate increases, COVID-19, acquisitions and integration, and cyber or other operating disruptions as risks.
- At September 30, a Philadelphia operation acquired with Dubin remained held for sale and was reported as discontinued operations; it generated $98,000 of after-tax income in Q3 and $277,000 year to date.
- Disclosure controls and procedures were deemed ineffective because a previously reported material weakness in financial reporting controls remained open, relating to insufficient accounting resources for technical accounting and review. Management said remediation was underway, including additional accounting staff and outside expertise.
- Related-party matters warrant attention: entities with significant shareholder or director ownership interests purchased assets from the Temporary Alternatives and Northbound acquisitions, and related-party franchisees operated 64 offices. The filing says the Audit Committee reviews reportable related-party transactions.
- The company reported no material change in legal proceedings and did not expect material uninsured losses from them. It identified no material changes to other previously disclosed risk factors beyond those described in the filing.
Important facts for investors to verify
- How much of reported growth in system-wide sales, royalties and Adjusted EBITDA is organic versus acquisition-driven, and how comparable periods are affected by acquisitions and discontinued operations.
- Whether workers’ compensation reserve reductions are supported by claims development, and how future claims experience could affect earnings and cash needs.
- The carrying value and recoverability of notes receivable, especially the impaired non-franchisee note, and the remaining proceeds or obligations associated with held-for-sale operations.
- Borrowing-base availability, variable-rate exposure, covenant headroom and the ability to fund payroll and franchisee settlements while maintaining dividends and pursuing acquisitions.
- Progress and testing of remediation for the material weakness in internal controls, and governance and terms of related-party asset sales and franchise relationships.