HireQuest, Inc. — 2022 Form 10-K
Reporting period: Year ended December 31, 2022. This is an annual filing; the filing also reports fourth-quarter results. HireQuest is a staffing and recruitment franchisor whose revenue is primarily royalties and service fees, rather than the system-wide sales generated by its offices. The company ended 2022 with 435 franchised offices, plus two company-owned locations classified as held for sale.
Financial results and liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| System-wide sales | $472.2 million | $354.5 million | +33.2% |
| Total revenue | $31.0 million | $22.5 million | +37.4% |
| Operating income | $16.0 million | $7.7 million | +109.6% |
| Net income | $12.5 million | $11.9 million | +5.1% |
| Adjusted EBITDA (non-GAAP) | $22.0 million | $12.3 million | +78.9% |
| Operating cash flow | $16.9 million | $17.4 million | Down $0.5 million |
Franchise royalties were $28.9 million, up 35.6%; service revenue was $2.1 million, up 69.6%. The blended effective royalty rate rose to 6.2% from 6.0%. Operating margin was 51.8%, compared with 34.0%; net margin was 40.2%, compared with 52.6%. The prior-year result included a $5.6 million bargain-purchase gain, while 2022 included losses on converting acquired operations to franchises. Net income from continuing operations was $12.0 million versus $11.8 million. Diluted EPS was $0.91 versus $0.87.
Fourth-quarter revenue was $8.0 million versus $6.5 million, and net income was $2.7 million versus $2.2 million. 2022 included a $2.0 million net workers’ compensation benefit, including about $1.2 million from runoff of reserves assumed in the Snelling acquisition. Workers’ compensation estimates are a significant judgment area.
At year-end, cash was $3.0 million, current assets $51.9 million, and current liabilities $36.8 million, leaving working capital of approximately $15.2 million. Accounts receivable were $45.7 million, primarily receivables tied to franchisee customer billings that HireQuest owns under its agreements. Total reported line-of-credit and term-loan debt was approximately $16.5 million. The company reported $16.9 million of operating cash flow, $23.6 million of cash used in investing activities (including $32.4 million of acquisition payments), and $8.5 million of financing cash inflows. It paid $3.3 million in dividends.
The Truist facility had a $60 million revolving commitment; $12.5 million was drawn at year-end. The filing gives differing figures for remaining borrowing availability: approximately $12.2 million in the liquidity discussion and approximately $24.8 million in the credit-facility note. In February 2023, HireQuest refinanced with a $50 million Bank of America revolving facility, with a one-time option to increase it to $60 million, and paid off the Truist facility and term loan. The new facility includes financial covenants and is secured by substantially all borrower assets.
Material changes and developments
- HireQuest acquired Temporary Alternatives, Dubin, Northbound, and MRINetwork in 2022. The MRI acquisition closed in December for approximately $13.3 million and added a global executive-search franchise network. The company said 2022 sales growth reflected acquisitions, existing-office growth, and recovery from COVID-19 disruption.
- Franchised offices increased from 217 to 435, including 207 acquired offices, 16 openings, and five closures. The company reported 33.2% system-wide-sales growth; it attributed approximately $39.2 million of sales to 2022 acquisitions and $47.7 million to organic growth.
- Two company-owned operations—Dental Power and certain Dubin/Philadelphia assets—were classified as discontinued operations and held for sale. Dental Power generated $6.3 million of 2022 revenue and $0.5 million of net income in discontinued operations. In March 2023, HireQuest agreed to sell Dental Power assets for $2.0 million payable over five years and expected to recognize an estimated $0.34 million gain upon completion.
- Notes-receivable reserves fell to approximately $0.26 million from $1.9 million. The company recorded an additional impairment related to the California purchaser and agreed to a further forbearance arrangement.
Outlook, risks, and unusual items
The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management said it expected liquidity from cash, operations, notes-receivable collections, and borrowing capacity to meet requirements, including dividends, for at least the next 12 months and beyond. It also noted that results remain exposed to economic conditions and continued pandemic-related effects.
- Key business risks include economic and staffing-market cyclicality, seasonal demand, worker availability and wage pressure, competition, customer retention, and franchisee financial performance.
- Workers’ compensation is a material exposure: HireQuest is effectively self-insured for many claims and must provide substantial collateral. The company reported $5.9 million of workers’ compensation claims liability and approximately $10.7 million of collateral in letters of credit at year-end; its provider later reduced required collateral to $9.2 million in March 2023.
- Acquisition integration, goodwill and intangible-asset valuation, and future impairment are important risks. Year-end goodwill was $5.9 million; management reported no impairment in its 2022 assessment.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2022 because of an unresolved material weakness: insufficient accounting resources and review capacity for technical accounting matters. Management reported remediation efforts, but had not concluded the weakness was resolved.
- Other notable items include higher interest expense amid rising rates, acquisition-related conversion losses, a $0.33 million expected debt-extinguishment loss from the 2023 refinancing, and ongoing quarterly dividends of $0.06 per share, which remain subject to board discretion and credit-facility restrictions.
The independent auditor issued an unqualified opinion on the financial statements, but did not audit or express an opinion on the effectiveness of internal controls. The auditor identified workers’ compensation liability estimates and valuation of acquired intangible assets as critical audit matters. The company stated that pending legal matters were not expected to result in material uninsured losses.
Most important facts for investors to verify
- Reconcile the filing’s inconsistent year-end borrowing-availability figures and review the terms, covenant headroom, and borrowing-base limits under the subsequent Bank of America facility.
- Track remediation and testing of the material weakness in financial reporting controls, particularly as the acquisition portfolio and accounting demands expand.
- Assess the sustainability of earnings: 2022 results included a material workers’ compensation benefit and acquisition-related items, while the 2021 comparison included a bargain-purchase gain.
- Monitor integration and performance of MRI and other acquisitions, franchisee health, organic system-wide sales, and the realization of expected acquisition benefits.
- Review workers’ compensation claims development, collateral requirements, franchisee receivable exposure, and the collection outlook for notes receivable.