HireQuest, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless stated otherwise, financial amounts are in millions of dollars. HireQuest is a nationwide staffing franchisor, with staffing revenue also generated by company-owned locations.
Business context and operating developments
At quarter-end, the company reported 223 franchisee-owned offices and two company-owned offices across 38 states and the District of Columbia. 2022 acquisitions included Temporary Alternatives, Dubin and Northbound; the company also continued integrating earlier acquisitions. Most 2022 acquired operations were converted to franchises or assets were sold to franchisees, while certain Dubin operations remained company-operated and classified as held for sale.
System-wide sales, a company-defined operating indicator rather than GAAP revenue, increased 33.7% in Q2 to $120.0 million and 51.6% in the first half to $221.1 million. Growth reflected acquisitions and organic sales growth; the comparisons also reflect the pandemic-affected prior-year period.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $9.288 | $5.707 | $17.433 | $9.109 |
| Operating income | $4.201 | $3.300 | $8.181 | $2.528 |
| Net income | $4.891 | $2.720 | $5.494 | $6.462 |
| Diluted EPS | $0.36 | $0.20 | $0.40 | $0.47 |
| Adjusted EBITDA (non-GAAP) | $5.913 | $4.407 | $11.220 | $5.940 |
Q2 revenue rose approximately 63%; first-half revenue rose approximately 91%. Franchise royalties were $7.220 million for Q2 (+32.5%) and $13.793 million for the first half (+58.4%). Q2 net effective royalty rate was 6.1%, unchanged year over year; the first-half rate rose to 6.3% from 6.0%.
Gross profit was $8.341 million in Q2 and $15.724 million in the first half. As a percentage of total revenue, gross profit was 89.8% and 90.2%, respectively; the prior-year periods were 100% because there was no company-owned staffing revenue. Management said gross profit as a share of system-wide sales improved to 6.9% in Q2 from 6.4%, and to 7.1% for the first half from 6.2%.
Q2 net income increased, while first-half net income declined. The comparison is substantially affected by non-operating acquisition-related items: Q2 included approximately $1.4 million of gains from adjustments to acquisition accounting, while first-half 2022 included $1.922 million of net miscellaneous expense, including losses associated with converting acquired operations to franchises. First-half 2021 included a $4.9 million bargain-purchase gain from Snelling. Adjusted EBITDA is non-GAAP and includes adjustments for unusual acquisition-related items.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $9.083 million, including $8.656 million from continuing operations, versus $11.330 million in 2021. Investing activities used $9.962 million, including $19.063 million for acquisitions, partly offset by $9.317 million of sale proceeds. Financing activities provided $0.751 million, including $2.667 million net revolver borrowings and $1.650 million of dividends paid.
- Cash was $1.128 million at June 30, 2022, down from $1.256 million at year-end. Current assets exceeded current liabilities by approximately $22.2 million; accounts receivable was $45.676 million and amounts due to franchisees were $12.254 million.
- Debt comprised $2.839 million drawn on the revolving line and $4.299 million of term loans. The company reported approximately $27.0 million of revolver availability, subject to the borrowing base and reserves. A $60 million Truist revolving facility matures in 2026; the Truist term loan and seller financing add scheduled amortization. The Truist facilities have variable interest rates and financial covenants; the company reported compliance at quarter-end.
- Workers’ compensation obligations remain an important funding requirement: $10.7 million of required collateral was supported by letters of credit. The company reported workers’ compensation claims liabilities of $8.185 million, current and noncurrent combined.
Management said cash, operating cash generation and borrowing capacity should be sufficient for working capital and other requirements over the next 12 months and beyond. It cautioned that financing availability and borrowing costs may be affected by credit-market conditions and rising benchmark interest rates.
Outlook, risks and notable matters
- No specific financial guidance was provided. Management said unusually high service revenue in the first half, driven partly by timing of services and related costs, was not expected to continue at the same level in the second half.
- Management cited staffing demand, franchisee and customer performance, inflation, supply disruptions, COVID-19, geopolitical conditions, acquisition execution and integration, and technology or cybersecurity disruptions as factors that could affect results. It noted inflation had not materially affected results to date but could constrain organic growth or acquisitions if persistent.
- A non-franchisee note was further impaired by $233,000 after the debtor sought another forbearance; the remaining net carrying amount was approximately $71,000, which the company expected to collect by year-end. Additional forgiveness may be required.
- The company disclosed that disclosure controls and procedures were ineffective due to a continuing material weakness in financial reporting controls, attributed to insufficient accounting resources for technical accounting and review. Management reported remediation efforts, including added accounting staff and external technical support.
- Related-party franchisees purchased assets from the Temporary Alternatives and Northbound acquisitions; the company reported losses on those asset sales. The filing states that legal proceedings were not expected to result in material uninsured losses.
Important facts for investors to verify
- Whether organic system-wide sales and royalty growth persist after separating acquisition contributions and the pandemic-affected comparison base.
- How much of reported earnings reflects acquisition accounting adjustments, franchise-conversion gains or losses, and other unusual items; assess GAAP results alongside the company’s non-GAAP Adjusted EBITDA reconciliation.
- Whether acquired operations are successfully integrated and converted to franchises, and whether the company-owned staffing operations and held-for-sale Dubin assets meet expectations.
- Revolver availability under borrowing-base limits, variable-rate debt costs, covenant headroom, and liquidity needs as receivables and payroll funding fluctuate.
- Progress in remediating the material weakness, and developments in the impaired non-franchisee note and workers’ compensation claims exposure.