HireQuest, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted. HireQuest is a nationwide staffing franchisor, with 224 franchisee-owned offices and two company-owned offices at quarter-end.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $8.145 | $3.403 |
| Gross profit | $7.383 | $3.403 |
| Operating income (loss) | $3.979 | ($0.772) |
| Net income | $0.603 | $3.742 |
| Diluted EPS | $0.04 | $0.27 |
| Adjusted EBITDA (non-GAAP) | $5.307 | $1.533 |
| Cash from operating activities | $5.443 | $11.864 |
- Revenue increased about 139%; franchise royalties rose 102% to $6.573 million, while owned-location staffing revenue was $1.104 million and service revenue was $0.468 million.
- Gross margin on reported revenue was 90.6%, compared with 100% a year earlier; operating margin was 48.9%, versus negative 22.7%. The revenue mix changed with company-owned staffing operations.
- System-wide sales, a company-defined operating indicator and not GAAP revenue, were $101.032 million, up 80.1%. Management reported the net effective royalty rate rose to 6.6% from 5.8%.
- Net income fell despite higher operating income, chiefly reflecting a $3.379 million net loss in other miscellaneous income/expense in 2022 versus $3.781 million of other miscellaneous income in 2021. The prior-year comparison included a substantial Snelling bargain-purchase gain; current-period results included losses on converting acquired operations to franchises.
- Adjusted EBITDA increased, but is a non-GAAP measure. The filing adds back specified items, including acquisition-related and other non-recurring charges; it cautions that the measure may not be comparable across companies.
- Operating cash flow was $5.443 million, including $0.369 million from discontinued operations; continuing-operations operating cash flow was $5.074 million. Investing activities used $9.290 million, including $18.470 million for acquisitions, partly offset by $9.317 million in proceeds from sales of purchased locations. Financing activities provided $4.417 million, mainly from revolving-credit borrowings.
- At March 31, cash was $1.826 million; current assets were $47.167 million and current liabilities $28.287 million, a working-capital surplus of about $18.9 million. Net accounts receivable was $41.300 million.
- Reported borrowings comprised $5.464 million under the line of credit and $4.513 million in term loans. The $60 million revolving facility had approximately $19.2 million of availability after reserves and advances. The company reported compliance with its financial covenants.
Changes and significant transactions
- Q1 2022 growth reflects both acquisition activity and recovery from the pandemic-affected prior-year quarter. Management said COVID-19 had materially affected 2020 and, to a lesser extent, Q1 2021, making year-over-year comparisons less representative.
- During Q1, HireQuest acquired Temporary Alternatives, Dubin and Northbound. The filing cites transaction prices of approximately $5.25 million, $2.4 million and $11.0 million, respectively. The acquisitions expanded geographic reach and added staffing and executive-search operations.
- Some acquired operations were sold or converted to franchises. HireQuest recorded approximately $3.6 million of related losses in Q1 2022. Purchase-price allocations for the 2022 acquisitions were provisional and could change.
- SG&A declined 26.1% to $2.838 million, principally due to an approximately $818,000 reduction in workers’ compensation expense, which management attributed mainly to claims management and lower experience rates. Depreciation and amortization increased to $0.566 million, largely due to acquired intangible assets.
Outlook, risks and contingencies
- No specific revenue, earnings or other financial guidance is provided. Management said cash, expected operating cash flow and borrowing capacity should be sufficient for working capital and other liquidity needs over the next 12 months, and also expressed confidence beyond that period. These are forward-looking statements, not assurances.
- Management identified uncertainty around staffing demand, franchisee performance, customer retention, COVID-19 and other disruptions, acquisition integration, regulation, litigation, technology and cybersecurity, and economic conditions. It noted that recovery from the pandemic remained uncertain.
- Workers’ compensation exposure is significant: the company is effectively self-insured for many claims up to policy deductibles and provides approximately $10.7 million of collateral through letters of credit. Workers’ compensation claims liabilities totaled $8.151 million, current and non-current combined.
- The Truist credit agreement is secured by substantially all operating assets and includes leverage and fixed-charge-coverage covenants, restrictions on certain payments, and default provisions. The company reported covenant compliance at quarter-end.
- Disclosure controls and procedures were reported ineffective at March 31, 2022 because of a material weakness in internal control over financial reporting related to insufficient accounting resources and review capacity. Management said remediation efforts were ongoing; the weakness was not yet considered remediated.
- The filing reports no material change in previously disclosed risk factors and no material change in legal proceedings; management did not expect material uninsured losses from the proceedings described.
Important facts for investors to verify
- How much of revenue and system-wide sales growth reflects acquisitions versus organic growth and post-pandemic recovery.
- The final purchase-price allocations, acquired-business performance, and costs or proceeds associated with converting or selling acquired locations.
- Whether operating cash generation can support acquisition plans, working-capital needs, dividends and debt service as staffing volumes change.
- Workers’ compensation claim development, collateral requirements, and the adequacy of reserves and related estimates.
- Progress and testing of controls remediation, and whether the material weakness is resolved in subsequent filings.
- The filing reports a $0.06-per-share quarterly dividend and states that future dividends depend on business results and financial position; verify subsequent declarations and any credit-agreement constraints.